Affordable Housing: Global Evolution, Indian Context, And The Post–Budget 2026 Policy Imperative

Executive Summary

Affordable housing in India has evolved from a welfare-driven state intervention into a structured, market-linked growth strategy that integrates fiscal incentives, credit support, and private sector participation. Globally, successful affordable housing models demonstrate that long-term viability depends not merely on subsidies but on integrated land policy, zoning reform, transit-oriented development, and institutional capacity. India's flagship programme, Pradhan Mantri Awas Yojana (PMAY), has been central to expanding access to formal housing finance and accelerating supply across urban and rural markets, with PMAY 2.0 reflecting a shift toward consolidation and fiscal rationalisation.

Union Budget 2026 reiterates the government's commitment to affordable housing through continued allocations under PMAY 2.0 and sustained infrastructure emphasis. However, the policy approach largely reflects continuity rather than structural recalibration. Key issues, such as the rigid ₹45 lakh price cap, the absence of a meaningful revival of Section 80-IBA profit-linked incentives, limited flexibility in Credit-Linked Subsidy Scheme (CLSS) eligibility, GST-related cost pressures, labour compliance cost escalation, stamp duty valuation constraints, and modest home loan interest deductions, remain only incrementally addressed.

The post-Budget 2026 landscape therefore presents a mixed picture. While demographic fundamentals, urbanisation trends, and continued state backing provide long-term demand visibility, project viability in high-cost urban centres remains constrained by static affordability definitions and embedded tax and compliance costs. The sector is entering a phase where operational efficiency, innovative structuring, and financial discipline will play a greater role than direct fiscal stimulus.

Going forward, calibrated reforms, such as location-indexed affordability benchmarks, region-sensitive price thresholds, rationalised GST structures, expanded credit access, and targeted tax incentives, will be critical to aligning policy objectives with market realities. Affordable housing now stands at an inflection point where sustained political commitment must translate into coordinated structural fine-tuning to preserve affordability without undermining commercial viability.

Affordable Housing

Affordable housing refers to residential units that are economically accessible to low and median-income households, ensuring they can meet other essential living expenses without undue financial burden. The concept is context-specific, varying across countries and policy frameworks, with factors like income levels, housing markets, and cost of living influencing affordability. A widely accepted metric is the housing cost-to-income ratio, where costs should not exceed 30–40% of gross household income.

Historically, affordable housing emerged in post-industrial Western economies as a response to rapid urbanization and poor living conditions. Governments pioneered social and subsidized housing models, such as Vienna's "Red Vienna" and public housing programs in the United States. In developing economies like India, affordable housing has evolved into a policy-driven growth instrument, addressing housing shortages while simultaneously stimulating construction activity, employment, and urban infrastructure development.

India's policy approach has gradually shifted from direct state provision to a more incentive-based, market-linked framework that leverages private sector participation, fiscal incentives, and credit support mechanisms.

India's Affordable Housing Drive: A Holistic Approach

Launched in 2015, the Pradhan Mantri Awas Yojana (PMAY) has remained the cornerstone of India's "Housing for All" mission. Through PMAY-Urban and PMAY-Gramin, the government has attempted to address both urban and rural housing deficits.

PMAY-Urban has relied on multiple verticals, including in-situ slum redevelopment, the Credit-Linked Subsidy Scheme (CLSS), beneficiary-led construction, and partnerships with private developers. The CLSS component significantly expanded formal housing finance access for Economically Weaker Sections (EWS), Lower Income Groups (LIG), and certain Middle-Income Groups (MIG).

With the rollout of PMAY 2.0, the policy focus has shifted toward consolidation, targeted beneficiary identification, and fiscal rationalisation, reflecting evolving market realities and budgetary constraints.

Global Best Practices

Globally, affordable housing succeeds when embedded within land policy, zoning flexibility, and transport planning. Vienna's land pooling mechanisms, Singapore's Housing Development Board model, South Korea's public housing corporations, and inclusionary zoning in US cities demonstrate how regulatory incentives can unlock supply at scale.

Transit-oriented development (TOD), density bonuses, transferable development rights (TDR), and land banking have proven particularly effective in reducing per-unit housing costs while maintaining urban sustainability. These tools illustrate that affordability must be structurally engineered into urban planning frameworks rather than treated solely as a fiscal subsidy.

Union Budget 2026: What Has Changed and What Remains

With the announcement of Union Budget 2026, affordable housing has once again featured within the broader urban development and infrastructure narrative. While the Budget reaffirmed support for PMAY 2.0 and continued allocations toward urban housing, it stopped short of undertaking deeper structural recalibration in certain critical areas.

The post-Budget landscape therefore requires a nuanced evaluation of reforms undertaken and gaps that persist.

• Definition of Affordable Housing

Despite expectations of a dynamic and region-sensitive definition, the Budget has largely retained the existing parameters governing affordable housing classification. The current framework does not sufficiently account for land cost disparities across metropolitan, Tier-I, and emerging urban centres.

As a result, projects in high-cost cities continue to struggle within rigid affordability benchmarks, affecting viability and supply.

Policy Imperative Going Forward: A location-indexed affordability framework linked to city categorization, land values, and income distribution patterns would create greater flexibility and realism. Periodic revision indexed to construction cost inflation and market data would ensure continued relevance.

• ₹45 Lakh Price Cap – A Structural Constraint

The ₹45 lakh cap, originally introduced in 2017, remains misaligned with prevailing urban market conditions. Escalation in land acquisition costs, statutory levies, compliance burdens, and construction input prices, especially steel, cement, and labour, has significantly eroded feasibility under the current threshold.

While Budget 2026 maintained support for affordable housing projects, it did not substantially revise the price ceiling or introduce city-specific caps.

Policy Imperative Going Forward: Region-sensitive price thresholds, potentially calibrated across metropolitan and non-metropolitan zones, would better reflect market realities while preserving end-use safeguards through carpet area restrictions.

• Section 80-IBA – Limited Revival of Developer Incentives

One of the sector's key expectations from Budget 2026 was the revival or restructuring of Section 80-IBA, which previously granted profit-linked tax deductions for affordable housing projects. Although the Budget emphasized housing supply and private participation, it did not meaningfully restore this incentive framework in its earlier form.

The absence of a robust fiscal incentive continues to compress developer margins in a segment already characterized by thin spreads and long gestation cycles.

Policy Imperative Going Forward: A simplified and time-bound reintroduction of profit-linked or viability-linked tax incentives would significantly enhance private sector participation and accelerate supply creation.

• Credit-Linked Subsidy Under PMAY 2.0

Budget 2026 reaffirmed allocations for PMAY 2.0 but retained relatively tight eligibility filters under CLSS. While fiscal prudence may justify targeted subsidies, demand-side momentum in the affordable and lower middle-income segment requires broader credit access.

For many households, even a 3–6.5% interest subsidy materially reduces EMI burdens and enhances loan eligibility.

Policy Imperative Going Forward: Expanding CLSS coverage, rationalizing documentation norms, and widening eligibility bands would strengthen demand absorption and reduce unsold affordable inventory.

• GST on Construction and Works Contracts

The structural issue of input tax credit restrictions and the 18% GST rate on works contract services remains largely unaddressed. For affordable housing developers operating under capped pricing, embedded GST costs significantly impact project viability.

Budget 2026 did not introduce a sector-specific rationalisation of GST for certified affordable housing projects.

Policy Imperative Going Forward: A concessional GST structure for affordable housing construction or partial restoration of input tax credits could substantially reduce cost pressures without materially distorting revenue streams.

• Labour Cost Implications

With the gradual operationalisation of the four labour codes, compliance costs and statutory contributions have increased. While these reforms enhance worker welfare and formalisation, they have also raised labour-linked cost components, estimated at 25–30% of project expenditure.

Budget 2026 did not introduce targeted offsets or incentives to cushion the impact on price-sensitive housing projects.

Policy Imperative Going Forward: Targeted compliance-linked incentives, wage support mechanisms, or tax credits for affordable housing projects could balance labour welfare objectives with housing affordability goals.

• Stamp Duty and Deemed Valuation

The issue of taxation based on ready reckoner rates, often exceeding market values, continues to affect affordable housing transactions. Budget 2026 did not significantly alter the 10% tolerance band under deemed valuation provisions.

Policy Imperative Going Forward: Expanding the tolerance threshold under Sections 43CA and 56(2)(x) would reduce unintended tax burdens on genuine end-users and improve transaction efficiency in the affordable segment.

• Home Loan Interest Deduction

While Budget 2026 maintained continuity in housing-related tax provisions, the ₹2 lakh cap on home loan interest deduction remains modest relative to current loan sizes and EMIs. Moreover, its limited applicability under the new tax regime continues to dilute its effectiveness.

Policy Imperative Going Forward: Enhancing deduction limits and harmonizing benefits across tax regimes would provide meaningful relief to middle-income and first-time buyers.

Our Analysis

Union Budget 2026 reaffirms the government's continued commitment to affordable housing through sustained allocations under PMAY 2.0 and its broader infrastructure push. However, the Budget largely signals policy continuity rather than structural recalibration. While the commitment to housing supply remains intact, deeper reforms relating to affordability benchmarks, tax incentives, GST rationalisation, and demand-side stimulus appear incremental rather than transformative.

In the current regulatory and fiscal environment, the affordable housing segment is entering a phase where viability will increasingly depend on operational efficiency and financial structuring rather than policy-led stimulus alone. The continued rigidity of the ₹45 lakh price threshold, the limited revival of profit-linked incentives, and embedded indirect tax costs suggest that margin pressures are likely to persist. Projects in metropolitan and high-cost urban centres may therefore require innovative structuring, land partnerships, and cost optimisation strategies to remain commercially sustainable within prescribed affordability norms.

At the same time, steady policy support and the demographic fundamentals underpinning housing demand provide long-term visibility for capital deployment in the sector. Urbanisation trends, migration patterns, and the aspiration for formal home ownership continue to sustain structural demand in entry-level and lower mid-income segments. However, unlocking this demand at scale will require greater alignment between land policy, taxation, credit access, and regulatory flexibility.

The post-Budget 2026 framework thus reflects stability but also underscores the need for calibrated fine-tuning. Affordable housing in India now stands at an inflection point where incremental policy continuity must evolve into coordinated structural reform to ensure that affordability is preserved without compromising project viability. The sector's trajectory will depend on how effectively fiscal prudence is balanced with market realism in the years ahead.

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