Union Budget 2026: Sitharaman & Co may finally make affordable homes and faster commutes reach the aam aadmi

Budget 2026 opens against two urgent realities. On one hand, a young professional earning well and saving diligently still finds home ownership out of reach because monetary ‘affordable housing’ thresholds have been frozen since 2017.

On the other, highways and metro projects worth tens of thousands of crores remain stalled—not for lack of ambition, but because financing structures are broken. These are not abstract policy puzzles; they shape how millions of Indians live, commute, and build their futures.

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The housing affordability crisis

The decline in India’s affordable housing segment has been stark. Affordable units accounted for 52.4% of residential sales in 2018, but by June 2025, this share had plunged to just 17%. Developers face a simple economic reality: the economics no longer work, and existing policy support does not help bridge the gap.

In recent years, construction costs have risen sharply. According to broader industry estimates, labour expenses have increased by around 20%, while cement prices have risen by 8–12% and steel by 15–20%. These cost escalations significantly squeeze margins, especially in the affordable segment.

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While luxury housing typically delivers margins of 25–30% or more, affordable housing margins have dropped to around 10–12%, sometimes even lower. At the same time, the monetary threshold for ‘affordable housing’ under tax laws has remained frozen since 2017 at ₹45 lakh, despite dramatic shifts in land prices, material costs, and overall market conditions.

Given these constrained margins, even developers who have historically served lower- and middle-income buyers are reluctant to launch affordable projects. The result is a severe contraction in supply, which pushes overall housing prices higher and keeps genuine end-users, particularly younger families, out of the homeownership cycle.

The policy environment is evolving, calling for renewed alignment and recalibration. Section 80-IBA, which provided a tax holiday for developers of affordable housing, expired in 2021. When active, it successfully incentivised new launches across segments.

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Meanwhile, mid-sized developers, especially those in Tier-2 and Tier-3 cities, face higher borrowing costs, limited access to equity capital, and tougher financing terms. Although India’s real estate sector has attracted significant institutional capital in recent years, this funding has flowed predominantly to large developers and listed platforms such as REITs and SM REITs. Smaller players, who are crucial for delivering affordable stock, remain capital-constrained.

To revive this segment, the industry has urged the government to raise the monetary threshold for affordable housing to ₹75–85 lakh in metropolitan markets, reflecting today’s construction economics. Such a revision may unlock multiple benefits for buyers and developers. Houses within the new threshold would qualify for the concessional 1% GST rate instead of the current 5% applicable to houses valued above ₹45 lakh, thereby lowering upfront costs for buyers. Homebuyers would also become eligible for Credit Linked Subsidy Scheme (‘CLSS’) benefits, which offer interest subvention to qualifying urban households.

Further, while the government is promoting the new tax regime, as a more targeted benefit for the industry, it may consider reinstating the Section 80-IBA tax holiday for developers and Section 80EEA interest deduction for individual homebuyers, which would compound the positive impact. A reduction in state stamp duty, assisted by central funding, would also enable lower home costs. Lastly, on the personal taxation front, the existing ₹2 lakh limit on home loan interest set-off has become inadequate given current loan sizes and interest rates. Raising this limit may improve affordability for middle-income families.

A related but emerging need is student housing. With India’s growing young population and expanding educational institutions, demand for quality student accommodation has surged. Policy incentives to encourage private developers to build student housing and hostel infrastructure would improve living standards for students and ease the financial burden on non-earning youth.

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Building infrastructure capacity to unlock growth potential

Parallel to housing affordability is a mounting infrastructure challenge. Despite ambitious national plans to expand expressways, metro networks, and transport corridors, many projects remain incomplete. As of December 2025, around 85 highway projects worth thousands of crores were stalled—not due to weak project design, but because of financing bottlenecks and delayed payments that developers cannot absorb indefinitely.

The problem is structural. Most infrastructure projects rely on a 70:30 debt-to-equity financing model, which assumes predictable revenue streams. On the ground, however, toll collections often fall below projections, state payments are delayed, and traffic estimates prove overly optimistic. Developers, burdened by heavy debt based on these assumptions, struggle to service loans, resulting in mid-construction halts.

Many infrastructure companies are already highly leveraged due to prior investment cycles. Banks, having absorbed earlier defaults, now impose stricter lending norms, leaving developers with limited refinancing options. Interest during construction accumulates rapidly when projects face delays due to land acquisition issues, forest clearances, or utility shifting—a cost that developers must bear without corresponding revenue.

A core mismatch also persists between project finance and project revenues. Bank loans usually have 10–15 year tenures, while infrastructure assets generate stable revenues over 20–30 years. Correcting this requires reforms that allow banks to offer longer-tenure debt aligned with project economics. Additionally, the industry has long advocated revising PPP frameworks to include more flexible viability gap funding models and improved risk allocation between public and private stakeholders.

Strengthening dispute resolution mechanisms

Strengthening dispute resolution mechanisms is equally critical. Prolonged arbitration ties up developers’ capital for years and discourages lenders from participating. Faster dispute settlement and reliable payment frameworks would boost confidence among both equity and debt investors.

While the announcement of the Urban Challenge Fund of ₹1 lakh crore in the previous Union Budget was a welcome move, the historic pattern of stalled execution, fragmented implementation, and poor planning capacity in cities must be resolved. Without addressing these issues, urban India continues to face the same challenges encountered during the Smart Cities Mission. Fast-tracking municipal reforms and enforcing stricter execution monitoring mechanisms should be implemented for intended success.

The Bottom Line

Budget 2026 must address the underlying constraints affecting both real estate and infrastructure. Developers need updated monetary thresholds and revived tax incentives to restore affordable housing viability. Infrastructure companies require improved PPP structures, longer loan tenures, faster land acquisition, and predictable payment mechanisms. By resolving these structural bottlenecks, the government can unlock private capital at scale and accelerate the delivery of homes and infrastructure.

It is expected that the measures announced on February 1 will help shape the next 3–5 years of these sectors. With the right support for industry expectations, millions of Indians could see improved housing access and better-connected cities—advancing both economic and social progress.

Neetu Vinayek, Partner and Infrastructure Tax Leader at EY India, is the author of the article.