Union Budget 2026: Knight Frank Urges Fiscal Interventions to Revive Affordable Housing and Rental Markets

As India gears up for the Union Budget FY 2026–27, global real estate consultancy Knight Frank India has urged the government to implement targeted fiscal interventions to revive the affordable housing sector, incentivize rental housing, and improve tax efficiency for homebuyers.

The real estate sector, which contributes nearly 7% to India’s GDP and employs over 70 million people, is crucial for economic growth, job creation, and urban development. However, it faces significant structural challenges, particularly in the affordable housing segment.

Affordable Housing Needs Urgent Support

Affordable housing has been one of the weakest links in India’s residential market over the past few years. Knight Frank data reveals that the share of housing sales in the sub-Rs 50 lakh segment has declined sharply from 54% in 2018 to just 21% in 2025, despite overall housing demand remaining resilient.

Sales in this segment declined by 17% year-over-year in 2025, primarily due to rising home prices, lower disposable incomes, and limited access to formal credit. While the government’s PMAY 2.0 scheme offers a 4% interest subsidy on loans up to Rs 8 lakh, subject to a house value cap of Rs 35 lakh, Knight Frank argues that these thresholds no longer align with the realities in major urban markets.

Knight Frank has recommended raising the maximum house value limit to Rs 75 lakh, or aligning it with RBI’s priority sector lending criteria, to ensure more urban homebuyers can benefit from the scheme. The consultancy has also suggested increasing the Section 24(b) home loan interest deduction from the current Rs 2 lakh to Rs 5 lakh, a move that could significantly improve housing affordability and stimulate demand, especially among first-time buyers.

Building a Sustainable Rental Housing Ecosystem

Knight Frank has highlighted the urgent need to deepen India’s rental housing market. While the Affordable Rental Housing Complexes (ARHCs) scheme addresses the needs of urban migrants, the low-income rental segment remains underserved. Many sub-Rs 50 lakh homes purchased as investments remain vacant due to low rental yields, discouraging owners from renting them out.

To unlock this idle stock, Knight Frank has proposed a 100% tax exemption on rental income up to Rs 3 lakh for homes priced up to Rs 50 lakh. This measure could boost rental supply in the most constrained segments of the market. The firm has also recommended using surplus government-owned urban land, held by entities such as the railways and defence, for high-density, long-term rental housing. Units would be offered at regulated yields and not allowed to be sold in the open market. Under this model, the government would retain ownership and responsibility for maintenance, ensuring long-term affordability and stability in rental supply.

Additional measures suggested include a five-year tax holiday for purpose-built rental housing projects and central viability gap funding for ARHCs in Tier-II and Tier-III cities to improve project viability.

Making Home Upgrades More Tax-Efficient

On the taxation front, Knight Frank has sought changes to Section 54 of the Income Tax Act to ease long-term capital gains reinvestment for homeowners. Given that modern residential projects often take more than three years to complete, the firm has recommended extending the completion timeline for under-construction properties from three to five years to allow buyers to fully claim capital gains exemptions. It has also suggested relaxing the timeline for purchasing a new home before selling an existing one from one year to two years, helping sellers avoid distress sales while upgrading homes.

Push for Green and Sustainable Buildings

To promote sustainability, Knight Frank has called for a central subsidy covering 20–25% of incremental capital expenditure on green building materials and technologies, capped at Rs 1–2 crore per project. Several states already offer similar incentives, and a central framework could accelerate the adoption of green construction across the country.

Industry View: Need for Policy Recalibration

Commenting on Budget expectations, Shishir Baijal, International Partner, Chairman and Managing Director, Knight Frank India, emphasized the need for immediate policy recalibration to address declining affordability and structural imbalances. He noted that while residential markets have shown resilience, affordable housing continues to underperform due to elevated costs and limited end-user support. Baijal also highlighted the importance of building a formal rental housing ecosystem to unlock underutilized stock, improve labor mobility, and attract long-term institutional capital. Continued investment in urban infrastructure and mass transit, he said, would be critical to expanding affordable land supply and enabling inclusive urban growth.