Union Budget 2025: Why tax reforms will help India's real estate sector

India’s real estate sector stands at the threshold of a transformative era, driven by a robust economy, accelerated urbanisation, and rising foreign investments. Yet, the sector’s true potential can only be realised through strategic reforms in taxation. As Budget 2025 approaches, the industry’s stakeholders are eager for measures that could lower costs, simplify processes and incentivise participation from developers and buyers alike. Below are key tax reforms that could redefine the future of real estate in India.

Revamping GST on under-construction properties

The current Goods and Services Tax (GST) framework imposes rates of 5 per cent on non-affordable housing and 1 per cent on affordable housing, but the lack of Input Tax Credit (ITC) makes these projects less attractive compared to ready-to-move-in homes. Reintroducing ITC could transform this scenario by enabling developers to offset project costs and pass on the savings to buyers. This reform would not only increase demand for under-construction properties but also enhance developers’ liquidity, accelerating project completions.

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Rationalising stamp duty and registration costs

High stamp duty and registration fees—ranging between 7 per cent and 10 per cent across many states—add a substantial financial burden for property buyers, particularly in the mid-segment market. Reducing these costs uniformly could enhance affordability, reinvigorate sales of under-construction properties, and inject vitality into the real estate sector.

Expanding tax benefits for homebuyers

Tax deductions under the Income Tax Act, such as Rs2 lakh for home loan interest (Section 24(b)) and Rs1.5 lakh for principal repayments (Section 80C), have remained unchanged for years. Increasing the interest deduction limit to ₹5 lakh would make homeownership more accessible for middle-income families, while raising the principal repayment cap could further incentivise investments in residential real estate, driving significant growth in the sector.

Incentivising rental housing development

With urban migration driving demand for rental properties, the lack of tax incentives in this segment limits its growth potential. Offering tax benefits on rental income and extending fiscal support to Real Estate Investment Trusts (REITs) could stimulate investment in rental housing, ensuring a steady supply of high-quality rental properties and addressing urban housing challenges effectively.

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Simplifying capital gains tax

Complex capital gains tax regulations deter both individual and institutional investors from engaging in real estate. Simplifying these rules, particularly for long-term investments, could encourage greater participation. These reforms would also attract foreign direct investments (FDI), providing critical support for large-scale infrastructure and housing projects.

Strengthening affordable housing initiatives

Affordable housing remains a cornerstone of India’s developmental priorities, yet additional tax measures could amplify its impact. Reinstating interest subsidies under the Pradhan Mantri Awas Yojana (PMAY) for loans up to ₹6 lakh and offering fixed interest rates of 5 per cent for loans up to Rs25 lakh could improve accessibility for low- and middle-income buyers. Such initiatives hold immense potential for growth in Tier II and Tier III cities, where demand for affordable housing is surging.

Streamlining approvals with a single-window clearance system

Prolonged approval processes significantly delay real estate projects and inflate costs. Implementing a single-window clearance system could minimise bureaucratic delays, improve operational efficiency, and enhance the ease of doing business in the sector.

Lowering GST on construction materials

High GST rates on essential construction materials such as cement, steel, and bricks elevate project costs for developers and buyers alike. Lowering these rates would not only make housing more affordable but also improve profit margins for developers, stimulating sector-wide growth.

Boosting growth in Tier II and Tier III cities<

Tier II and Tier III cities are emerging as promising real estate hubs, driven by infrastructure advancements. Providing targeted tax incentives for developers in these regions could stimulate investment, bridge the urban-rural divide and promote balanced regional development. Furthermore, fostering digital infrastructure and data centre projects in these cities would position them as future-ready economic growth centres.

Enhancing financing options for developers

Affordable financing remains a persistent challenge for developers, especially those focused on mid-segment and affordable housing projects. Offering tax incentives to financial institutions providing long-term loans to real estate developers could ensure a steady flow of capital. This, in turn, would facilitate timely project completions and reduce costs for both developers and buyers.

The real estate sector is a cornerstone of India’s economic growth. Strategic tax reforms in Budget 2025 could unlock its full potential, driving affordability, enhancing investor confidence and creating a sustainable growth path.

From rationalising GST to simplifying capital gains tax and boosting affordable housing, the proposed reforms would address key pain points in the sector. As we look ahead, the right policy measures could transform real estate into a trillion-dollar industry, creating value for developers, investors, and homebuyers alike.

The author is CEO, Bhutani Infra. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.