Lifting the ₹45 Lakh Cap Won't Fix Affordable Housing Supply

On 3 October, CREDAI said the Centre is preparing a new affordable housing policy. Its headline ask is to scrap the ₹45 lakh price cap and keep only the carpet-area test of 60 sq m in metros and 90 sq m elsewhere (1). The diagnosis is right. The cure is not. For capital, the question is whether a 600–650 sq ft metro home can close at all, and who captures the spread if the label changes.

The cap is a 2019 number in a 2026 cost stack

The definition dates from the GST regime that took effect on 1 April 2019. Affordable units (≤60 sq m carpet in the six metro regions, ≤90 sq m elsewhere, and ≤₹45 lakh in value) attract 1% GST without input tax credit. Other residential attracts 5%, also without ITC (2).

The cost base has moved and the cap has not. ANAROCK puts the rise in residential construction costs at nearly 40% between 2019 and 2024, with labour up about 150% and steel and cement up 30–57% (3). Another regulator has already re-indexed. RBI's revised priority-sector norms, effective 1 April 2025, treat housing loans of up to ₹50 lakh as priority sector in centres with more than 50 lakh people, with a dwelling-cost ceiling of ₹63 lakh (4). Two arms of the state now define "affordable" ₹18 lakh apart in the largest cities.

The arithmetic of a 60 sq m metro unit

Take the ceiling unit: 60 sq m of carpet, about 646 sq ft. Industry estimates for 2025 put affordable-segment construction cost at ₹2,500–4,500 per sq ft in Mumbai and ₹1,800–3,200 in Bengaluru (8). Assume a built-up-to-carpet ratio of 1.3x. That ratio is our assumption and varies by typology.

• Mumbai: construction cost ₹2,500–4,500 per sq ft (2025 est.) (8); implied hard cost per unit about ₹21–38 lakh; left under the ₹45 lakh cap about ₹7–24 lakh.
• Bengaluru: construction cost ₹1,800–3,200 per sq ft (2025 est.) (8); implied hard cost per unit about ₹15–27 lakh; left under the ₹45 lakh cap about ₹18–30 lakh.

Implied hard cost = 646 × 1.3 × ₹/sq ft. These are AIS estimates, not observed project data.

In Mumbai, that leaves ₹7–24 lakh per unit for land, premiums, finance, marketing and margin, which most of MMR cannot deliver on market-priced land. The segment has hollowed out accordingly. ANAROCK data show sub-₹40 lakh homes falling from 40% of top-7-city supply in 2019 to 16% in 2024, and from 38% of sales to 18% (5). In Q3 2026 they were 14% of launches (6).

Why "carpet area only" is the wrong fix

Remove the value test and a 60 sq m Worli flat priced at several crore qualifies for 1% GST. The first supply to respond will be premium compact product, which does not need the subsidy; the 4-point saving is worth most where tickets are largest. We do not expect the finance ministry to accept an open-ended concession. Our base case is a tiered or indexed cap, probably along the lines of RBI's population-band structure (4). That is our judgement, not a reported proposal.

Both rates are without ITC, so GST paid on cement, steel and contracted works is a sunk cost either way (2). The September 2025 GST cuts on cement and some other building materials therefore lower affordable project costs directly, provided manufacturers pass them through (7). A relabel does not lower costs at all.

Where the demand gap actually sits

Unsold sub-₹40 lakh stock fell 19% year-on-year to about 1.13 lakh units at end-Q1 2025, while stock above ₹1.5 crore rose 24% (5). By Q3 2026, total unsold inventory across the top seven cities had climbed 12% year-on-year to about 6.31 lakh units, as launches rose 18% against sales growth of 3% (6). Supply follows margin, not absorption.

What this means for capital

1. Underwrite at 5% GST and the current cap. A six-month change is CREDAI's expectation, not a notified rule (1).
2. Back cost discipline, not labels. In this segment, returns come from hard cost per sq ft and cycle time: standardised floor plates, precast, and fixed-price EPC. Diligence those before location.
3. Lean to non-metro and to land partnerships. The 90 sq m allowance and lower land values in non-metros widen the viable margin (2)(8). In metros, it works mainly on JDA or revenue-share land paid out of sales.
4. Structured credit over equity for compact mid-income product. Absorption risk is lower where unsold stock is falling (5). Escrow-ringfenced construction finance captures that absorption at a senior position without betting on a GST definition.

Limits of this note

The per-unit arithmetic uses published 2025 industry cost estimates and an assumed 1.3x loading, not project data. ANAROCK's sub-₹40 lakh band is not the GST definition of affordable housing. No policy draft is public; final terms may differ from CREDAI's ask. This note is not investment advice.

Disclosure: AIS accepts land, joint-venture and development (PMC) mandates and may benefit from interest in this segment.