The Union Budget 2025, ahead of a few significant Assembly Elections, quite obviously aimed at headline management & garnering likes. And to a large extent the Finance Minister & Modi Government succeeded in this, since the most vocal middle class of India finally got something to cheer about. However, the larger issue is whether the Personal Income Tax exemption level up to an income of INR 12 lakh going to change the household realities of the shrinking middle class of India. More importantly, will it lead to consumption and asset creation, and that too of a high value asset like real estate.
Well, let’s first look at the larger issues around the Union Budget 2025:
Has this budget been any different?
What did you get with the budget that you waited for?
Is Income Tax exemption limit up to INR 12 lakh going to change the household realities of Indian middle class?
Will Income Tax exemption limit actually lead to consumption?
What would you buy with the Income Tax exemption—property, car or gold?
Doesn’t hyper-inflation, especially food inflation, balance the Income Tax exemption benefits?
Shouldn’t tax exemption limit be linked to Cost Inflation Index and not dependent upon the wishes of the Finance Minister?
Hasn’t domestic saving rate of India been continuously falling?
Is the rising household debt a predominant reality of middle class India?
Is there anything substantial to fuel home buying?
Has the wish list of the home buyers been fulfilled?
What is there to fuel job growth?
Has the wish list of real estate sector been fulfilled?
This budget has raised more questions than what anyone could probably answer.
The Budget claims that the Government’s efforts is 5 pronged – To Accelerate Growth; Inclusive Development; Private Sector Investments; Uplift Household Sentiments; and Enhance the Spending Power of India’s Rising Middle Class. The last two mission statement affects the common man the most.
Let’s do a cost & benefit analysis of how Income Tax exemption limit would affect the consumption sentiment and also lead to asset creation. We have to first look at the ground realities and financial compulsions of the urban Indian middle class.
There are 570 million Indians who make up India’s middle class; roughly 38% of population, with household earning between INR 6-36 lakh. Their percentage of population has shrunk in the last few year, especially post Covid, but that is a subject of discussion some other day. This middle class is reeling under a triple whammy of high inflation, particularly of food, high taxation and stagnating incomes. Private consumption, which accounts for nearly 60% of India’s GDP, has been a significant growth driver. However, the urban middle class — the backbone of this consumption — faces stagnating real wages, mounting household debt, and surging costs of living.
Reports indicate that real wage growth in India has been negligible, at just 0.01% over the past five years. This stagnation has severely eroded purchasing power, compelling households to cut back on discretionary spending. Food inflation remains alarmingly high at 10.87%, disproportionately impacting middle-income households. Food carries 46% weightage in consumption basket. This has forced consumers to prioritise essentials over discretionary goods, with ripple effects across the economy.
According to RBI data, net household savings as a percentage of GDP are at their lowest level in nearly 50 years. India’s gross domestic savings rate fell from 34.6% of GDP in 2011-12 to 18.4% in 2023-24. Household savings constitute total 60% savings in the economy. As per RBI data in June 2024, household debt stood at 42.9% of GDP at current market prices. Loan against gold is also all time high in India, thus reflecting stressed out middle class that has borrowed from multiple lenders. Mounting unsecured loans have pushed net savings into the red, leaving families with less disposable income.
This is particularly noticeable in urban areas where the middle class forms a significant consumer base. There is slowdown in even entry level consumption items today. Companies like Nestle and Hindustan Unilever have reported a decline in demand from the middle class, indicating a reduction in consumer spending.
Thus, it is evident that the middle class Indians are borrowing more for consumption, and definitely not asset creation or productive activities. And hence, a saving of few thousands won’t change the ground realities of India. It would neither fuel consumption nor lead to asset creation. The priority of an average Indian household at this point of time is to reduce the debt burden and add savings for emergencies. But the stakeholders of Indian real estate are, for some strange reasons, projecting as if the person has more disposable income for asset creation now.
For instance, someone earning INR 12 lakh yearly gets to pay 0% Income Tax now. We are taking INR 12 lakh as the median earning of the middle class Indians in this calculation. Even if we don’t factor in the standard deductions of PF or HRA and other allowances that differs from company to company, and take this INR 12 lakh as his take-home salary, it simply means that one is earning INR 1 lakh per month as a take-home salary. Now from the thumb rule of house affordability, that is 5 years of one’s gross income with second simultaneous condition of EMI not being 40% of take-home salary, this IT exemption doesn’t make any sense to buy a house. Where is a house worth INR 60 lakhs available in any of the top tier cities, forget the metro cities. Similarly, to make a payment of INR 40,000 as EMI the cost of the house shouldn’t be more than INR 50 lakh. Is this available?
Citing research reports of real estate consultants, the Economic Survey ahead of Union Budget said that housing demand in India is expected to touch 93 million units by 2036. But this budget has more failures than successes for the average middle class Indian aspiring to buy a house.
With India’s affordable housing shortage projected to reach 31.2 million by 2030, there has been absolutely nothing for affordable housing in this budget. Forget affordable housing, even the basic need of EWS (Economic Weaker Section) housing was not mentioned in this budget.
There has been no incentive to buy a house No measures has been taken to lower the home loan interest burden of the home buyers. Section 24 tax rebate has not been hiked beyond INR 2 lakh. Expectation was to see the rebate of INR 5 lakh. Housing loan principal repayment is still at INR 1.5 lakh under section 80C. There has been a need to hike it to INR 5 lakh.
Under Section 54 of the Income Tax Act, Long-Term Capital Gains (LTCG) from selling an existing house can be reinvested in a new property. However, the exemption applies only if the new property is completed within three years of the sale. Given increasing project sizes and frequent delays, there was a need to extend it to 5 years. Additionally, the rule requiring a homebuyer to purchase a new property within one year before or two years after selling the old one is seen as restrictive. The Union Budget didn’t extend the pre-purchase period to two years, and give home sellers more flexibility in finding the right property
No measures have been announced for roll out of rental housing and make it lucrative for the investors. There has been no encouragement for NRIs to buy a house in India; something that could bring dollar revenue to the economy.
Yes, the Union Budget allowed the benefits to have two self-occupied properties, expecting it to bring more investment in real estate. The Union Budget also exempted TDS limit on rental properties from INR 2.4 lakh to 6 lakh. But the larger question is whether it affects the large universe of middle class of India. The fact is that only the real wealthy Indians can today afford to have two properties and it is definitely not the reality of vast majority of Indians. The focus of the Finance Minister has definitely been on Super Prime Borrowers and not Sub Prime Borrowers; and it would only encourage buyers who can afford to park money into real estate.
As for the common man who was looking for a basic need of roof over the head, you have never voted for development. So, you better bear with it! I have a few pertinent questions with the industry stakeholders and leading voices of Indian real estate as well. But I would raise those questions in my piece. I am afraid raising too many questions in one story might get me a GST notice. And this GST with a Sin Item slab of 28% would be actually Go Slow Tax.
Ravi Sinha
#Ravi Track2Media
Ravi Sinha is a journalist with over two decades of cross-discipline media exposure. He is the CEO of real estate thinktank group Track2Realty. He has been writing extensively on the real estate sector for more than a decade now. Evaluation of real estate brand performance is his core domain expertise and he has immense insight into consumers’ psychograph. He has conceptualised Track2Realty BrandXReport as India’s 1st & only objective & non-paid brand rating journal that is industry-accepted benchmark of brand equity & ranking of the Indian real estate companies.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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