The recent Union budget saw the government giving 100% tax exemption to developers building small flats within a specific size in metros and non-metros. This is a move that the government hopes will encourage developers to build smaller, more affordable homes. While it is a strong incentive, real estate experts and activists say there are serious loopholes in the waiver that the government should focus on plugging first.

1) The Houses Will Be Too Small

The government’s plan is to provide 100% tax exemption to developers who build homes of 30 sq. meters or less in metros and 60 sq. meters or less in non-metros. But real estate experts say the sizes mandated are too small and may actually lead to the rise of more slums.

“I think the sizes in the budget announcement have been condensed too much. From a design perspective, from a habitation perspective and a visualization perspective, small homes of those sizes will only create more slum clusters. The sq. feet should have been increased to about 600 sq. feet in metros and about 900 sq. feet to 1,000 sq. feet in non-metros” says Anuj Puri, chairman and country head of JLL India.

2) Small Homes May Not Mean Affordable Homes

While the sizes of the flats have been clearly defined, there is no clear limit on the pricing of these homes. Which means a developer could gain tax exemptions by building a smaller flat, but sell it at a premium. For instance, in an area like Mumbai even a 300 sq. feet apartment can be sold for as much as Rs 1 Crore or more depending on its location. Hardly the affordable home the government is hoping for.

“For every law, there will always be people who misuse that law. I think 7% to 8% of developers will misuse it and there should be provisions to ensure that this does not happen. This should be done on a state level rather than at a central level.” says Sandeep Ahuja, CEO of Mumbai-based Richa Realtors

3) Build Small Flats Now, Combine Them Later

Developers could build multiple small flats in compliance with the announcement while enjoying the 100% tax waiver. But then, these flats could be sold at a premium to different members of the same family who can simply break down the walls and combine these units into a larger apartment, once again defeating the very purpose of the announcement.

“This has happened in Maharashtra before. Today I may have one affordable house which is legally sanctioned under this scheme. But I can always buy my neighbour’s house. I can buy the house above me, adjacent to me, below me; there is no restriction on that.” claims architect and housing activist, Nitin Killawala,

Developers are hoping that the waiver will do more good than harm by increasingly supply and bringing down the cost of ownership. While that may be true, Mumbai’s experience with such laws shows that loopholes can and will be exploited. While no one is saying the waiver is bad, the government should plug these loopholes if it truly wants to boost affordable housing in the country.

Nikhil Narayan Sivadas, Assistant Editor, NDTV