The affordable housing project deduction under Section 46 of the Income Tax Act, 2025 is one of the most significant incentives for developers. However, the eligibility conditions are stringent, with the EWS/LIG/MIG rentable area test being the most critical. Understanding this test is essential for developers seeking to claim the deduction.
The Rentable Area Test
The rentable area test requires that a specified percentage of the total allocable rentable area of the project be allocated to affordable housing categories. The requirements are:
- At least 30% for Economically Weaker Section (EWS) category
- At least 60% for EWS and Lower Income Group (LIG) categories
- At least 90% for EWS, LIG, and Middle Income Group (MIG) categories
The remaining 10% or less of the total allocable rentable area may comprise other residential or commercial units.
Understanding the Categories
Economically Weaker Section (EWS)
The EWS category covers the smallest housing units. The rentable area limits are:
- Specified cities: Up to 25 square metres
- Other cities: Up to 30 square metres
Lower Income Group (LIG)
The LIG category covers units larger than EWS but still within affordable limits. The rentable area limits are:
- Specified cities: Greater than 25 and up to 50 square metres
- Other cities: Greater than 30 and up to 60 square metres
Middle Income Group (MIG)
The MIG category covers units larger than LIG but still within affordable limits. The rentable area limits are:
- Specified cities: Greater than 50 and up to 70 square metres
- Other cities: Greater than 60 and up to 85 square metres
Specified Cities
For the purposes of the rentable area test, "specified cities" mean:
- The urban agglomerations comprising of the area included on the basis of the latest census of Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore, Ahmedabad
- The districts of Faridabad, Gurgaon, Gautham Budh Nagar, Ghaziabad, Gandhinagar
- The city of Secunderabad
Key Definitions
Rentable Area
"Rentable area" means the carpet area at any floor level, including the carpet area of kitchen, pantry, store, lavatory, bathroom, 50% of unglazed verandah and 100% of glazed verandah, in accordance with the provisions of the Indian Standard - Method of Measurement of Plinth, Carpet and Rentable Areas of Buildings, IS 3861:2002.
Total Allocable Rentable Area
"Total allocable rentable area" means the total rentable area of all the proposed housing units or non-housing units but excluding the areas earmarked for common facilities and services.
Housing Unit
"Housing unit" means an independent residential unit with separate facilities for living, cooking and sanitary requirements, distinctly separated from other residential units within the building.
Application Process
Form 18 Filing
The application for notification must be filed in Form No. 18 with the Member (IT), Central Board of Direct Taxes.
Deficiency Rectification
If any defect is noticed in the application, a deficiency letter is served on the applicant. The applicant must remove the deficiency within one month from the end of the month in which such deficiency letter is served.
Approval or Rejection
The Board may issue the notification granting approval to the project or reject the application after recording the reasons for rejection in writing.
Compliance Requirements
Separate Books of Account
The applicant must maintain separate books of account with complete details of all capital expenditure incurred during the tax year for which it intends to claim the deduction.
Completion Timeline
The project must be completed within a period of five years from the end of the tax year in which the project is sanctioned.
Withdrawal of Approval
The Board may withdraw approval if it is satisfied that the assessee has ceased its activities, such activities are not genuine, or are not being carried out in accordance with all or any of the conditions.
Expert Legal Guidance
Understanding the EWS/LIG/MIG rentable area test is essential for developers seeking to claim the affordable housing deduction. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping developers navigate the approval process and ensure compliance with all conditions.