Value Capture Financing Framework (MoHUA) 2017: Can Land Value Capture Finally Transform Urban Infrastructure Financing In India?

Policy Update
Tanvi Nerurkar

Introduction

Nearly a decade after the Ministry of Housing and Urban Affairs (MoHUA) introduced the Value Capture Finance (VCF) Policy Framework in 2017, the central policy question has shifted from the theoretical viability of land value capture to the practical challenge of institutionalizing it across India’s rapidly urbanizing cities. The framework’s core premise remains highly relevant: when public investments such as metro corridors, highways, or urban redevelopment schemes increase the value of surrounding land, a portion of this “unearned increment” should be recovered by the government and reinvested in public infrastructure, rather than accruing solely to private landowners.

The financial challenge that the framework aims to solve has become even more urgent. By 2036, India’s cities are expected to house nearly 600 million people and  to generate  60–70% of the country’s GDP. Yet, Urban Local Bodies (ULBs) collect less than 1% of that GDP as their own revenue, while other developing countries collect 5–8% of that GDP.

The grant-based model for urban development, used since the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), can no longer keep up. New programs like PM Gati Shakti, AMRUT 2.0, the Digital India Land Records Modernization Program (DILRMP), and the Urban Challenge Fund (UCF) now tie central support to a city’s ability to raise its own funds, making land value capture a key part of this new approach.

This article re-examines the VCF Framework within the context of the evolving policy landscape. It analyzes the scale of India’s urban financing gap, reviews the application of value capture in cities such as Mumbai, Ahmedabad, Delhi, and Hyderabad, explores the reasons for fragmented implementation since the framework’s launch, and outlines a pragmatic reform agenda for 2026 and beyond.

The Financing Gap: Why Value Capture Matters Now

India’s urban infrastructure deficit is extensively documented. The World Bank estimates that India will require nearly US$840 billion for urban infrastructure by 2036, or about 1.2% of GDP each year. But from 2011 to 2018, actual spending was only about 0.6% of GDP, which is half of what is  needed. Other estimates, like the Brickwork Ratings assessment used by the government, put the total need even higher, at nearly ₹80 lakh crore (about US$854 billion) by 2037. No matter the exact number, all major estimates show that the gap between what is needed and what cities can currently raise is large and ongoing.

The revenue constraints facing Indian cities are significant. Property tax, the primary source of municipal revenue, generates less than 0.2% of GDP in India, compared to approximately 1.1% in OECD countries. This disparity is largely attributable to outdated valuation rolls, inadequate GIS-based property mapping, and political reluctance to revise tax rates.

The Fifteenth Finance Commission addressed this issue by making a substantial portion of urban local body grants conditional on property tax reform and the notification of floor rates, thereby acknowledging that fiscal transfers cannot replace robust own-source revenue. In this context, the Union Budget 2025–26 introduced the ₹1 lakh crore Urban Challenge Fund, which centrally finances only 25% of a bankable project’s cost and requires cities to secure the remaining 75% through municipal bonds, bank loans, or public-private partnerships. This development signals the end of the grant-dependent urban finance era and underscores the renewed policy relevance of land value capture as a municipal revenue instrument.

Functioning: How the Value Capture Finance Framework Works

The VCF Framework operationalizes a simple economic principle: public investment creates private wealth. Metro rail lines, highways, flyovers, public parks, and zoning reforms typically raise the market value of the land around them. Because this appreciation arises chiefly from government action rather than the landowner’s own effort, the framework argues that the government can legitimately recover part of it to help finance the very infrastructure that created it.

MoHUA suggests that value capture should be part of project planning from the very beginning. This means defining the area affected by a new project, estimating how much land values will rise, choosing the right tools, and including expected revenue in the project’s budget. The Ministry of Finance now also requires that Detailed Project Reports (DPRs) for central government projects must consider value capture as a funding option during review.

Because land and urban planning are State subjects under the Constitution, the framework deliberately does not prescribe a single national model. Instead, it offers States and ULBs a menu of instruments to adapt to their own legal and institutional context:

• Betterment levy: A one-time charge on landowners benefiting from a specific public project
• Development charges and impact fees: Levied at the point of building permission or land-use change
• Land value tax and vacant land tax
• Premium Floor Space Index (FSI) / Floor Area Ratio (FAR): charging developers for additional built-up area above baseline norms
• Charges for change of land use
• Transfer of Development Rights (TDR)
• Tax Increment Financing (TIF)
• Land pooling and land readjustment
• Special assessment districts and zoning incentives

In practice, premium FSI and land pooling are the easiest tools for Indian cities to use. For example, Mumbai has financed major infrastructure through premium FSI, particularly around the Bandra-Kurla Complex, and recently expanded land pooling approaches for its new development corridors. Similarly, Ahmedabad has used land pooling extensively under its Town Planning Schemes, allowing the city to provide new roads and public amenities while returning more valuable serviced plots to original landowners. On the other hand, betterment levies and Tax Increment Financing (TIF) are rare because most Urban Local Bodies (ULBs) lack the skills or legal frameworks to support them.

Figure 1. Value capture works as a loop: each round of infrastructure funds the next.

Policy Evolution: From JNNURM to the Urban Challenge Fund

VCF is not a standalone idea. It comes from a long history of changes in how Indian cities manage their finances.

Looking at the timeline, it is clear that VCF was  designed  to work  alongside  other reforms. It was designed to go hand in hand with municipal reforms such as JNNURM and the Finance Commission, spatial policies such as TOD and Gati Shakti, and newer market-based tools such as municipal bonds and the Urban Challenge Fund. The 2024 review by the Standing Committee on Housing and Urban Affairs found that many cities struggled to generate revenue from land or attract private investment, even when policies supported it. This warning applies to both VCF and the new Urban Challenge Fund.

Case Studies: VCF in Practice

Mumbai Metropolitan Region: Premium FSI and the Mumbai 3.0 Land Pooling Model

The Mumbai Metropolitan Region Development Authority (MMRDA) has long financed infrastructure through premium FSI and development rights charged on real estate built above baseline norms, most visibly around the Bandra-Kurla Complex. In 2026, MMRDA extended this logic with a new participatory land acquisition framework for the “Mumbai 3.0” expansion linked to the Atal Setu corridor, covering over 323 sq.km in Raigad district.

Landowners can choose between consent-based acquisition, compensation in development rights (FSI or TDR), or a land pooling option, under which 22.5% of developed, infrastructure-serviced land is returned to them. The model illustrates how value capture can be structured as a partnership with landowners rather than a purely regulatory levy, improving political acceptability while still recovering a share of the value that public infrastructure creates.

Gujarat: Town Planning Schemes

Gujarat’s Town Planning Scheme (TPS) mechanism, used extensively by urban development authorities such as AUDA in Ahmedabad, remains India’s most mature land-readjustment model. Under a TPS, private landholdings within a designated area are pooled, roads and public amenities are laid out, and a portion of the serviced, appreciated land is retained by the authority, typically sold to fund infrastructure, while the remainder is returned to original owners at a higher value than before. Because it works with existing landowners rather than requiring outright acquisition, the TPS model has faced comparatively less political resistance and offers a template that other States have studied but rarely replicated at the same scale.

Delhi Metro: Property Development as Non-Fare Revenue

The Delhi Metro Rail Corporation (DMRC) has used station-area property development, commercial leasing, and advertising rights as a significant source of non-fare revenue since its early phases, supplementing farebox income and helping service project debt. This model, while narrower than a formal betterment levy, serves as an indirect form of value capture: DMRC captures part of the commercial value generated by a metro station in its immediate vicinity, rather than leaving that value entirely to private developers.

Hyderabad Metro: Station-Area Commercial Development

The Hyderabad Metro, delivered under a public-private partnership with L&T as concessionaire, was structured from the outset around the expectation that fare revenue alone would not cover the cost of one of the world’s largest metro PPPs; project financing therefore, leaned heavily on non-fare revenue from station-area property and commercial development. The model shows both the promise and the risk of relying on value capture at the project appraisal stage: when real estate markets underperform projections, as happened in Hyderabad’s early years of operation, the anticipated non-fare revenue can fall short, leaving the financing plan exposed.

Together, these examples show that value capture is already used in India and supports some of the country’s biggest infrastructure projects. However, there is no clear, standard legal and administrative framework at the State level, which means only large cities with strong technical teams can use these tools effectively.

Challenges: Why the 2017 Framework Has Not Been Institutionalized

The main problem is not whether people accept the idea, but how it is put into practice. Although the framework has influenced how India thinks about urban finance, implementing it remains uneven across States and cities for three main reasons.

The Framework  Is Advisory, Not Mandatory.

The 2017 framework is guidance, not binding law. Beyond the Metro Rail Policy’s requirement that States examine VCF before seeking central assistance, no legal obligation compels States or ULBs to adopt any specific instrument, and the Union Government has limited constitutional room to mandate one.

Land Remains A State Subject.

Since land, urban planning, and municipal taxation fall under the State List, implementation depends entirely on each State amending its own Town and Country Planning Acts, Municipal Corporation Acts, and land revenue legislation. This has produced a patchwork: Maharashtra and Gujarat have relatively well-developed premium FSI, TDR and TPS provisions; many smaller States have none.

Weak Technical And Institutional Capacity.

Most ULBs lack GIS-based land valuation systems, up-to-date land records, or staff trained in land economics or financial modeling. Out of more than 4,000 ULBs in India, only a few, like Pune, Ahmedabad, and Indore, have issued municipal bonds, and even fewer have the skills and legal tools to confidently create a betterment levy or TIF district. The Digital India Land Records Modernization Program (DILRMP) aims to fix this over time, but just digitizing records is not enough. It also needs trained valuation officers and updated legal rules.

Political factors also pose challenges. Extra charges on landowners and developers, even if they make sense, often face strong opposition, and city councils up for re-election are not eager to impose them on their own. Coordination is another problem, since VCF typically requires agreement among development authorities, municipal corporations, transport agencies, and State governments, each with their own goals and schedules. The Standing Committee’s 2024 report found that many Smart Cities struggled with land monetization and PPPs, even with clear support, a warning for the next stage of VCF.

Impact: The Equity Question

A real discussion about value capture must also look at who gains and who loses. On the one hand, VCF can be fairer than funding infrastructure solely through debt or taxes, since it asks landowners who benefit from higher property values to help pay for the projects. On the other hand, higher land values near metro stations and redevelopment areas can push out low-income residents and tenants, accelerate gentrification, and reduce affordable housing where it is most needed.

A credible VCF architecture therefore needs an explicit equity safeguard: earmarking a defined share. To be fair, a good VCF system should set aside a clear share of the captured value, whether from premium FSI, betterment levies, or land pooling for affordable housing, slum upgrades, or public transport subsidies in the same area. Gujarat’s Town Planning Schemes already reserve some serviced land for poorer groups, but this is not always done well. Making these reservations a standard rule, not just an option, would help ensure value capture benefits everyone, not just a few.

Way forward: A Reform Agenda for 2026 and Beyond

Rather than generic exhortations to “build capacity” or “improve coordination,” the next phase of VCF reform needs specific, sequenced actions at each level of government.

National Level

• Update the 2017 VCF Framework to explicitly reference post-2020 missions, e.g. , PM Gati Shakti, AMRUT 2.0, the Urban Challenge Fund, and DILRMP, so that value capture is designed as a complement, not a substitute, for these instruments.
• Make the VCF assessment a mandatory, auditable component of DPR appraisal for all centrally assisted urban infrastructure, rather than merely a recommended practice.
• Prepare model State legislation on premium FSI, betterment levies, TIF and land pooling that States can adopt or adapt, reducing the drafting burden on individual State governments.
• Link a portion of Urban Challenge Fund and Finance Commission incentive grants to demonstrate adoption of at least one VCF instrument, mirroring the property-tax conditionalities already used by the Finance Commission.

State Level

• Amend the Town and Country Planning Acts to explicitly authorize premium FSI, betterment levies, TIF districts, and land pooling, thereby closing the legal ambiguity that currently deters many ULBs from acting.
• Issue State-level VCF guidelines that specify valuation methodologies, influence-zone definitions, and revenue-sharing formulas between the State, development authorities, and ULBs.

City Level

• Establish dedicated VCF cells within major ULBs and development authorities, staffed with land economists, GIS analysts, and financial modelers, to appraise and monitor value-capture revenue.
• Integrate VCF projections into City Development Plans and Comprehensive Mobility Plans, so that anticipated land-value revenue is budgeted for, rather than treated as a windfall.
• Publish annual VCF revenue reports, both to build public trust and to create the track record that credit-rating agencies need before a city can access municipal bond markets.
• Earmark a fixed share of captured value, for instance, a minimum proportion of premium FSI or betterment-levy proceeds, for affordable housing and climate-resilient infrastructure in the same influence zone.

Conclusion

The future of India’s cities will depend as much on how infrastructure is paid for as on how it is built. Grants and taxes alone cannot fill an investment gap of hundreds of billions of dollars. Recent government reforms, the Urban Challenge Fund’s focus on market financing, the Finance Commission’s property-tax rules, and the push for municipal bonds all point to one thing: cities need to learn how to fund themselves. Value Capture Finance is one of the few ways cities can use land, an asset they already have, instead of raising new taxes or taking on more debt.

The 2017 framework made a strong economic case for value capture. But the legal and administrative systems needed to use it widely have not kept pace, so only a few big cities with enough technical expertise have adopted it effectively. To make VCF a common tool for Indian cities, the framework should be updated to reflect today’s policies, States should provide practical legal templates, cities need better valuation and management skills, and a share of the revenue should go to affordable housing. These steps would help move VCF from a good idea to a standard part of city finance as urbanization grows.

References & Bibliography

Asian Development Bank. (2022, April 5). In India, capturing the value of land near metro stations is critical. ADB Blog. https://blogs.adb.org/blog/india-capturing-value-land-near-metro-stations-critical

Asian Development Bank. (n.d.). Transit-oriented development and land value capture in India. https://www.adb.org/sites/default/files/publication/812521/india-transit-oriented-development-land-value-capture.pdf

Global Infrastructure Hub. (2021, October 17). Hyderabad Metro Rail: Improving delivery models. https://infrastructuredeliverymodels.gihub.org/case-studies/hyderabad-metro-rail/

Government of India, Ministry of Finance. (2017). Office Memorandum on inclusion of Value Capture Finance in Detailed Project Reports. Referenced within the VCF Policy Framework.

Government of India, Ministry of Housing and Urban Affairs. (2017). Metro Rail Policy, 2017.

Government of India, Ministry of Housing and Urban Affairs. (2017). National Transit-Oriented Development Policy.

Government of India, Ministry of Housing and Urban Affairs. (2017). Value Capture Finance Policy Framework. https://mohua.gov.in/upload/whatsnew/59c0bb2d8f11bVCF_Policy_Book_FINAL.pdf

Government of India, Ministry of Housing and Urban Affairs. (n.d.). Acts and policies. https://mohua.gov.in/documents/acts-and-policies

Government of India, Press Information Bureau. (2016, November 7). Tapping value added to finance urban infrastructure through Value Capture Financing. https://pib.gov.in

India Brand Equity Foundation. (2026, May 18). India’s cities need US$854.43 billion investment to support urban growth: Report. https://www.ibef.org/news/india-s-cities-need-us-854-43-billion-investment-to-support-urban-growth-report

MMRDA rolls out participatory land acquisition model for Mumbai 3.0 development. (2026, April 21). Prop News Time. https://www.propnewstime.com/getdetailsStories/MjkzMzg=/mmrda-rolls-out-participatory-land-acquisition-model-for-mumbai-3-0-development

National Institute of Urban Affairs. (2024). Value Capture Finance Knowledge Platform. https://vcf.niua.in

OECD, Lincoln Institute of Land Policy, & PKU-Lincoln Institute Center. (2022). Global compendium of land value capture policies: India. https://www.oecd.org/en/publications/global-compendium-of-land-value-capture-policies_4f9559ee-en/

PRS Legislative Research. (2026). Demand for grants 2024–25 analysis: Housing and urban affairs. https://prsindia.org/budgets/parliament/demand-for-grants-2024-25-analysis-housing-and-urban-affairs

Prime Minister of India. (2026, February 14). Cabinet approves Rs. one lakh crore Urban Challenge Fund to drive market-led urban transformation. https://www.pmindia.gov.in/en/news_updates/cabinet-approves-rs-one-lakh-crore-urban-challenge-fund-to-drive-market-led-urban-transformation/

The Federal. (2025, February 3). Urban Challenge Fund: Smart Cities Mission gets new coat of paint. https://thefederal.com/budget-2025-26/budget-urban-challenge-fund-smart-cities-mission-169980

World Bank. (2022, November 14). India’s urban infrastructure needs to cross $840 billion over next 15 years: New World Bank report. https://www.worldbank.org/en/news/press-release/2022/11/14/india-s-urban-infrastructure-needs-to-cross-840-billion-over-next-15-years-new-world-bank-report

World Bank. (2024, January 30). Gearing up for India’s rapid urban transformation. https://www.worldbank.org/en/news/opinion/2024/01/30/gearing-up-for-india-s-rapid-urban-transformation

About the Contributor

Tanvi Nerurkar is currently working as a Research & Editorial Intern at IMPRI. She holds a Bachelor’s degree in Architecture from VESCOA, University of Mumbai. She is presently pursuing a Master’s in Urban Management at CEPT University, where she explores cities through research-driven policy approaches, adaptive governance frameworks, and sustainable development initiatives. Her objective is to contribute implementation-oriented policy research that supports the efficient functioning of cities and creates meaningful value for society at large.

Acknowledgement 

The author extends her sincere gratitude to the IMPRI team for their invaluable guidance throughout the process.

Reviewers: Rashi Kothari and Neha Kumari

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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