The cabinet has amended a bill to regulate the real estate sector, protect home buyers and curb undeclared "black money" in property markets that costs the exchequer billions of dollars in lost taxable income.
The decision by Prime Minister Narendra Modi's government to amend the bill, which was submitted by the previous government in 2013 but not passed by the upper house, aims to boost investor confidence and stamp out illegal practices.
The new rules, applicable to residential and commercial developments, will make it mandatory for all projects and brokers to be registered with the real estate regulator who will oversee transactions and settle disputes.
"The bill seeks to ensure accountability and transparency, which will in turn enable the real estate sector to access capital and financial markets essential for its long-term growth," the government said in a statement on Tuesday.
During recent years sluggish economic growth and delays in getting approvals stalled several real estate projects, leaving buyers waiting for their homes and developers holding high debt.
"This will be a game-changer for the sector," Rajeev Talwar, executive director at DLF Ltd, India's top real estate developer.
"It will lead to more transparency and mature industry, and investor confidence will go up," he told Reuters on Wednesday, adding that it will make developers more accountable and investors more aggressive.
The new laws, expected to benefit developers such as DLF, Oberoi Realty and Puravankara Projects are also expected to help Modi achieve his election promise of providing homes for all Indian families by 2022.
India's real estate index outperformed the wider market, rising 2.18 percent at 0654 GMT.
Puravankara and Orbit Corporation were among the shares leading gains. Vendors in India's real estate market often demand part payment in illicit cash, making many ordinary people party to corruption and excluding some of the emerging middle class from the market.
A key provision of the amended bill makes it mandatory for developers to put aside 50 percent of the money collected from buyers during pre-sale of homes and use that only for funding construction of the project.
Several projects in India have been delayed in recent years after some developers diverted funds raised for one project to another, leaving them out of pocket to complete construction and resulting in buyers still waiting for their homes.
The bill seeks to divert this flow of funds, and impose penalties, including de-registration of the project and other fines in case of a breach.
