The Goods and Services Tax (GST) has had a substantial influence on the taxation of residential property deals in India. While GST does not apply to ready-to-move-in properties, it does apply to under-construction projects at different rates based on the nature of the project.
This blog examines how GST influences residential property buying, applicable rates, when exemptions are permitted, and how it impacts prices and cost considerations for buyers and developers.
Introduction
Purchasing a home is perhaps the biggest financial decision for households and individuals. But aside from location, design, or qualifications for a loan, there’s one key issue that tends to confuse people how GST impacts residential property.
Since its implementation in the year 2017, the Goods and Services Tax has subsumed several indirect taxes such as VAT, service tax, and excise duties. Nonetheless, not every property transaction is taxed equally. For example, GST is only for specific residential purchases primarily of under-construction properties, not ready ones.
For buyers, knowing when and how GST is applicable can make a significant difference in planning and budgeting. For developers, it has a direct impact on project pricing, compliance, and recovery of input costs.
When is GST Charged on Residential Property?
The GST depends on the stage of the property while selling.
- GST is charged when a buyer buys an under-construction residential property from a builder or a developer.
- GST is not charged when a buyer is buying a ready-to-move property, wherein the completion certificate has been obtained at the time of sale.
So, if you’re buying a flat directly from a builder before possession, GST will be charged. But if the builder completes the construction, receives the occupation certificate (OC), and then sells the unit, it’s exempt from GST.
This distinction is critical and it’s one of the most misunderstood aspects of property taxation.
GST Rates on Residential Property
According to the current regulations (as of the April 2019 amendment), the GST rates on residential property are as follows –
1. Affordable Housing Projects
- GST Rate – 1% without input tax credit (ITC)
- Conditions – The flat should be in the “affordable” category, i.e.,
- Carpet area ≤ 60 sq. m in metros and ≤ 90 sq. m in non-metros
- Value of the property ≤ ₹45 lakh
2. Non-Affordable Housing Projects
- GST Rate: 5% without ITC
- Applies to apartments above the affordable housing limit
3. Developments with Commercial Elements
Where a residential development has up to 15% commercial area, the above rates continue to apply. Where the commercial element is higher, various rates can be applied to commercial units.
Note– GST has to be paid only on the construction price and not on land value. GST is calculated only on the value minus land by builders, as a general assumption that land value is one-third of the entire price.
Input Tax Credit (ITC) and the 2019 Change
Before April 2019, developers had been permitted to offset input tax credit (ITC) for building materials and services against their GST burden. Yet, this generally prompted disputes as to whether the benefit had been transferred to consumers.
For making the system simpler and transparent, the government redesigned the structure of GST –
- Rates of GST reduced to 5% (affordable) and 1% (non-affordable)
- In exchange, developers are no longer permitted to avail of ITC under the new scheme
This modification eliminated tax uncertainty for customers but caused worry for developers who now have to bear GST paid on raw materials such as cement and steel without set-off.
GST on Ready-to-Move-in Flats
If the property has been issued its Completion Certificate (CC) or Occupancy Certificate (OC) prior to sale, no GST is charged. This is applicable whether you are purchasing from a builder or a reseller.
But these properties could still incur stamp duty and registration fees, which are distinct from GST and still charged by state governments, typically 5–7% based on location.
This GST exemption provides ready-to-move-in houses that are financially appealing to prospective buyers who would not like to bear the additional 1–5% tax load.
Impact on Buyers
For purchasers, GST influences not only the final property cost but also when payment is made. As GST is levied on under-construction properties, the stage-wise payment plan (correlated with construction milestones) implies that GST is levied on every payment installment until possession.
This increases the ultimate price versus a ready-to-move-in apartment, which contains no GST element.
The Advantages are as follows –
- Early-bird pricing
- Improved unit choice
- Increased payment term
Purchasers need to plan for GST judiciously when assessing overall home expenses, particularly for developments under construction.
Impact on Builders and Developers
The elimination of ITC has raised input prices for developers, particularly in big housing projects. Developers are now confronted with –
- Greater construction expenses, since GST paid on raw materials cannot be recovered
- Pricing pressures, as the GST cost has to be borne or transferred to consumers
- More organized compliance, such as land value segregation and construction value segregation
Therefore, some builders like to go for ready-to-move projects or move towards commercial development where ITC is permissible.
GST on Resale Properties
No GST for resale of residential property, either completed or under construction, subject to the fact that the original sale must already have triggered GST or stamp duty. On the secondary market, registration charges and stamp duty alone need to be paid as taxes.
Resale properties become value-friendly for price-conscious buyers.
Conclusion
GST on residential housing is a high cost factor for homebuyers buying flats in under-construction projects. At 1% for affordable and 5% for other schemes, GST strongly influences pricing as well as purchasing decisions.
Even though ready-for-possession schemes have the advantage of zero GST, under-construction projects allow greater flexibility at the cost of an evident tax burden. From the developer’s perspective, the absence of ITC raises operational expense, affecting planning and margins.
Knowledge of the intricacies of GST on housing property enables both buyers and sellers to make wise, tax-conscious choices in a complicated but dynamic real estate marketplace.
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