How GST Impacts Under-Construction Property Prices: Must-Know Insights for Buyers

When investing in an under-construction property in India, understanding the Goods and Services Tax (GST) implications is crucial for effective financial planning. This comprehensive guide explores everything you need to know about GST on under-construction properties, helping you make informed decisions and manage your tax obligations efficiently.

What is GST on Under-Construction Properties?

Introduced in 2017, the Goods and Services Tax (GST) streamlined India's complex tax structure by replacing multiple indirect taxes with a unified tax system implemented at both central and state levels.

For home buyers, it's important to note that GST applies only to under-construction properties. Ready-to-move-in properties or those with completion certificates are exempt from GST charges.

Initially, the government imposed an 18% tax on under-construction properties, with homebuyers responsible for approximately 12% (about two-thirds of the total tax). Since land value constitutes a significant portion of property cost, the government allowed land value deduction before GST calculation, resulting in substantial savings for buyers.

Following the 33rd GST Council amendment, the GST rate for under-construction properties was reduced from 12% to 5% (without Input Tax Credit). For affordable housing (properties priced up to ₹45 lakhs), the GST rate was further reduced to 1%.

How to Calculate GST on Under-Construction Properties

The formula for calculating GST on under-construction properties is:

GST = (Total property value × 2/3) × GST rate/100

Where:

• Total property value = The complete price of the property
• 2/3 taxable value = The property value subject to taxation (as 1/3rd represents land value, which is exempt from GST)
• GST Rate = 5% for standard residential housing and 1% for affordable housing

Example: GST Calculation for Affordable Housing

• Property Value: ₹42,00,000
• GST Rate: 1%
• Taxable Value: ₹42,00,000 × 2/3 = ₹28,00,000
• GST Amount: ₹28,00,000 × 1/100 = ₹28,000
• Total Amount: ₹42,00,000 + ₹28,000 = ₹42,28,000

Example: GST Calculation for Standard Residential Housing

• Property Value: ₹75,00,000
• GST Rate: 5%
• Taxable Value: ₹75,00,000 × 2/3 = ₹50,00,000
• GST Amount: ₹50,00,000 × 5/100 = ₹2,50,000
• Total Amount: ₹75,00,000 + ₹2,50,000 = ₹77,50,000

Essential GST Details Every Home Buyer Should Know

Understand Applicable GST Rates

• Residential Properties: 5% GST without Input Tax Credit (ITC)
• Affordable Housing: 1% GST without ITC
• Commercial Properties: 12% GST

Before making payments, verify whether your property qualifies as standard residential or affordable housing to ensure you pay the correct GST rate.

Verify Taxable Value Calculation

GST applies only to construction costs, not land value. Ensure your builder has separated land value from the total cost and is charging GST only on the construction component.

Check Project Status

Remember that completed properties with occupancy certificates are GST-exempt. Verify the actual construction status of your property before making GST payments. Note that GST is separate from mandatory stamp duty and registration charges that apply to all property transactions.

Negotiate with Developers

While GST rates are fixed by law, you may negotiate with developers to absorb part or all of the GST in the property price. Successful negotiation can reduce your overall financial burden significantly.

Include GST in Budget Planning

GST represents a substantial portion of your property investment. When planning your budget, always factor in GST payments to avoid financial strain later.

Financial Implications of GST for Home Buyers

Cost Savings

The exclusion of land value from GST calculations results in significant savings for property buyers compared to the previous tax regime.

Price Advantage

Under-construction properties often offer price advantages over ready-to-move-in options, partially offsetting the GST payment. This makes them attractive despite the associated construction risks.

Simplified Taxation

The GST system has streamlined multiple taxes into a single structure, making compliance easier and more transparent for both buyers and developers.

Tips for Managing GST Payments Effectively

Pay According to Construction Progress

GST payments are typically made in installments based on construction milestones. Be prepared to pay GST each time the developer issues an invoice for completed construction phases.

Avoid Payment Delays

Ensure timely GST payments to avoid penalties and interest charges, which can add significantly to your financial burden.

Maintain Proper Documentation

Keep all GST payment receipts and related documents safely. These records are essential for potential disputes, property resale, or income tax filings.

Verify Developer's GST Compliance

Before finalizing a property purchase, confirm that the developer is GST-registered and compliant. Non-compliant developers may create legal complications for buyers if they fail to remit collected GST to the government.

GST Exemptions for Under-Construction Properties

While there are no general exemptions for under-construction properties, the government has provided relief through reduced rates:

• Affordable Housing: Benefits from a significantly reduced 1% GST rate without ITC
• Government Housing Schemes: Projects under initiatives like Pradhan Mantri Awas Yojana may qualify for certain exemptions to reduce the financial burden on economically weaker sections and low-income groups

Essential Documents for GST Compliance

When filing GST returns or claiming benefits related to property purchases, maintain these key documents:

• PAN Card: Essential for tax identification
• Bank Statements: Evidence of payments made
• Sale Agreement: Proof of transaction between buyer and developer
• GST Registration Certificates: Required for both parties during tax filings
• Developer's GST Invoices: Should clearly state property price, applicable GST rate, and total amount payable
• Payment Receipts: All documentation of booking amounts, installments, and other payments

Conclusion

Understanding GST implications is essential when investing in under-construction properties in India. The reduced 5% rate for standard residential properties and 1% for affordable housing has made property investment more accessible while simplifying the previously complex tax structure.

By being aware of GST calculations, payment processes, and necessary documentation, home buyers can effectively manage their tax obligations and make financially sound property investments. Always consult with a tax professional for personalized advice regarding your specific property purchase scenario.

Frequently Asked Questions

1. Is GST applicable on ready-to-move properties?
No, GST is not applicable on ready-to-move properties that have received completion certificates.

2. Can I claim Input Tax Credit (ITC) on GST paid for residential property?
No, the current GST structure for residential properties doesn't allow homebuyers to claim ITC benefits.

3. What is the GST rate for affordable housing projects?
Affordable housing projects are taxed at a concessional rate of 1% without ITC benefits.

4. Does GST apply to resale properties?
No, GST is not applicable on resale of properties as it's considered a transfer of immovable property.

5. Is GST charged on car parking spaces in residential projects?
Yes, car parking spaces are charged the same GST rate as the main property if purchased together.

6. Can builders charge GST on preferential location charges?
Yes, preferential location charges attract the same GST rate as the main property.

7. Is GST applicable on maintenance charges paid to RWAs?
Yes, maintenance charges exceeding ₹7,500 per month are subject to 18% GST.

8. Do I need to pay GST if I'm buying directly from a landowner who's not a builder?
No, GST doesn't apply when purchasing directly from individual landowners who aren't registered under GST.