The Goods and Services Tax (GST) significantly affects residential property. Importantly, GST applies only to under-construction properties; the sale of completed (ready-to-move-in) flats with an occupancy certificate is exempt. For under-construction apartments, the applicable GST rate depends on whether the unit qualifies as affordable housing under Indian GST rules.
The Goods and Services Tax (GST) significantly affects residential property. Importantly, GST applies only to under-construction properties; the sale of completed (ready-to-move-in) flats with an occupancy certificate is exempt. For under-construction apartments, the applicable GST rate depends on whether the unit qualifies as affordable housing under Indian GST rules.
What Qualifies as Affordable Housing?
GST defines affordable housing by both size and price:
- Carpet area of up to 60 sq. meters in metro cities, or up to 90 sq. meters in non-metros.
- Price cap of ₹45 lakh (whichever city).
Units meeting these criteria are treated as affordable housing. Others are classified as non-affordable (luxury) housing for tax purposes.
GST Rates and Conditions
Under the current law (since April 2019), the GST rates are:
- 1% GST (without ITC) on under-construction affordable housing.
- 5% GST (without ITC) on under-construction non-affordable (standard) housing.
These rates replaced the earlier 12% (non-ITC) and 8% (ITC) rates to reduce the tax burden on homebuyers.
Key Condition: To claim the 1% rate, developers must procure at least 80% of construction materials and services from GST-registered vendors. If this condition is not met, the developer must pay 18% GST under the Reverse Charge Mechanism (RCM) on the shortfall. This rule ensures that most inputs are taxed and discourages procurement from unregistered sources.
Input Tax Credit (ITC) and Reverse Charge
Under the 1%/5% regime, no Input Tax Credit (ITC) is available for construction materials or services. All GST paid by the developer or builder on inputs effectively increases the net tax outflow. Buyers cannot claim GST credit on the purchase of residential units in either category.
The Reverse Charge Mechanism (RCM) kicks in if the 80% condition fails. In such cases, the developer bears 18% GST liability on the remaining inputs, which may indirectly affect pricing. Buyers do not directly pay RCM; however, it is an indicator of the project's compliance.
Key Takeaways for Buyers
- Under-Construction vs Completed: GST is charged only on under-construction units. Verified completed, ready-to-move-in flats (with completion certificate) attract no GST.
- Affordable vs Non-Affordable: Check if your flat meets the affordable housing criteria (≤60/90 m² and ≤₹45L) to qualify for 1% GST. Otherwise, the 5% rate applies.
- Builder Compliance: Developers must source most materials from registered suppliers. If not, they incur 18% GST under RCM (which may indirectly impact costs).
- Overall Impact: The 1%/5% GST structure lowers upfront taxes for homebuyers. For affordable housing buyers, the 1% rate (without ITC) significantly reduces cost compared to earlier tax regimes.
Conclusion and Next Steps
GST rules for housing can be intricate, but they generally favor homebuyers through lower rates on affordable units. If you are purchasing an under-construction flat, verify the project's GST category and the builder's compliance status.
For personalized guidance on GST on affordable housing, consult Tax Vimarsh. Our specialists can help you navigate GST rates, confirm your eligibility for reduced rates, and ensure your transaction is fully compliant. Contact Tax Vimarsh today to optimize the tax impact on your property purchase.