The introduction of Goods and Services Tax (GST) in India has significantly impacted the real estate sector. GST is a value-added tax levied on the sale of goods and services, and it has replaced several indirect taxes like VAT, service tax, and stamp duty. When it comes to property purchases, especially for new residential properties, GST has made notable changes. Below is a detailed overview of how GST affects property purchases in India.
1. GST on Residential Property Purchases
GST on Under-Construction Properties
For under-construction properties (residential or commercial), GST is applicable, and the rate depends on the type of property:
- Affordable Housing:
- GST is charged at 1% (without input tax credit or ITC) for properties that fall under the affordable housing category.
- The definition of affordable housing is based on the property price and the size of the apartment. As of the latest updates, affordable housing properties are those priced below ₹45 lakhs and measuring 60 square meters or less for a single unit in non-metro cities, or 90 square meters or less for cities like Delhi, Mumbai, Chennai, Bengaluru, etc.
- Other Residential Properties:
- GST is charged at 5% (without input tax credit) on non-affordable residential properties. This rate applies to properties that do not qualify as affordable housing and includes properties with a larger area and higher price.
GST on Ready-to-Move-In Properties
- No GST on Ready Properties: If the property is ready for possession, and you are purchasing it directly from the builder or seller, GST does not apply. However, if the property was purchased during construction, GST would have been applicable until the completion.
2. Input Tax Credit (ITC) for Builders
The input tax credit (ITC) allows builders to claim a refund for the GST they paid on construction materials, labor, and other inputs. However, since homebuyers purchasing under-construction properties cannot directly benefit from ITC, the developers usually factor this cost into the final price of the property.
- Impact on Buyers:
- Builders cannot pass on the input tax credit to buyers, which means the GST on under-construction properties is paid as a part of the overall price, and it is non-refundable for the buyers.
- However, with the reduced GST rates for residential properties, the overall cost of under-construction properties has come down compared to pre-GST days.
3. GST on Sale of Land
Land is exempt from GST. Whether the land is agricultural or non-agricultural, it is not subject to GST, and therefore, no tax is levied on land transactions.
- Property Purchase with Land: When buying a plot of land (without any construction), GST is not applicable. However, if there is a building or construction on the land (like a ready-to-move-in property), the applicable GST rates will depend on the stage of construction.
4. GST on Commercial Properties
GST is applicable to commercial properties in a similar way as residential under-construction properties. The GST rate is typically:
- 12% GST (with input tax credit or ITC) on commercial real estate. Commercial properties are subject to this higher rate due to their intended use for business purposes.
This means that when buying a commercial property, buyers will have to pay 12% GST, and they can claim the input tax credit on materials and services purchased for the construction.
5. GST Impact on Property Transactions Involving Builders
When you buy property directly from a builder, the GST is applied to the sale price of the property. For transactions involving a builder-developer, the GST is added to the cost of the property, and the buyer pays it directly.
Impact on Homebuyers:
- Higher Property Prices: Since developers factor in the GST costs (especially the 5% GST rate), the price of under-construction properties is typically higher than pre-GST days.
- No GST on Stamp Duty: GST is not applicable on stamp duty or registration charges, so these costs are separate from the GST paid on the property.
6. GST on Property-Related Services
Apart from the property price itself, there are other services that may attract GST. These include:
- Brokerage Charges: Real estate agents or brokers who facilitate property transactions may charge a service fee, which is subject to 18% GST.
- Legal and Documentation Fees: Charges for legal services related to property transactions, such as document preparation or registration, are also subject to 18% GST.
7. GST on RERA-Registered Properties
The introduction of RERA (Real Estate Regulation and Development Act) has streamlined the real estate sector, and it works in tandem with GST to ensure transparency in the sector.
- Benefits of RERA and GST: Developers are now bound to follow certain rules, ensuring timely possession, quality assurance, and pricing transparency. This reduces the chances of hidden costs or GST-related discrepancies.
- Transparency: With RERA registration, builders are also obligated to disclose GST in their advertisements and contracts, making it clearer for the buyer.
8. GST on Maintenance Charges
Maintenance charges levied by the builder or property management company in a housing society are subject to 18% GST. These charges are applicable for common area maintenance, including water supply, security, and cleaning services.
- Exemption for Residential Property Owners: If the maintenance charges are levied on a single residential unit, a GST of 18% is applicable. However, for property owners of smaller units in larger developments (apartments or housing societies), some exemptions or reductions in charges may apply.
9. GST’s Role in Affordable Housing Projects
The GST rates for affordable housing are significantly reduced to encourage the development of low-cost housing. This has created an opportunity for buyers looking to invest in affordable homes:
- 1% GST for Affordable Housing: The 1% GST rate (without input tax credit) applies to affordable housing, making it more accessible to the target audience. The reduced rate ensures that the overall cost of affordable housing projects remains within reach of the average buyer.
10. Impact of GST on Real Estate Investment
For real estate investors, GST can have both positive and negative impacts:
- Positive Impact: The introduction of GST has led to more transparency and standardized pricing in the real estate sector. The reduced GST rates on affordable housing make it more attractive for investors targeting rental income from affordable properties.
- Negative Impact: Higher GST rates on commercial properties and under-construction residential properties may increase the initial investment required, potentially impacting short-term returns on investment.
Conclusion
GST has brought significant changes to the real estate market in India, particularly for new constructions and under-construction properties. While it has increased transparency and streamlined the taxation process, homebuyers and investors need to be aware of the different GST rates applicable to residential and commercial properties, as well as the input tax credit (ITC) provisions for builders. Buyers should factor in GST when planning their property purchase to better assess the overall cost and impact of the tax on their budget.