GST on Under-Construction Flats and Property

If you buy a flat before it is finished, you pay GST on it. If you buy the same flat after the completion certificate is issued, you do not. That single distinction drives most of the confusion around GST on property, and the rates themselves are simpler than they look once you see how the land abatement works. This post covers what a buyer pays on an under-construction residential or commercial unit, what counts as affordable housing, how the extra charges on a builder's demand letter are treated, and why you cannot claim the GST back.

When GST applies to a property purchase

GST taxes supplies of goods and services. Land is outside it, and so is the sale of a completed building. What the builder supplies to you while the building is still going up is treated as a construction service, and that service is taxable.

The line is drawn in Schedule III of the CGST Act, which lists activities that are neither a supply of goods nor a supply of services. It includes the sale of land and, read with paragraph 5(b) of Schedule II, the sale of a building where the entire consideration is received after the completion certificate is issued by the competent authority, or after its first occupation, whichever is earlier.

So the test is about when the money is received, not when you sign. A flat booked and paid for in instalments during construction is taxable on each instalment. A finished flat bought outright with a completion certificate in hand is not. If your payments straddle the completion certificate, ask the builder in writing how they are treating the instalments received after it, and have your adviser check the position; the condition in the law refers to the entire consideration.

Resale is different again. When one individual sells a flat to another, the seller is not making a business supply of construction services, so there is no GST on the resale price, only stamp duty and registration.

The rates for residential and commercial units

The current scheme for real estate took effect on 1 April 2019. It replaced the earlier 12% and 8% effective rates, which came with input tax credit, with lower rates that come without it. Projects already under way on that date had a one-time option to stay on the old rates, so a buyer in an older project may still see 12% or 8% on the demand letter; the builder should be able to tell you which option the project took.

A residential real estate project is one where commercial carpet area is no more than 15% of the total carpet area of the project. Shops in such a project are taxed like the flats around them. A mall or office tower is a commercial project and sits in the last taxable row.

The builder's side of this has its own conditions. Under the lower rates, a promoter must buy a large share of inputs and input services from registered suppliers, and pays tax under reverse charge on any shortfall. Those are the builder's compliance obligations and do not change what you pay, but they are part of why a builder's GST registration and filing record matter. The classification of the underlying construction service is covered in HSN and SAC codes for works contracts.

The one-third land abatement, and how to calculate it

A flat price includes land, and land is outside GST. Rather than make every builder value the land separately, the rate notification deems one-third of the total amount charged to be the value of the land or the undivided share of land, and taxes the remaining two-thirds. That is why the notified rate and the effective rate differ.

• 7.5% × 2/3 = 5% of the total price.
• 1.5% × 2/3 = 1% of the total price.
• 18% × 2/3 = 12% of the total price.

Worked through on two purchases:

• Non-affordable flat, ₹90 lakh. Taxable value is ₹60 lakh (two-thirds). GST at 7.5% is ₹4.5 lakh, split equally between CGST and SGST. That is 5% of ₹90 lakh.
• Affordable flat, ₹40 lakh. Taxable value is about ₹26.67 lakh. GST at 1.5% is ₹40,000, which is 1% of ₹40 lakh.

In practice you apply the effective rate to each instalment as the builder raises it. The general mechanics of computing tax on a price are in how to calculate GST, and the GST calculator will do the arithmetic if you enter the effective rate.

The deemed one-third is a fixed figure. It applies even where the land is worth more or less than a third of the price, which is the trade-off for not having to value it.

What counts as affordable housing

The 1% rate turns on a definition, and both parts of it have to be met.

1. Carpet area. No more than 60 square metres in a metropolitan city, or 90 square metres elsewhere. The metropolitan cities for this purpose are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon and Faridabad), Hyderabad, Kolkata and Mumbai (the whole of MMR).
2. Price. The gross amount charged for the apartment is no more than ₹45 lakh.

A 55 sq m flat in Pune priced at ₹48 lakh fails the price test and is taxed at 5%. A 70 sq m flat in Bengaluru priced at ₹42 lakh fails the carpet area test for the same reason. Carpet area here is the RERA-style usable area, not super built-up area, so read the figure on the agreement, not the brochure.

Housing built under specified central and state government schemes is also treated as affordable. If your project is one of these, the builder will usually say so on the agreement.

Parking, PLC, club fees and maintenance

A builder's demand letter rarely has one line. How each extra line is taxed depends on whether it is part of the same supply as the flat.

• Preferential location charges, floor rise and covered parking charged as part of the apartment price are generally treated as part of the single construction supply, taxed at the same rate as the flat. Advance rulings have gone this way, but the answer depends on how the agreement is written.
• Club membership, amenity or facility charges for a service that is separate from the flat are generally taxed as a standalone service at the rate applicable to that service, which for most such services is 18%. Ask the builder which rate they have used and why.
• Maintenance deposits and advance maintenance collected by the builder before the society takes over are a supply by the builder and are usually charged at 18%.
• Maintenance paid to a resident welfare association is exempt up to ₹7,500 per member per month. Above that, GST applies to the entire amount, not just the part over ₹7,500. An RWA whose aggregate turnover is below the registration threshold does not charge GST at all.

Input tax credit and stamp duty

A buyer who is going to live in the flat has no way to recover the GST. Input tax credit is only available to a registered person who uses the purchase in the course of business, and a home is not.

A business buying an office or shop under construction is also generally shut out. Section 17(5)(d) blocks credit on goods and services received for the construction of an immovable property on your own account, other than plant and machinery, even when the building will be used for business. Paying for an under-construction unit is paying for construction service on your own account. The details and the exceptions are in blocked credits under Section 17(5), and the wider rules in the input tax credit guide.

Stamp duty is a state levy on the conveyance, and the rate and valuation basis vary by state. It is payable in addition to GST on an under-construction purchase. On a completed property the buyer pays only stamp duty and registration, which is one reason ready-to-move flats can be cheaper in total even when the headline price is higher.

The builder is also denied credit. Under the 1% and 5% schemes, GST the builder pays on cement, steel and contractor services is a cost, and that cost is priced into the flat. The input side is covered in HSN codes for cement and construction materials.

A checklist before you pay the next instalment

1. Confirm the rate on the demand letter and which scheme the project follows: 1% or 5% for a project on the post-April 2019 scheme, or the older rates if it opted to stay on them.
2. Check affordable housing eligibility yourself against the carpet area and ₹45 lakh tests. A flat just over either limit is taxed at 5%.
3. Ask for the GST split on every line: base price, PLC, parking, club, maintenance deposit. Each should state the rate and the reason.
4. Check the builder's GSTIN. The GSTIN on the demand letter and invoice should be active, in the builder's legal name and in the state where the project sits. You can check it free, five times a day, on the GST number search, which also shows whether the builder has been filing returns.
5. Keep every tax invoice and receipt. If the completion certificate arrives before your final payment, those documents are what you and your adviser will use to work out what was taxable.

Frequently asked questions