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Published on:
March 21, 2023
By
Prudhvi Raj

Reduction of tax outgo under GST for Home Buyers

The Goods and Services Tax (GST) has revolutionized the way India's indirect tax regime works. It has replaced multiple taxes and has made the process of taxation simpler, more transparent, and more efficient. GST has also had a significant impact on the real estate sector. In this blog, we will discuss how homebuyers can reduce their tax outgo under GST.

1.Understanding GST for Home Buyers:

GST is a consumption-based tax, which means it is levied on the value of goods and services consumed in the country. In the real estate sector, GST is levied on the sale of under-construction properties, and it is important to note that it is applicable only to the construction cost and not on the land cost.

The GST rate applicable to under-construction properties is 18%. However, there is a provision for a deduction of one-third of the amount charged for the property, which reduces the effective tax rate to 12%. This deduction is allowed for the cost of the land and other goods and services, which are not related to the construction of the property.

2.Ways to Reduce Tax Outgo under GST:

Here are some ways homebuyers can reduce their tax outgo under GST:

A.Purchase a ready-to-move-in property:

As mentioned earlier, GST is not applicable to the sale of ready-to-move-in properties. Therefore, purchasing a completed property can help homebuyers avoid the GST altogether.

B.Avail of the Credit Linked Subsidy Scheme (CLSS):

The government has introduced the Credit Linked Subsidy Scheme (CLSS) under the Pradhan Mantri Awas Yojana (PMAY) to provide affordable housing to the economically weaker sections of society. Homebuyers who fall under this category can avail of a subsidy on the interest rate of their home loan. The subsidy amount is directly credited to the loan account of the beneficiary, reducing their overall outgo.

C.Claim Input Tax Credit (ITC):

Homebuyers can claim Input Tax Credit (ITC) on the GST paid on the purchase of goods and services used in the construction of the property. This can help reduce their overall tax liability. However, it is important to note that ITC can only be claimed if the developer has passed on the benefits of ITC to the homebuyer.

D.Invest in Affordable Housing:

The government has provided several incentives for the development of affordable housing projects. For instance, affordable housing projects are eligible for a lower GST rate of 8%. Investing in such projects can help homebuyers reduce their tax liability.

3.How does the GST affect Homebuyers?

The implementation of the Goods and Services Tax (GST) has had a significant impact on the real estate sector, particularly on homebuyers. The GST is a single tax that has replaced multiple taxes, making the process of taxation simpler, more transparent, and more efficient. Here's how the GST affects homebuyers:

A.Increase in Cost:

The GST is applicable to under-construction properties, which means homebuyers need to pay a tax on the cost of construction. The GST rate applicable to under-construction properties is 18%, which has increased the overall cost of buying a home.

B.ITC Benefit:

However, homebuyers can claim Input Tax Credit (ITC) on the GST paid on the purchase of goods and services used in the construction of the property. This can help reduce the overall tax liability of homebuyers. However, it is important to note that ITC can only be claimed if the developer has passed on the benefits of ITC to the homebuyer.

C.Tax Deduction:

There is a provision for a deduction of one-third of the amount charged for the property, which reduces the effective tax rate to 12%. This deduction is allowed for the cost of the land and other goods and services, which are not related to the construction of the property.

D.Impact on Affordable Housing:

The government has provided several incentives for the development of affordable housing projects. Affordable housing projects are eligible for a lower GST rate of 8%, which has made it more affordable for buyers in this segment.

E.Ready-to-Move-In Properties:

The GST is not applicable to the sale of ready-to-move-in properties. Therefore, purchasing a completed property can help homebuyers avoid the GST altogether.

Conclusion

In summary, the implementation of the GST has had both positive and negative impacts on homebuyers. While the overall cost of buying a home has increased due to the GST, homebuyers can claim ITC, take advantage of tax deductions, invest in affordable housing projects, and purchase ready-to-move-in properties to minimize their tax liability. It is important for homebuyers to understand the impact of the GST on the real estate sector and to consult a tax expert to ensure compliance with the law.

4.What tax reduction can you get by buying a house/residence?

There are several tax reductions that you can get by buying a house/residence, depending on the country and the tax laws in place. Here are some of the common tax reductions that homebuyers may be eligible for:

A.Mortgage Interest Deduction:

In many countries, including the United States, Canada, and the United Kingdom, homeowners can deduct the interest paid on their mortgage from their taxable income. This can significantly reduce their tax liability and make homeownership more affordable.

B.Property Tax Deduction:

Homeowners may also be eligible for a property tax deduction. In some countries, such as the United States, homeowners can deduct the property taxes they pay on their primary residence from their taxable income.

C.Capital Gains Exclusion:

When you sell your primary residence, you may be eligible for a capital gains exclusion. In the United States, for example, homeowners can exclude up to $250,000 in capital gains from the sale of their primary residence (or up to $500,000 for married couples filing jointly) if they have owned and used the property as their primary residence for at least two years.

D.Home Improvement Deductions:

If you make improvements to your home that increase its value, you may be eligible for a tax deduction. In some countries, such as the United States, homeowners can deduct the cost of energy-efficient upgrades, such as solar panels or a geothermal heating system, from their taxable income.

E.First-Time Homebuyer Credit:

Some countries, such as the United States, offer a tax credit for first-time homebuyers. This credit can help offset some of the costs associated with buying a home, such as closing costs or down payments.

It's important to note that the specific tax reductions available to homebuyers vary by country and can change over time. It's always a good idea to consult with a tax professional or financial advisor to understand the tax implications of buying a home in your specific situation.

5.What are the GST benefits for Homebuyers?

The Goods and Services Tax (GST) has brought several benefits for homebuyers. Here are some of the key GST benefits for homebuyers:

A.Streamlined Taxation:

Prior to the GST, there were multiple taxes applicable to the real estate sector, including VAT, service tax, and stamp duty. The GST has replaced these taxes with a single tax, making the process of taxation simpler, more transparent, and more efficient.

B.Input Tax Credit (ITC):

Homebuyers can claim Input Tax Credit (ITC) on the GST paid on the purchase of goods and services used in the construction of the property. This can help reduce the overall tax liability of homebuyers. However, it is important to note that ITC can only be claimed if the developer has passed on the benefits of ITC to the homebuyer.

C.Affordable Housing:

The government has provided several incentives for the development of affordable housing projects. Affordable housing projects are eligible for a lower GST rate of 8%, which has made it more affordable for buyers in this segment.

D.Transparent Transactions:

The GST has brought more transparency to the real estate sector. The GST Council has mandated that developers must pass on the benefits of ITC to homebuyers. This has made it more difficult for developers to manipulate prices and has brought more transparency to the pricing of under-construction properties.

E.Increased Competition:

The GST has made it easier for developers to do business across different states, as there is now a single tax system in place. This has increased competition in the real estate sector, which has led to more affordable prices for homebuyers.

In summary, the GST has brought several benefits for homebuyers, including streamlined taxation, input tax credit, affordable housing, transparent transactions, and increased competition. These benefits have made it more affordable and easier for homebuyers to purchase a property in the real estate sector.

Updated on:
March 16, 2024