When buying a house, we often focus on the prices of the properties but sometimes overlook the taxes they come with. These taxes affect your overall home loan amount since loans taken for a constructed house, an under-construction house, or a renovation are all taxed differently.
The Goods and Services Tax, or GST, was introduced in 2017 to provide more transparency to buyers, and so it has in the real estate market.
But how does GST impact your home loan?
Understanding GST on Home Loans
GST on home loans does not directly apply to the loan amount, the interest, or EMIs, but it does apply to the processing fees and other legal costs imposed on home loans. These charges can include prepayment, partial prepayment, and document handling charges. GST does not apply to constructed houses since it is covered by the constructor. However, under-construction houses are subjected to 12% GST on the processing fee which has been reduced from 18%.
Impact of GST on Home Loans
GST has simplified home loans by eliminating the previously existing value-added tax, entry tax, etc. that would be separately applicable to your loan. This has provided additional transparency and accountability with one uniform tax rate. There is no GST applicable in constructed homes.
However, if your loan is sanctioned for an under-construction property, you are charged a GST of 18% on the processing fees. You also benefit from the input tax credit given to the builder, which brings the final GST payable to 12%.
Since you don’t need to pay home loan GST on ready-to-be-occupied flats, the contractor covers the taxes, which makes the overall cost of the property much higher. This also results in costlier housing loans.
Calculating GST on a home loan
Since GST on home loans does not apply to constructed homes, let us find out the amount of your home loan GST for an under-construction home. All you need to do is calculate 12% of the applied processing fees on your home loan. Processing fees can cost up to 1% of the total loan amount.
Let us understand with an example.
Suppose you take a loan of Rs 60 lakh from your bank with 1% processing fees. The processing fees would be Rs 60,000, and according to 12% GST for an under-construction home, your GST charges would be Rs 7,200, making the final fee of Rs 67,200.
Impact of GST on home loan EMI
GST on home loans doesn’t directly affect your EMIs. However, as the GST on under-construction has reduced from 18% to 12%, the cost of the property is lower, leading to lower EMIs for you. Since the constructor covers the GST on constructed houses, they are priced higher, leading to higher EMIs for you.
Impact of GST on the construction or renovation of a house
Before GST was implemented, you would have to pay various taxes, such as entry tax, central excise duty, and central sales tax charged as service tax, as well as the material required for the services used for construction.
GST has provided constructors with input tax credit benefits of 6%, reducing construction and renovation costs. This directly affects the taxes you need to pay because these benefits get passed on to you, helping the GST on the construction of a house come down from 18% to 12%, which makes home-buying more affordable.
Impact of GST on home loan interest rates
Since the GST for housing loans has been reduced for under-construction properties, the interest rates also get affected, but in a beneficial way for you. A lower loan amount results in a lower interest rate, making building your dream home much more accessible.
However, as the GST on constructed properties is absorbed by the constructors, the prices of these properties are higher which results in higher interest rates on your home loan.
Also Read: 10 easy steps for the Home Loan application process
Conclusion
If you wish to reduce your overall costs, you can opt for a property that is under construction. The GST rate for properties under construction is effectively 12%. Ready-to-move-in flats have become more expensive as builders are solely responsible for the tax liabilities associated with completed properties.
GST has enhanced transparency in our current economic landscape and eliminated instances of double taxation, leading home buyers to make cost-effective decisions.
Getting a home loan is a monumental step towards owning your dream house. Hence, it becomes important to be mindful of the decisions you make. Understand and educate yourself about all charges applicable, including GST and others. This not only makes you a responsible buyer but also saves you from any financial concerns in the future. Once you ensure everything, your dream house is simply a home loan away.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
