GST Impact on Home Loan

• Replaced taxes like excise duty, service tax, and VAT  
• Three components: CGST, SGST, and IGST  
• Levied at every stage of the supply chain  
• Input Tax Credit (ITC) helps avoid double taxation   
• Implemented after constitutional amendment in 2016  
• Officially launched on 1 July 2017 

Overview of GST (Goods and Services Tax)

• GST is a major tax reform introduced in India to simplify the indirect taxation system.  
• It replaced multiple taxes imposed by central and state governments, including excise duty, service tax, and Value-Added Tax (VAT).  
• The core concept behind GST is “One Nation, One Tax,” promoting a uniform tax structure across the country.  

Components of GST:

• Central GST (CGST) – levied by the central government.  
• State GST (SGST) – levied by state governments.  
• Integrated GST (IGST) – applicable to inter-state transactions.  

Working Mechanism of GST: 

• GST follows a destination-based taxation system, meaning the tax is collected at the point of consumption rather than origin.  
• It is applied at every stage of the supply chain, from manufacturer to end consumer.  
• This structure helps reduce the overall tax burden on the final customer.  

Input Tax Credit (ITC): 

• Businesses can claim credit for taxes paid on inputs.  
• This reduces their overall tax liability.  
• It also prevents double taxation, making the system more efficient.  

History and Implementation of GST in India: 

• The idea of GST in India was first proposed around 16 years prior to its implementation during the tenure of Prime Minister Atal Bihari Vajpayee.  
• After multiple discussions and legislative efforts, the Constitution was amended in 2016 to facilitate GST.  

Key GST-related bills (CGST, IGST, UTGST, and Compensation Bills) were:  

• Passed by the Lok Sabha on 29 March 2017.  
• Passed by the Rajya Sabha on 6 April 2017.  
• Enacted in law on 12 April 2017. 

GST Applicability on Home Loan

GST is not applicable on the home loan amount itself (principal or interest). However, GST is charged on various services associated with availing and maintaining a home loan, such as processing fees, legal charges, and administrative costs. 

Key Points

• GST is applicable only on service-related charges connected to the home loan.  

• Principal repayment and interest paid on the home loan are exempt from GST.  

• Earlier, these charges attracted service tax at 15%; under GST, the rate is generally 18%.  

• GST replaced multiple indirect taxes such as service tax, entry tax, and excise duty, simplifying the taxation structure. 

GST on Different Home Loan Charges

Impact of GST on Home Loan EMI

GST does not directly affect the home loan EMI because GST is not charged on the principal amount or interest component of the loan. 

• Processing fees and other service charges attract 18% GST.  

• This increases the overall borrowing cost at the time of loan disbursement.  

• While calculating EMI, GST should generally be excluded, as it is a one-time or service-based charge and not part of the EMI calculation. 

GST Rate on Home Loan Processing Charges

Home loan processing fees fall under financial and related services categorized under HSN Code 9971 and attract GST at 18%. 

Processing Fee Structure by Lenders

Note 

• GST at 18% is charged on the processing fee amount separately.  

• The final payable processing cost increases after adding GST.

Why It’s Essential to Understand GST’s Impact on Home Loans

Before applying for a home loan, it’s important to understand how Goods and Services Tax (GST) influences different components of the loan and property cost. While GST doesn’t directly apply to loan amounts, it affects several related charges and overall affordability. 

Key Areas Where GST Impacts Home Loans

Processing Fees  

• Lenders charge a processing fee when you apply for a home loan.  
• GST (currently 18%) is applicable on this fee.  
• The fee is usually a small percentage (up to 3%) of the total loan amount.  

Interest Rates (Indirect Impact)

• GST does not directly change interest rates.  
• However, increased construction costs due to GST can raise property prices.  
• Higher property prices may require larger loans, which can influence interest rates.  

Tax Benefits

• You can claim deductions:  
• Under Section 80C (principal repayment)  
• Under Section 24 (interest payment)  
• Changes in property prices due to GST may affect the overall tax savings.  

Advantages of GST Implementation for Home Loan Borrowers and Lenders

The implementation of GST has simplified the taxation structure related to home loans, making the process more transparent and streamlined for both borrowers and lenders. 

For Home Loan Borrowers 

• Simplified and transparent tax structure due to the implementation of a single tax system.  

• Reduced paperwork and easier documentation process.  

• GST is not charged on the principal amount or interest component of the home loan.  

• Borrowers are required to pay GST only on service-related charges such as processing fees and legal charges.  

For Home Loan Lenders 

• Home loan providers can claim Input Tax Credit (ITC) on eligible services and expenses.  

• Availability of ITC may help lenders reduce operational costs.  

• Lower operational costs can indirectly contribute to making home loans more affordable for borrowers. 

GST on Property Types and Loan Charges

• No GST is charged on ready-to-move-in properties.  
• Under-construction properties attract 12% GST.  
• GST applies only to:  
• Processing fees  
• Other service charges by lenders  
• GST is not applied to:  
• Loan principal  
• EMI payments  

Impact on EMIs and Interest Rates

• GST does not directly increase EMIs.  
• Indirect effects include:  
• Higher construction costs → increased property prices  
• Larger loan amounts → potential adjustments in interest rates  

• Final interest rates depend on:  
• Credit score  
• Loan tenure  
• Market conditions  

How to Calculate GST on Processing Fees 

• GST is calculated only on the processing fee, not on EMIs.  

• Example:  
• Loan amount: ₹50,00,000  
• Processing fee (0.5%): ₹25,000  
• GST (18% of ₹25,000): ₹4,500  

• Formula:  
• GST = (Processing Fee × 18%)  

Factors That Influence Interest Rate Changes Due to GST

Construction Costs 

• GST increases costs for under-construction properties.  
• Developers may pass these costs to buyers, raising property prices.  

Input Tax Credit (ITC) Changes  

• Earlier, developers benefited from ITC on materials.  
• Reduced ITC benefits under GST may lead to higher property prices.  

Market Dynamics  

• Changes in demand and supply due to pricing shifts can influence lending rates.  
• Lenders may adjust rates based on overall housing market conditions. 

GST Impact on Construction or Renovation of a House

Before the implementation of GST, the contractor's costs included the heavy occurrence of Entry Tax, Central Excise Duty, and Central Sales Taxes on the material and Service Tax on the services used at the time of construction. This is eventually passed on to the customers.

Under the Goods and Services Tax regime, contractors will have to pass on benefits of the lower tax burden to the customers. Contractors will stand eligible for GST credit paid on services and materials used for construction.

The effective Goods and Services Tax (GST) rate on the under-construction properties will be 12% and not 18%. This is due to the reduction in the cost of land. President of CREDAI, Jaxay Shah stated that effective GST will stand at 12% and according to the law, the developers will be passing on the input tax credit benefits to the buyers.

The Government of India has levied a GST rate of 18% on the renovation sector. However, the value of the land has been removed from tax computation. Due to the abatement of land value, the effective rate comes down to 12%.

Titbits About the Effect of GST on Landowners

• Property prices for affordable housing will not be increased under the new GST rule.
• The GST for properties that are under construction is 18%. However, the effective tax comes to 12% as the builders will be given a chance to enter tax credits.
• Ready-to-move-in flats may be expensive under the new GST regime. The builders will have to bear the tax burden for flats that are already built.
• The benefits of investing in under-construction properties will outweigh the benefits of investing in ready-to-move-in homes under the new Goods and Services Tax (GST) regime.
• Landlords will not be burdened under GST as those who have given their property on rent for residential use will not be charged any GST.
• As far as renting a property for commercial purposes, landlords will have to pay 18% GST- only if their annual income through rent is more than Rs.20 lakh.
• The prices of properties are expected to reduce as before the implementation of GST, developers were paying multiple taxes and other charges which would come to 20% to 25% of the total cost of materials they buy. However, under the new GST rule, the tax will be between 12% to 18% which will greatly help in reducing the producing cost incurred by the developers. This gives them an opportunity to reduce the price of the property.
• In the real estate sector, GST has eliminated about 16 major levies and taxes and has been replaced by a single GST.

To conclude, the implementation of GST will make our current economic condition transparent and will eliminate double taxation.

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GST Impact on Immovable Property Rentals

Under the Goods and Services Tax Regime, renting of an immovable property is a part of Schedule II. The GST rate applicable to it stands at 18%. However, according to the Exemption Notification, the services are exempted by way of residential house renting for residential purposes. This means, if there is a residential property leased out for commercial needs, then exemption will not be applicable. Rental income from such a residential property will be taxed under the GST regime.

Interstate Supply or Intrastate Supply?

As far as the services are concerned, the concept of interstate supply and intrastate supply are new. Before Goods and Services Tax was implemented in the Indian economy, service tax was a part of the Central Tax. On services, no State Tax was levied.

With the new tax infrastructure in place, it is important that distinguish the supply of services into intrastate supply and interstate supply. Let us understand how supply of services is classified into intrastate and interstate.

'Location of supplier' and 'Place of supply' are the two coordinates that must be established. If these coordinates fall in 2 different states, then the supply will fall under the interstate category. However, if both coordinates fall under the same state, the supply will be under intrastate category.

Now, let us understand how this is going to affect the immovable property rental. Let us consider that a landowner is located in Mumbai and owns an immovable property (commercial) in Delhi. The landowner has rented out the immovable commercial property. The question in hand is whether the owner of the land get registered under GST in Maharashtra or Delhi.

As per Section 12 (3) of the IGST Act, the place of supply of the service with respect to an immovable property will be the location where the property is located. In this case, the place of supply is Delhi as that is where the property is located.

Section 2 (15) consists of four clauses - (a), (b), (c) and (d). These clauses determine the service supplier location. Clause (a) states that the location of a supplier refers to a place of business where the supply will be initiated. 'Place of business' is defined as the place where the business is carried on. Warehouse or storage place for goods also fall under the category of 'place of business'. The immovable property in this case does not qualify as a place of business.

As per Clause (b), under Section 2 (50) of the CGST Act, fixed establishment is defined as a place that has a suitable structure and sufficient degree of stability in terms of technical resources and human resources. In this case, the immovable property does not have any technical or human resource, making Clause (b) void.

Clause (c) of Section 2 (15) of the IGST Act, talks about the supply of service from multiple establishments. Clause (c) is also not applicable in this case.

The only clause left is Clause (d) which states that in the absence of the other clauses, location of the usual residence will be the location of supplier of services. This has been mentioned under Section 2 (15) of the IGST Act.

Bottom Line:

Thus, in this example, the land owner's location will be Mumbai but the place of supply will be Delhi. This will fall under Section 7 of the IGST Act. The owner of the land will not have to take the GST registration in Delhi.

Important Facts to Know:

1. According to the Government, the builders will not be allowed charge high tax rates after GST has been imposed.
2. For people who have home loan for properties under construction, Goods and Services Tax will prove to be a pleasant surprise.
3. The Government also stated that home prices will go down after GST imposition.
4. According to the Finance Ministry, the construction of complex, flats and building will have lower incidence of Goods and Services Tax as compared to different state and central indirect taxes incurred by them under the present regime.