Impact of GST on Home Loan

Updated on November 30, 20185 mins read

Buying a home is one of the biggest milestones in one’s life. And to achieve that milestone many of us opt for a home loan that not only helps in getting the desired home but also helps avail various tax benefits. With home loan interest rates being slashed and the ease of availing home loans these days, more and more people are seeking home loans to make their dream come true. As such it’s really important to understand how the newly introduced Goods and Services Tax (GST) would affect real estate market, home loan and EMIs.

 

GST on Real Estate – An introduction

More than a month has passed since the introduction of the Goods and Services Tax (GST). But, still, there’s a lot of confusion over how it applies to the real estate market. Let’s take a minute to understand it better. The GST that came into effect on July 1 aims at eliminating the multiple taxes and removing cascading taxes that lead to a higher tax incidence on customers. This means it replaces all the indirect taxes including central excise duty, commercial tax, octroi tax, service tax, VAT and other local taxes to create a single tax, the GST. Under this you would find following new changes:

  • Real estate now falls under the realm of GST
  • Ready to move in houses won’t attract GST
  • Residential projects launched under the Pradhan Mantri Awas Yojna (PMAY) has been exempt from GST
  • Under construction properties would attract a GST of 12%
  • The developers would have to pass on the benefits of input tax credit (ITC) to the final customer, i.e. the buyers

 

GST Impact on home loan

Before we go further, it is important to understand the components that will be impacted by the increased rates under the GST. While taking a home loan, you have to pay the interest on that money, which will not change, as there is no service tax or GST on it. Similarly, any stamp duty charged in connection with the documentation of the home loan, will not change, as stamp duty is not subsumed under the GST. So, does that mean there will be no impact on your home loan? No, there would be marginal impacts on your home loan. Let’s see how. Apart from the cost of the home loan itself, there are several other charges like the processing fee, advocate fees, valuation charges etc, that you have to pay to your bank or the lender. Under GST, the home loan services would now attract 18 per cent, which was previously 15 per cent. This one-time additional charge would incur a marginal increase of 3% on your home loan. To illustrate GST’s effect on the processing fee, Say you have taken a loan of Rs. 30 lakhs:

Processing Fee = 0.25% – 1% of 30 lakhs = Rs. 7,500 – 30,000

Before GST = 15% (service tax) on Rs 7,500 – 30,000 = Rs. 1,125 – 4,500

After GST = 18% on Rs 7,500 – 30,000 = Rs. 1,350 – 5,400

Marginal Effect = Rs. 225 – 900

As you can see from the example above, after the GST, there’s a marginal increase in the cost of your home loan. The processing fee which is usually 1% of loan value and is capped to values such as Rs.10,000 or 20,000 would differ from person to person depending on borrower’s profile, income and the type of loan. In addition to that, several PSU banks like SBI charge evaluation fees and legal fees, which will also increase marginally. Prepayment fees for MCLR-linked home loans shouldn’t be a problem as such loans do not charge for this service. However, a fixed-rate home loan does, meaning prepayment fees will now fall under the 18 per cent GST bracket instead of the previous 15 per cent service tax. Again, the lenders can also charge you for any EMI default, either due to the return of the cheque or ECS return, on which you would have to pay the 18% GST. So, on any charge recovered by the lenders, you would have to pay 3% extra money under the new GST regime. And when all these marginal increase in costs are added up, the home loan would go up by all means.

 

GST on under construction property

Under revised order from the government, under-construction properties will be taxed at 18% which includes 9% SGST plus 9% CGST. The government has also allowed deduction of land value equivalent to one-third of the total amount charged by a developer, thus, making the effective tax rate as 12%. Now, it’s safe to say that at this point in time, there would be some properties that are already under construction with existing buyers. Then there would also be some housing projects that would be launched soon. For ongoing projects, a builder would have already paid some of the taxes in the form of excise, VAT and state entry tax and spent money on raw materials needed for the whole project. It’s important to note the stage of construction while buying such properties. If the project is at an advanced stage, where substantial cost has already been incurred before the application of the GST, very little input credit will be available and very less benefit will be passed on. If the project is at an early stage, more benefits can be passed on. Depending upon the stage of construction of your property you may see no change in the cost or a slight correction of about 1-3% post deduction of input credits. However, reforms in price change would not be evident for another six months. Therefore, if you buy apartments in projects which are less than 60% completed, you will get more benefit. This, in turn, means you might have to pay less to the builder, so a lower home loan. But, again the difference in cost is likely to be marginal, but 2-3 lakhs less on your shoulder and a lower EMI is definitely good news for anyone.

 

GST on ready-to-move-in properties

The new tax laws points out that if the occupancy certificate for the project has been received, then, no GST is applicable. Logically, under the GST regime, a buyer opting to buy such a property is saved from the tax burden. So, you can expect the burden of your dream home loan to lessen to some extent.

 

Will GST make your home loan EMI go up?

It’s still too early to predict how the GST actually affects the EMIs of housing loans. A few months from now would give us a clearer picture. But, all said and done if the price of the houses go up, it will ultimately make the home loans dearer. Additional charges like the stamp duty that differ from state to state and are applicable on both under construction and ready-to-move-in properties would have to be borne by the buyer. If the state continues with double taxation system (GST + Stamp Duty), property prices may go up and the buyer would be burdened with the price rise.

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