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The GST Effect on Applying Mortgage Loan

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“We must care for each other more, and tax each other less.”

Although economists term GST implementation as a transparent and rational approach to enhance transaction symmetry, others term it as just another burden. GST has essentially parted ways with entry tax, excise duties and OCTROI, and can be termed as a consolidated tax system.


Immediately after its introduction, GST raised many voices claiming that it would effectively lead to more expensive deals. Apart from GST on goods and services, GST has essentially made loans, EMIs and other forms of credit more costly. However, proponents of GST claim that with the omission of service taxes and VAT, GST Effects on Mortgage Loans for construction properties will be comparatively lesser.

Factors responsible for GST Evaluation of Mortgage Loans

Long story cut short; potential buyers incur 18% rate on under-construction properties thus making it 6.5% dearer. However, GST does not apply on finished properties or resale of apartments. Factors on which effect of GST on home mortgage loans depend are:

● Land Cost.

● The burden of factor costs transferred to builders

● Surface Area

● Construction Phase

Remember that GST attracts construction, renting and leasing of houses. Sale of land or buildings, however, exerts no pull on GST. Apparently, GST on home loans is now equally divided between centre and state nullifying the effect of service taxes and VAT.

Pre GST scenario:

Factors that real estate builders take into consideration for pricing includes locality and construction phase. Thus under-construction buildings attract series of levies and charges whereas stamp duties and registration charges were to be paid for ready-to-move apartments. The complications arising from levying a network of taxes led to the disparity.

Post GST Effects on Loans:

With the Pradhan Mantri Awas Yojana scheme into play, 2/3rd of under-construction buildings attract an 18% GST. While the remaining finds its validity as land value, actual tax rate turns out to be 12% excluding stamp duty and registration fees. From the developer’s perspective, input tax credits turn to be beneficial because they are directly transmitted to customers.

Furthermore…

From a bird’s eye view, GST taxes consumers more because the Mortgage Loan Interest Rate charged on principal amount is sealed at 18% instead of 15%. This includes charges for property valuations, processing and advocate charges levied at different stages of the legal hierarchy. MCLR (Marginal Costs of funds based lending Rate) induced Mortgage loan attract no GST. However, fixed mortgage fees are charged at 18% flat.

Additional Read: Does CIBIL Score Affect Your Loan Against Property?

Good news for Property Dealers?

Pre-GST tax system institutionalised a multiple tax payment scheme for developers and realtors. Not only did it give birth to unnecessary tax hassles, the burden of multiple taxes was passed on to consumers with varying explanations for each. Albeit a higher tax rate, GST has unified all isolated tax versions thus simplifying the whole process.

Under the GST regime, building materials have seen significant changes in their costs which in turn affect building costs. Materials like pillars, iron rods, sand-lime bricks and fly ash bricks have turned cheaper although cement marks the highest taxes levied at 28%. Marginal variations in relative costs affect price structures especially for mid-ranged apartments under construction calculable by mortgage loan calculator.

Amongst multiple ambiguities and lack of imperfect information, both realtors and customers have been troubling their peace of mind. Mortgage loans attract GST depending on construction phase and other charges. Although the exact GST Benefits on mortgage loans is still unclear, the unification of tax structure has eased the overall payment make-up.

Leading lending institutions charge mortgage loans based on this reformed GST regime and promise to bring transparency for buyers and sellers alike! Moreover, they also provide pre-approved offers on their home loan, personal loan and others EMI financing on various products.

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