GST impact on real estate sector in India 2025

India’s big GST reset (the 56th GST Council meeting, 3 Sep 2025) cuts tax on cement from 28% to 18% and reduces GST on marble/granite blocks to 5%, while moving toward a two-rate structure (5% “merit”, 18% “standard”, with a 40% de-merit band). For residential under-construction sales, the 2019 regime (1% affordable / 5% non-affordable, without ITC) remains the bedrock; rate cuts on inputs now flow straight to developers’ costs because credits are blocked. On rentals, the 2022 rule continues: residential renting stays exempt unless the tenant is GST-registered, in which case 18% applies on RCM. On commercial leasing and build-to-lease assets, the Supreme Court’s 2024 ruling briefly opened a door for ITC, but the Finance Act 2025 closed it retroactively—ITC remains blocked for building/works used on own account (including leasing) unless it is true “plant and machinery”. Several CBIC circulars in 2024 cleaned up grey zones like RERA collections and long-stay hostel/service apartment accommodation. Expect modest but real construction-cost relief in housing, some compliance easing, but ITC policy and RERA/RCM rules keep margins tight.

Shri. Nirmala Sitharaman - Minister of Corporate Affairs of India

1) The rate landscape in 2025: what actually changed and GST Impact on Real Estate Sector

a) Rate rationalisation & key material cuts (effective from 22 September 2025, with phasing):The 56th GST Council approved a simpler, two-rate system (5% and 18%, with a 40% de-merit rate for a few sin goods) and specific cuts that matter for real estate: cement falls from 28% to 18%, and marble / travertine / granite blocks drop to 5%. The Council set 22 Sep 2025 as the implementation date for services and most goods (with some phasing) and asked CBIC to operationalise 90% provisional refunds for inverted duty structures via risk-based processing. For real estate, that translates to lower tax on some major inputs (especially cement).

b) The 2019 “real estate package” remains the backbone for how flats are taxed:Since 1 April 2019, under-construction residential sales moved to 1% (affordable) and 5% (other residential) without ITC; definitions like REP/RREP, and the treatment of TDR/FSI/long-term lease of land were reset and RCM procurement rules for promoters introduced (80% from registered suppliers; shortfalls taxed under RCM—with cement specifically at the cement rate, now 18%). Those mechanics are unchanged in 2025.

c) Renting rules: the 2022 flip still standsFrom 18 July 2022, renting a residential dwelling is exempt if used as a residence unless the tenant is a GST-registered person; then it is taxable at 18% under RCM (paid by the tenant).

d) “Sale of land / completed building” remains outside GSTGST does not apply on sale of land and sale of completed buildings post-OC/first occupation—so ready-to-move homes remain non-GST (stamp duty/registration still apply).

2) Cost side: how rate cuts flow through to housing & commercial projects

For residential under-construction (1%/5% without ITC):Because ITC is blocked under the 2019 scheme, GST on inputs is a cost line. So cutting cement from 28% to 18% directly reduces developers’ cash outflow per bag/tonne—no “credit chain” to dilute the benefit. Likewise, 5% on marble/granite blocks trims finishing costs. Net impact varies by project mix, but the mechanics clearly point to lower construction cost for RREP/REP residential supply.

For commercial and mixed-use (with ITC generally available on outward taxable supplies):When ITC is available and fully utilizable, input tax cuts reduce credits rather than net cost. But many real-world projects experience blocked credits or mismatches (e.g., fit-outs for leasing), and rate cuts on high-weight items like cement can still lower working capital strain and interest costs. Procurement contracts signed pre-change will need price-variation reviews to capture the benefit.

Back-of-envelope economics:

• Materials can be ~60% of construction cost (varies widely by spec and city). Within materials, cement is a major line item, so a 10-percentage-point GST drop is directionally meaningful. This cost relief is most visible in residential (no ITC) and in mid-income projects where finishing specs are standardised and margins tight.

• Will home prices fall? Expect a partial pass-through over time—more on new launches and ongoing projects still procuring than on nearly-finished inventory. However, state-level levies (guidance value hikes, stamp/registration tweaks) and non-GST cost escalations can blunt benefits, such is the gst impact on real estate sector.

3) Sales taxation on homes: unchanged fundamentals

Under-construction homes:

• Affordable: 1% (no ITC).

• Other residential: 5% (no ITC).

• Commercial apartments and certain mixed-use blocks have separate entries/rates, and works contract services to promoters are commonly 18% (with ITC), with specific exceptions in notifications. The REP/RREP construct and 2019 notifications still govern.

Ready-to-move homes (post-OC/first occupation):

• No GST, only stamp duty + registration.

TDR/FSI/long-term lease of land:

• Residential: TDR/FSI is generally exempt, with RCM payable proportionately on unsold area at OC/first occupation (a “cap” formula governs).

• Commercial: TDR/FSI typically taxable.These rules from 2019 real-estate notifications continue. For redevelopment/JDAs, the landowner-promoter / developer-promoter mechanics and valuation rules still apply.

4) Rentals, co-living, hostels, and RWA fees

Residential renting:

• Exempt if used as a residence and tenant is not GST-registered.

• 18% under RCM if the tenant is GST-registered (since 18 July 2022). This catches, for example, proprietors who are GST registrants renting a flat for use connected to their business.

Long-stay accommodation / hostels / service apartments:CBIC’s 2024 circulars sought to define when such supplies are treated as accommodation vs. residential renting, providing safe harbours (e.g., monthly amount/tenure conditions) and clarifying RERA-related collections. This was designed to reduce disputes, particularly in the student/working-professional segment and for promoters interfacing with RERA. Read the fine print for dates and conditions if you operate hostels/PGs or service apartments.

RWA / society maintenance:CBIC’s 2019 circular reaffirmed that monthly contributions up to ₹7,500 per flat are exempt; if the amount exceeds ₹7,500, GST applies (and many authorities apply it on the entire amount once the threshold is crossed). Enforcement waves in 2025 have reignited confusion, but the threshold and basic logic are unchanged.

5) The ITC saga for build-to-lease assets: a 2024 opening and a 2025 closure

What the Supreme Court said (Oct 2024):In Safari Retreats and connected matters, the Supreme Court upheld the constitutional validity of Section 17(5)(c)/(d) (blocking ITC on works contract/construction of immovable property on own account). However, the Court held that if a building qualifies as “plant” under the functionality test, ITC can’t be denied, and sent Safari’s case back to test if a shopping mall could be “plant”. For a moment, this cracked open a route to ITC for certain commercial builds integral to output.

What the law now says (Finance Act, 2025):Budget 2025 shut that door by retrospectively amending Section 17(5)(d)—substituting “plant or machinery” with “plant and machinery” and declaring the change shall be deemed to have been in force since 1 July 2017, notwithstanding any contrary judgment. In plain English: the legislature overrode the carve-out the Court’s functionality test might have permitted, taking us back to the status quo ante: no ITC on works contract/construction of immovable property on own account, including for leasing, except for true “plant and machinery” (buildings/land/pipelines/towers are excluded by definition). Commercial developers and REITs planning a build-to-lease strategy should budget accordingly.

6) Compliance and cash-flow: 80% procurement rule, RCM on shortfall, and refunds

Promoter procurement rule (2019 onwards):Promoters must procure ≥ 80% of inputs/services from registered suppliers; shortfalls are picked up under RCM at 18% (and cement at the cement rate—previously 28%, now 18%). This remains a key cash-flow and compliance obligation; your procurement tracker needs to be tight.

Refund environment:While residential under the 1%/5% no-ITC regime cannot claim input refunds, the 56th Council has green-lit 90% provisional refunds for eligible inverted duty cases (useful in commercial supply chains where inversion persists). Expect CBIC to implement this administratively with risk-based checks—helpful for working capital.

7) Market effects: who benefits, who doesn’t

Mid-income housing should see the clearest benefit from input rate cuts—more standard specifications, heavier cement usage, and thin price-elastic demand—translating to faster pass-through (even if partial). Affordable housing also benefits, but absolute price drops can be competed away by freebies/amenity upgrades rather than headline ticket cuts. Luxury is least constrained by input tax; pricing moves there are driven more by demand cycles and brand pull than by GST.

Commercial & office developers don’t gain much on net tax (credits offset), but cash-flow and contract re-pricing can still improve. The retrospective 17(5)(d) change keeps ITC blocked for build-to-lease, so leasing yields still have to absorb construction taxes and capex without credit relief.

Regional/state friction matters: increases in guidance values, stamp duty/registration, or local fees can offset GST benefits. Watch these moving parts city by city.

8) Practical playbook for developers, investors, and housing societies

Developers (residential):

1. Re-price procurement now. Cement and stone rate cuts should reflect in new POs; invoke price variation clauses for ongoing contracts wherever possible.

2. Margin strategy: Decide on pass-through vs. amenity upgrades. Marketing can stress “value unlock” without promising blanket price cuts (watch competition).

3. RCM discipline: Tighten 80% registered procurement trackers and shortfall RCM workings; cement now at 18% helps, but documentation must keep pace.

4. TDR/FSI/JDA: For mixed portfolios, revisit unsold-at-OC computations and RCM liabilities; document area ratios meticulously.

Developers (commercial / mixed build-to-lease):

1. ITC expectations: Post-Budget 2025, assume no ITC on construction for lease assets; structure SPVs and capex with that in mind.

2. Cash-flow: Even with ITC offsets, rate cuts can ease working capital; re-negotiate supply terms to capture benefits upfront.

Investors/homebuyers:

1. Under-construction: Expect targeted price adjustments or spec upgrades rather than across-the-board price cuts; look for developers announcing “GST-aligned” offers.

2. Ready-to-move: GST doesn’t apply, so no direct impact from these GST rate cuts on the transaction; watch stamp duty or guidance value moves instead.

Rental market (landlords/tenants/co-living):

1. Residential rent remains exempt unless tenant is GST-registered; then 18% on RCM. Ensure proper RCM self-invoice/payment if applicable.

2. Hostels/long-stay: Recheck CBIC’s 2024 clarifications on thresholds and minimum stay to avoid disputes; update contracts and billing descriptors.

RWAs / management committees:

1. If monthly contribution per member ≤ ₹7,500: no GST.

2. > ₹7,500: plan for GST (many authorities apply it on the entire amount once the threshold is crossed). Align by-laws and invoices accordingly.

   
   

9) What this means for pricing and profitability in 2025–26

Residential developers finally get a clean, bankable input relief (because credits are blocked, rate cuts are “pure” savings). Expect the biggest ROI in mid-income projects and high-volume townships, where cement dominates the BOQ and procurement can be quickly re-tooled. Some of that will flow to customers—either as modest ticket reductions or spec bumps (wardrobes, ACs, clubhouse upgrades), depending on market depth.

Commercial developers/REITs see limited net tax change given ITC availability—but the Finance Act 2025 cements the old reality: no ITC on core building construction for leasing (outside of plant-and-machinery exceptions). That keeps pressure on yield math and strengthens the case for design-to-value engineering, phasing capex so more is creditable (tenant-attached fitouts) than blocked, and negotiating rent escalations where market allows.

Compliance becomes somewhat smoother: CBIC’s 2024 circulars de-litigate tricky corners (RERA, long-stay), and the Council wants 90% provisional refunds for eligible inversion cases. The GSTAT rollout this year should also accelerate dispute resolution, which is good for a sector with long project cycles.

10) Quick reference: unchanged pillars you should keep front-of-mind

• Under-construction residential: 1%/5% without ITC (since 2019). Input rate cuts help directly; no credits to net off.

• Ready-to-move (post-OC/first occupation) / land sales: outside GST.

• Promoter procurement rule (80%) & RCM shortfall: still applies; cement now 18% under RCM after the Council’s cut.

• Residential rent: exempt unless tenant is GST-registered, then 18% RCM (since 18-Jul-2022).

• TDR/FSI/long-term lease: residential exemption with proportionate RCM on unsold at OC; commercial generally taxable.

• Build-to-lease ITC: blocked by retrospective amendment (Finance Act 2025); plant-and-machinery carve-outs only.