Library / Goods and Services Tax: The Professional's Master Guide

27. Real Estate and Construction

Real estate is the sector where GST produces the most varied results. A flat may carry 1%, 5% or no GST at all depending on its size, price, city and the date on which the money is received. Landowners, contractors and tenants each face their own rules.

27.1 Why land and buildings are treated differently

Sale of land, and sale of a building where the whole consideration is received after the completion certificate (CC) or first occupation, is neither a supply of goods nor of services under paragraph 5 of Schedule III of the CGST Act. Stamp duty applies to these transfers instead. What GST taxes is construction: a building, civil structure or complex intended for sale, where any part of the consideration is received before the CC, is a supply of service under paragraph 5(b) of Schedule II. Works contracts are services under paragraph 6(a) of Schedule II.

The price of a flat includes land. The notifications deal with this through a deemed deduction of one-third of the total amount, so the rate applies only to the construction portion.

27.2 The residential scheme from 1 April 2019

From 1 April 2019 the Council moved residential real estate to a concessional scheme without input tax credit. The effective rates are 1% of the price for affordable residential apartments and 5% for other residential apartments. The notification rates are 1.5% and 7.5% on the value after deducting one-third for land, which works out to 1% and 5% of the gross price. Projects ongoing on 1 April 2019 could opt, by 20 May 2019, to stay on the old rates with ITC.

Affordable residential apartment

An apartment is affordable if both tests are met: carpet area up to 60 square metres in metropolitan cities or 90 square metres elsewhere, and gross amount charged up to Rs. 45 lakh. The metropolitan cities for this purpose are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram and Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR). Apartments in ongoing projects under specified Government housing schemes are also covered.

Illustration 148: Affordable or not

Shivam Realty is building two projects. Flat A is in Ahmedabad, 85 square metres carpet area, priced at Rs. 42,00,000. Flat B is in Thane (within MMR), 65 square metres, priced at Rs. 44,00,000.

Step 1: Flat A: Ahmedabad is not a metropolitan city for this scheme, so the carpet area limit is 90 square metres. Both tests are met. GST at 1% = Rs. 42,000.

Step 2: Check the working: land deduction one-third = Rs. 14,00,000; construction value = Rs. 28,00,000; GST at 1.5% = Rs. 42,000 (CGST Rs. 21,000 + SGST Rs. 21,000).

Step 3: Flat B: price is within Rs. 45 lakh but the carpet area of 65 square metres exceeds the metro limit of 60. It is not affordable. GST at 5% = Rs. 2,20,000.

Result: two flats with almost the same price carry tax of Rs. 42,000 and Rs. 2,20,000. The carpet area in the RERA registration and the allotment letter decides the rate, so it must be checked flat by flat.

Residential real estate project and commercial units

A residential real estate project (RREP) is a project in which the carpet area of commercial apartments is not more than 15% of the total carpet area. Shops and offices in an RREP are taxed like other residential apartments, at 5% without ITC. If commercial area exceeds 15%, the project is not an RREP; the commercial units are then taxed at 18% on two-thirds of the value (12% effective) with ITC, while the residential units still go at 1% or 5%.

Illustration 149: Annual output tax of a mixed project

Gokul Developers LLP runs an RREP in Vadodara with 20,000 square metres of carpet area, of which 2,400 square metres (12%) are shops. In FY 2025-26 it raised demands and received instalments as follows: other residential flats Rs. 18,00,00,000, affordable flats Rs. 4,00,00,000 and shops Rs. 3,00,00,000.

Step 1: Commercial share 12% is within 15%, so the project is an RREP and shops go at 5%.

Step 2: Other residential: Rs. 18,00,00,000 less one-third = Rs. 12,00,00,000; GST at 7.5% = Rs. 90,00,000.

Step 3: Affordable: Rs. 4,00,00,000 less one-third = Rs. 2,66,66,666.67; GST at 1.5% = Rs. 4,00,000.

Step 4: Shops: Rs. 3,00,00,000 less one-third = Rs. 2,00,00,000; GST at 7.5% = Rs. 15,00,000.

Step 5: Total output tax = Rs. 1,09,00,000, payable fully in cash because no ITC is allowed under the scheme (CGST Rs. 54,50,000 + SGST Rs. 54,50,000).

27.3 The 80% procurement condition

To keep suppliers of building material in the tax net, the scheme requires at least 80% of inputs and input services (by value) to be bought from registered persons. The test is done project-wise for each financial year. Development rights, long-term lease premium, FSI, electricity, high speed diesel, motor spirit and natural gas are excluded from both sides of the ratio. Capital goods are outside the ratio, but capital goods bought from unregistered persons attract reverse charge at their own rate.

If purchases from registered persons fall short of 80%, the promoter pays tax at 18% under reverse charge on the shortfall (the notification specifies 18% for the shortfall irrespective of what the goods were). Cement bought from an unregistered person is taxed under reverse charge at the rate applicable to cement, in the month of receipt; after GST 2.0 that rate is 18%. The shortfall tax is paid through DRC-03 by the end of the quarter following the financial year, that is by 30 June.

Illustration 150: Shortfall tax under the 80% rule

Gokul Developers LLP bought inputs and input services of Rs. 10,00,00,000 for the project in FY 2025-26, after excluding development rights of Rs. 3,00,00,000, electricity of Rs. 40,00,000 and diesel of Rs. 60,00,000. Purchases from registered suppliers were Rs. 7,40,00,000. All cement was bought from registered dealers.

Step 1: Minimum required from registered persons = 80% of Rs. 10,00,00,000 = Rs. 8,00,00,000.

Step 2: Shortfall = Rs. 8,00,00,000 less Rs. 7,40,00,000 = Rs. 60,00,000.

Step 3: Tax under reverse charge at 18% = Rs. 10,80,000 (CGST Rs. 5,40,000 + SGST Rs. 5,40,000), paid in cash through DRC-03 by 30 June 2026.

Step 4: No credit is available for this tax. Unregistered labour contractors are the usual cause, so track the ratio monthly.

27.4 Sale before and after the completion certificate

For a flat or shop, the tax point is each instalment: tax is due on the date of invoice or receipt, whichever is earlier, as the builder demands the milestones. Once the CC is issued, sale of an unsold unit where the whole consideration comes after the CC is outside GST. Two consequences follow.

A buyer who books before the CC pays GST on every instalment, including those paid after the CC. The test is whether any part of the consideration was received before the CC.
In a commercial project under the 18% with ITC route, ITC attributable to units still unsold on the CC date must be reversed, because their sale will be a non-taxable supply. Rules 42 and 43 contain specific provisions for this and the reversal is worked out project-wise at the CC stage.

Illustration 151: Commercial office unit with ITC

Sapphire Business Park is a commercial project (not an RREP) in Pune. Anand Traders books an office for Rs. 2,00,00,000 before the CC. ITC attributable to this unit on inputs and services is Rs. 15,00,000.

Step 1: Value after one-third land deduction = Rs. 1,33,33,333.33.

Step 2: GST at 18% on that value = Rs. 24,00,000 (effective 12% of the price; CGST Rs. 12,00,000 + SGST Rs. 12,00,000).

Step 3: Net cash tax after ITC = Rs. 24,00,000 less Rs. 15,00,000 = Rs. 9,00,000.

Step 4: If the same office had remained unsold and been sold after the CC for Rs. 2,20,00,000, there would be no GST on the sale, but the ITC of Rs. 15,00,000 attributable to it would have to be reversed.

Result: for Anand Traders the office is a capitalised immovable property, and the department treats its credit of Rs. 24,00,000 as blocked under section 17(5)(d).

27.5 Joint development agreements and development rights

In a joint development agreement (JDA) the landowner transfers development rights (TDR or FSI) to the developer, and gets a share of the built flats in return. The landowner supplies development rights to the promoter, and the promoter supplies construction service to the landowner. Both are barter transactions.

Landowner flats: the value is the price charged by the promoter for similar apartments to independent buyers nearest to the date of the JDA. Tax arises on the date of CC or first occupation, whichever is earlier, at the rate applicable to the flats (1% or 5% effective).
Development rights: tax is payable by the promoter under reverse charge. Development rights relating to flats booked before the CC are exempt. For the unsold portion, tax is at 18%, but limited to 1% or 5% of the value of the unsold residential apartments. The time of supply is the date of CC or first occupation.
Landowner selling his flats: if the landowner sells his share of flats before the CC, he charges GST and can take credit of the tax the promoter charged him on those flats.

Illustration 152: JDA: landowner flats and development rights

Mr. Ramesh Desai gives land in Surat to Parshva Homes under a JDA dated 1 April 2024 and gets 30 of the 100 flats. Similar flats were sold to outside buyers near that date at Rs. 50,00,000 each. The CC is issued on 10 January 2026. Of the promoter's 70 flats, 50 were booked before the CC and 20 are unsold. The price of similar flats on the CC date is Rs. 60,00,000.

Step 1: Value of landowner flats = 30 x Rs. 50,00,000 = Rs. 15,00,00,000.

Step 2: Less one-third land = Rs. 5,00,00,000; taxable value = Rs. 10,00,00,000; GST at 7.5% = Rs. 75,00,000, payable by Parshva Homes for January 2026.

Step 3: Development rights are valued at the value of flats given for them, Rs. 15,00,00,000. Unsold flats are 20 of 100, so 20% is taxable: Rs. 3,00,00,000.

Step 4: Tax at 18% under reverse charge = Rs. 54,00,000.

Step 5: Cap: 5% of value of unsold flats = 20 x Rs. 60,00,000 x 5% = Rs. 60,00,000. The tax is the lower amount, Rs. 54,00,000 (CGST Rs. 27,00,000 + SGST Rs. 27,00,000).

Result: January 2026 cash outflow on the CC is Rs. 1,29,00,000. Every flat sold before the CC would have reduced the development rights tax.

27.6 Long-term lease of land and assignment of leasehold rights

Industrial plots are often allotted on a lease of 30 years or more by State industrial development corporations on payment of an upfront premium. That upfront amount is exempt where the lessor is a State Government industrial development corporation or undertaking, or another entity with the Government ownership specified in the entry, and the plot is for an industrial or financial business area. The annual lease rent remains taxable at 18%. In residential projects, upfront lease premium is treated like development rights.

The department had also demanded tax when a lessee assigned his leasehold rights in a GIDC plot to a third party for a premium. The courts rejected this.

Judicial view: Assignment of leasehold rights

Gujarat Chamber of Commerce and Industry v. Union of India (Gujarat High Court, 2025): assignment of leasehold rights in land by the lessee to a third party is a transfer of benefits arising out of immovable property and is akin to sale of land. It is not a supply of service and no GST is payable on the premium. The Supreme Court dismissed the revenue's special leave petition in July 2026 (Union of India v. Gujarat Chamber of Commerce and Industry). The original grant of a lease and periodic rent remain taxable unless exempt.

27.7 Works contracts, Government works and sub-contractors

Section 2(119) defines a works contract as a contract for building, construction, installation, repair, renovation or commissioning (among other activities) of any immovable property, involving transfer of property in goods. It is treated as a supply of service.

After GST 2.0 most works contract services, including those supplied to Central and State Governments, local authorities and Government entities, are taxed at 18% with ITC. Before charging a lower rate on any works contract, verify the current entry in the rate notification for services as amended from 22 September 2025, because several of the old concessions have been removed or rewritten.

A sub-contractor supplying works contract service to the main contractor charges the same rate as applies to his own service. The main contractor gets ITC of it because section 17(5)(c) allows credit on works contract services where they are an input service for further supply of works contract service.

Illustration 153: Main contractor and sub-contractor

Vardhman Infra Pvt. Ltd. has a contract to build a private hospital building in Rajkot for Rs. 5,00,00,000. It sub-contracts the plumbing and electrical work to Om Services for Rs. 1,50,00,000 and buys materials of Rs. 2,00,00,000. All at 18%.

Step 1: Output tax on Rs. 5,00,00,000 at 18% = Rs. 90,00,000.

Step 2: ITC on sub-contract = Rs. 27,00,000; ITC on materials = Rs. 36,00,000. Total ITC = Rs. 63,00,000.

Step 3: Net cash tax of Vardhman Infra = Rs. 27,00,000.

Step 4: The hospital (whose health care services are exempt in any case) cannot take ITC of Rs. 90,00,000: section 17(5)(c) blocks works contract service for construction of immovable property except as an input for further works contract service. The tax is part of the building cost.

Judicial view: Works contracts before GST

Larsen and Toubro Ltd. v. State of Karnataka (Supreme Court, 2013): a developer who agrees to build flats for buyers before completion is executing a works contract, and the State can levy VAT on the value of goods at the time of incorporation. This is the root of the GST rule that sale of an under-construction flat is a supply of construction service, while sale after completion is a sale of immovable property outside GST.

Kone Elevator India (P) Ltd. v. State of Tamil Nadu (Supreme Court, 2014): supply and installation of lifts is a works contract, not a sale of goods, because installation is an integral part of the contract. Under GST the principle helps decide whether a supply-and-install contract relates to immovable property. Lift installation embedded in a building is generally treated as a works contract at 18%.

27.8 Renting of immovable property

Renting of immovable property for business is taxable at 18%. Renting of a residential dwelling for use as residence is exempt, except that a registered tenant pays GST under reverse charge (unless he is an individual renting it as his own residence in his personal capacity).

From 10 October 2024, renting of any immovable property other than a residential dwelling by an unregistered person to a registered person is taxed under reverse charge. The tenant pays 18% and takes credit in the same return. Tenants registered under the composition scheme were excluded from this reverse charge from 16 January 2025.

Illustration 154: Rent under reverse charge

Meera Fabrics Pvt. Ltd., a registered company in Ahmedabad, pays (a) Rs. 60,000 a month for a shop owned by Mr. Joshi, who is not registered, and (b) Rs. 45,000 a month for a flat used as a guest house for its staff, owned by Mrs. Iyer, also unregistered.

Step 1: Shop: commercial property from an unregistered landlord to a registered tenant, so reverse charge at 18% = Rs. 10,800 a month (CGST Rs. 5,400 + SGST Rs. 5,400).

Step 2: Flat: residential dwelling rented to a registered person, so reverse charge at 18% = Rs. 8,100 a month.

Step 3: Total reverse charge = Rs. 18,900 a month, paid in cash in GSTR-3B. ITC on the shop rent of Rs. 10,800 is available in the same return.

Step 4: ITC on the guest house rent is doubtful under section 17(5)(b); treat Rs. 8,100 as a cost unless the facts clearly support credit.

27.9 ITC restrictions for construction

Section 17(5)(c) blocks ITC on works contract services for construction of immovable property (other than plant and machinery), except where the service is an input for further supply of works contract service. Section 17(5)(d) blocks ITC on goods or services received for construction of immovable property on one's own account, other than plant and machinery (the words were "plant or machinery" until the Finance Act, 2025 amendment), even when used for business. Construction includes reconstruction, renovation, additions, alterations or repairs to the extent capitalised.

Judicial view: Credit on buildings let out

Safari Retreats (P) Ltd. v. Chief Commissioner of CGST (Supreme Court, 2024): section 17(5)(c) and (d) were held valid, but "plant or machinery" in clause (d) was read differently from "plant and machinery", so a mall could be a "plant" on a functionality test. The Finance Act, 2025 replaced "plant or machinery" with "plant and machinery" in clause (d), retrospectively from 1 July 2017. The functionality argument is no longer available, subject to any challenge to the retrospective amendment.

Key point

A builder selling under-construction commercial units can take ITC, but must reverse credit on any floor kept for letting. Keep separate cost centres for sale and rental areas.

Chapter summary

• Residential flats: 1% (affordable) or 5% (others) effective, without ITC, after a deemed one-third land deduction; affordable means up to 60 or 90 square metres and up to Rs. 45 lakh.

• Shops in an RREP (commercial area up to 15%) go at 5% without ITC; commercial projects go at 18% on two-thirds (12% effective) with ITC.

• At least 80% of inputs must come from registered suppliers; the shortfall bears 18% reverse charge by 30 June; cement from unregistered persons bears its own rate.

• No GST where the whole price is received after the CC, but ITC on unsold units of a commercial project must be reversed.

• JDA: landowner flats valued at the price of similar flats nearest the JDA; development rights for unsold flats taxed under reverse charge, capped at 1% or 5%; tax point is the CC.

• Commercial rent from unregistered landlords is under reverse charge from 10 October 2024; residential rent to registered persons is under reverse charge.

• After the Finance Act, 2025 amendment, ITC on buildings constructed for letting is blocked despite Safari Retreats.