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How to calculate GST on a home loan?

How to calculate GST on a home loan?

Goods and Services Tax (GST) is a comprehensive tax system introduced on July 1, 2017. With this uniform taxation system in place, the real estate sector has become more transparent in its dealings, leaving a positive impact on potential home buyers.

That being said, if you’re planning to opt for a loan to buy a house, it is vital to know about the GST applicable on the same. While GST doesn’t directly affect your loan EMIs or home loan interest rates, it applies to the processing fee and various other charges on your loan.

Let’s understand the home loan GST rate in detail below.

What is GST, and how does it impact home loans?

Goods and Services Tax (GST) is an indirect tax applied to the supply of goods and services. It replaces several earlier taxes, such as service tax, excise duty, entry tax, and Value-Added Taxes (VAT). 

When it comes to GST on home loans, it does not apply to the loan’s principal or interest. Thus, your EMIs remain unaffected. However, the rate is charged on service-related components such as processing fees, legal fees, valuation charges, and other administrative services offered by lenders. The effect of GST on loans is the rise in the upfront cost of taking a home loan. Additionally, GST plays a role in property pricing. Under-construction properties attract GST at 5% in regular housing and 1% in affordable housing. However, ready-to-move-in homes are GST-free. When GST rates are reduced on housing projects, they can lower property costs, indirectly reducing the loan amount borrowers need.

Also, read – GST on Personal Loan

GST on home loans: Property-wise breakdown

Here’s a property-wise home loan GST breakdown:

  1. Under-construction properties

These attract GST at 5% for standard housing and 1% for affordable housing. Since GST applies to payments made before the completion certificate, the property’s overall cost may rise, influencing the loan amount required.

  1. Affordable housing projects

With a reduced 1% GST on property purchase and no input tax credit, these projects remain more budget-friendly for you. Lower property prices can help you opt for smaller loan amounts, keeping EMIs manageable.

  1. Ready-to-move-in properties

GST does not apply once a completion certificate is issued. Buyers only pay stamp duty and registration charges, reducing the upfront tax burden and keeping loan requirements comparatively lower.

GST rates on home loan charges – Processing, legal, pre-payment

GST applies differently to home loan-related charges. Here’s a breakdown of home loan charges GST:

  1. GST on the loan processing fee

Banks and lenders charge 18% GST on processing fees. For example, a Rs. 10,000 fee would attract Rs. 1,800 GST.

  1. GST on legal charges of a home loan

The charges for legal verification, documentation, or property title checks are also subject to 18% GST. For example, if the legal fee is Rs. 5,000, the GST will be Rs. 900. This makes the services slightly more expensive. 

  1. GST on pre-payment

Pre-payment fees may include GST at 18% if the lender treats it as a service charge. This does not affect the principal or interest but adds to one-time costs.

How to calculate GST on home loan processing fee?

You must follow the steps mentioned below to calculate GST on a home loan processing fee. 

  1. Check the processing fee: Note the amount your lender charges. For example, Rs. 15,000.
  2. Identify the GST rate: Most banks apply 18% GST on processing fees.
  3. Calculate GST amount: Multiply the processing fee by the GST rate. For Rs. 15,000, the GST is Rs. 2,700 at 18%.
  4. Add GST to the fee: The total fee payable is a sum of the processing fee and GST. In this case, it will be Rs. 15,000 + Rs. 2,700 = Rs. 17,700.
  5. Pay the total amount: This is the upfront cost you need to settle before your loan is sanctioned.

These steps ensure accurate GST calculation for loans.

Also, read – GST on Flat Purchase and Its Impact on Home Buyers

How to calculate GST on a home loan?

The method to calculate GST on housing loans is fairly straightforward. Since it is levied on the processing fee on your housing loan, all you have to do is calculate 18% of the total fee charged to you. In the case of an under-construction property, the home loan GST rate is 12% of the overall processing fee.

For instance, if you have taken a loan amount of Rs. 50 lakh, the processing fee will be between Rs. 12,500 to Rs. 50,000. Now, consider a home loan GST rate of 18% on this fee, and it will amount to Rs. 2,250 to Rs. 9,000. Therefore, the total amount payable on the loan will come somewhere between Rs. 14,750 and Rs. 59,000.

If you’re unable to calculate the GST on a home loan manually, you can use an online GST calculator for home loans.

Also, read – Understanding GST on Sale of Used Car

Impact of GST on home loan EMIs

Since GST is levied on under-construction properties, it will significantly lower the cost of property and lead to lower EMIs for you. While the current standard GST rate on housing loans is 18%, the effective rate comes down to 12%. This is because builders transfer the input tax credit benefits of 6% to the buyer.

Here are some of the effects of GST on housing loan EMI:

  • As of April 1, 2019, the GST rate for under-construction flats has been reduced to 5% and that on affordable housing has been cut down to 1%.
  • Since no GST is applicable on ready-to-move-in flats, the developers have to bear the tax burden for these projects. This essentially means a higher cost of property and a higher cost of housing loans for you.
  • The new GST rates have reduced the total production cost incurred by the developer. As a result, many are taking up affordable projects. This revision can make housing loans more reasonable for you.

The bottom line

Now, with the reduction in GST rates on loans, purchasing your dream home has become more affordable than ever. To maximize your savings, choose a reliable financing partner like Tata Capital and enjoy attractive loan options at easy-to-meet home loan eligibility.

Enjoy a quick application process along with swift disbursal and get your funds in no time! Use our home loan EMI calculator to estimate your EMIs and a GST calculator for home loans to estimate the GST charges.

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FAQs

How to calculate GST on home loan processing fees?

To calculate GST on home loan processing fees, apply 18% GST to the lender’s processing charge. For example, if the fee is Rs. 10,000, GST will be Rs. 1,800, making the total payable Rs. 11,800. The GST amount varies based on the bank’s fee structure. You can use a GST calculator for home loans to ease calculations.

Does GST affect my home loan EMI amounts?

 

GST doesn’t affect your home loan EMI directly, as it isn’t charged on principal or interest. However, it is charged on associated services like processing fees, legal fees, and valuation fees, which can increase your upfront loan-related expenses.

Is GST applicable to interest or principal payments?

 

No, GST does not apply to home loan principal or interest payments. These are considered financial transactions, which are exempt from GST. GST is only charged on service components like processing fees, administrative charges, and other lender-provided services.

What is the GST rate for under-construction properties?

 

The GST rate for under-construction properties for regular housing is 5% without input tax credit and 1% for affordable housing. These rates apply to payments made to builders before the completion certificate is issued. Once completed, GST is no longer applicable.

Are ready-to-move-in properties subject to GST?

 

No, ready-to-move-in properties are not subject to GST. Since they come with a completion certificate, they are treated as completed assets rather than services. You only need to pay stamp duty and registration charges, not GST.

How does the input tax credit benefit buyers?

 

Input tax credit allows builders to claim 6% credit on GST paid for materials and services used in construction. This reduces their overall project cost, enabling them to price properties more competitively. As a result, buyers benefit from more affordable property prices in eligible projects.

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