GST 2.0 and Its Impact on the Real Estate Sector

The introduction of reduced GST rates has significant implications for the real estate sector, particularly for home buyers and investors in under-construction properties. Explore how these changes are expected to boost affordability and economic growth.

GstReal EstateAffordable HousingProperty TaxesEconomic GrowthReal EstateOct 31, 2025

GST 2.0 and Its Impact on the Real Estate Sector

Real Estate:Since 22 September 2025, the declaration of reduced rates of the Goods and Services Tax (GST 2.0) has generated economic excitement. Leading FMCG brands, automobile manufacturers, and electronic retailers have been announcing reduced and more attractive rates on their products to entice consumers. The reduced rates of GST have been hailed as a harbinger of enhanced savings and higher investment, thereby propelling economic growth fueled by the engine of domestic markets.

In this context, given that the real estate sector contributes around 7.8 per cent of the country’s GDP and is second only to agriculture and the IT sector in employment generation, it is crucial to explore the consequences of the reduced rates of GST on the real estate sector. GST is a destination-based, multi-stage, comprehensive tax levied at each stage of value addition. This tax, aimed at simplifying the structure of indirect taxation in India, is levied on goods and services sold for domestic consumption in the country. As GST is levied on the final market price of goods and services manufactured within the domestic boundaries, it reflects the maximum retail price.

GST is a form of indirect taxation which is passed on to consumers, to be collected by sellers who would then pay such taxes to the government. Intended to operate as a consolidated, “one umbrella” indirect tax structure, GST replaced all indirect taxes levied on goods and services produced within the country. The objective is to provide a unified system of centrally set tax rates for a good or service that is to be followed by all states in India. It accounts for every stage of manufacture whereby the value added to, as well as a change of destination of an item, is taxable. As the item passes from one link of the supply chain to another, an indirect tax is levied at every stage and this indirect tax, in the form of GST, embedded in the final purchase price of the product, is ultimately paid by the consumer.

The concept of destination-based levy also implies that the item is to be taxed where it is consumed. GST on real estate is paid by investors and home buyers on “under construction” properties. GST replaced the array of taxes such as VAT, Service tax, and associated charges payable by home buyers. With the onset of GST, 8 per cent GST was payable on “under construction affordable housing” purchased in association with the interest subsidy scheme of CLSS (Credit Linked Subsidy Scheme); 12 per cent GST was payable on “Other under construction” properties, 18 per cent was payable on works contracts, 18 per cent on composite supply of works, 12 per cent on composite supply of works to the government authority, 12 per cent on composite supply of works of use by the public, and 12 per cent on composite supply of works for affordable housing. GST was not levied on readymade houses with a completion certificate, resale of house property, or sale of land. Since 1 April 2019, the government had declared that the GST rates on under construction houses under Rs 45 lakh would be reduced from 8 to 1 per cent so as to enable purchasers of affordable housing to save more on their purchase of properties. Luxury properties were taxed at 5 per cent without any window to claim input credit tax.

To pull the under-construction housing sector out of the ongoing slump, in addition to reduced GST rates, the tax deduction limit on housing credit interest repayments was reduced. The GST regime also extends an abatement of 33 per cent of the contract amount as land value. Effective from 22 September 2025, GST rates on most construction services will continue at 18 per cent for commercial civil works and composite works contracts including material and labour. The non-affordable housing sector will be imposed a rationalized 5 per cent without input tax credit while the rate remains at 1 per cent for the affordable segment with no input tax credit. GST 2.0 also announced that rates would be reduced on key construction materials, such as cement and ready-mix concrete, which will now attract 18 per cent taxation as compared to the previous rate of 28 per cent.

Bricks, tiles, and sand will be taxed at 5 per cent as opposed to the earlier rate of 18 per cent, and paints and varnishes will be reduced to 18 per cent as compared to the erstwhile rates of 28 per cent. In the opinion of real estate experts, such reduced rates on construction materials are expected to lower construction costs by 3 to 5 per cent. This may potentially reduce housing purchase prices by 1 to 1.5 per cent, translated to Rs 1000 per square meter, provided the developers are willing to transfer the reduced construction costs to rationalized purchase prices for buyers, ensuring enhanced affordability and more competitive pricing. For home buyers, this means:

The reduced rates of 1 per cent on affordable and 8 per cent on other housing remain unchanged, implying thereby stability for home buyers.
The lowering of prices of retail and consumables will leave the average consumer with more disposable income.
With falling property purchase prices, their ability to negotiate reduced loan amounts and flexi-payments would encourage more purchases, especially in the affordable and middle-income sectors.
Reduction in marble, granite, and stone prices could rationalize construction costs for the luxury housing sector. Ultimate housing demand, however, will depend on the availability of finance, consumer confidence, and the ecosystem of associated infrastructure and connectivity.

Ensuring fairness and transparency is the key to building up consumer confidence. While legal protection of consumer rights has largely been institutionalized through the promulgation of the Real Estate (Regulation and Development) Act (RERA), 2016, prudent pricing by developers, straightforward invoicing, strict supervision of the rules on anti-profiteering, and digital surveillance are some of the steps the government may take to translate the “feel good” factor of GST 2.0 into boosting consumer desire to invest more in the purchase of real estate and the developer to invest in new projects that will drive the economy in an upward trajectory. Another fiscal reform to improve affordability could be to restore the Input Tax Credit (ITC).

As developers cannot claim input tax on credit, they pass on these costs as a direct tax, thereby multiplying the tax burden of the buyers. If their ability to claim such input tax credit is restored, this element of double taxation on the purchaser would be reduced, enhancing the affordability of the housing projects. To ensure transparency, it would be worthwhile to place emphasis on more transparent audit trails, on transparent supply chains, and on ensuring that developers source supplies from GST registered suppliers. To strengthen consumer confidence, it is equally important that the reduced housing prices are tangible and not merely cosmetic in import.

Developers who benefit from the reduced construction costs would need to balance the ideas of pragmatic pricing with their legitimate profit expectations. Once convinced of tangible affordability, consumers would generate increased demand for housing, which would, in turn, encourage developers to invest in newer projects. The take-home message is that the “feel good” factor emanating from GST 2.0 should be a reality, and the consumer should be in a position to acknowledge their actual savings consequent to the modified tax structure. This will build consumer trust not only in the real estate sector but also in the government machinery intending to introduce fiscal reforms.

Frequently Asked Questions

What is GST 2.0 and how does it affect the real estate sector?

GST 2.0 is a revised version of the Goods and Services Tax that has introduced reduced rates. For the real estate sector, it means lower taxes on under-construction properties and construction materials, potentially reducing housing costs and improving affordability.

How does GST 2.0 impact home buyers?

GST 2.0 reduces the tax burden on home buyers, especially for those purchasing under-construction properties. This can lead to lower property prices and increased disposable income, making it easier to afford homes.

What are the tax rates for different types of properties under GST 2.0?

Under GST 2.0, affordable housing (under Rs 45 lakh) is taxed at 1 per cent, other under-construction properties at 8 per cent, and non-affordable housing at 5 per cent without input tax credit. Readymade houses, resale properties, and land are not taxed.

How can reduced construction costs benefit the real estate market?

Reduced construction costs can lower housing prices by 1 to 1.5 per cent, making properties more affordable. This can increase demand, especially in the affordable and middle-income segments, and encourage developers to invest in new projects.

What role does transparency play in the real estate sector under GST 2.0?

Transparency is crucial for building consumer confidence. Steps like straightforward invoicing, strict anti-profiteering rules, and digital surveillance can ensure that the reduced costs are passed on to consumers, making the benefits of GST 2.0 tangible and real.