GST Reforms: Can Lower Taxes on Construction Materials Make Homes More Affordable?
The government's proposed GST reforms aim to reduce the tax rates on construction materials, which could lower overall costs for real estate developers and potentially make housing more affordable for homebuyers.
Gst ReformsReal EstateHousing PricesConstruction CostsAffordable HousingReal EstateAug 21, 2025
For affordable housing, currently taxed at 1%, the impact of GST changes would be limited. However, lower input costs, particularly if input tax credits (ITC) are restored, could reduce prices by 2–4%. In the mid-segment, a GST cut from 5% to 3% could bring down prices by 2–3%, an analysis by Anarock has shown.
In the luxury homes segment, while input costs may reduce, the luxury items used in such projects may be subject to the highest 40% rate, thus reducing the potential for price reductions, it said.
Mumbai, Delhi NCR, and Bengaluru remain the most expensive cities for construction. In these metros, luxury housing costs exceed ₹5,000 per sq. ft, while mid-range housing typically ranges from ₹2,000–2,800 per sq. ft, and affordable housing falls between ₹1,500–2,000 per sq. ft.
Between 2019 and 2024, construction costs for homes rose about 40%, with a 27.3% increase occurring in just three years. In October 2021, the average cost for Grade A projects in tier-1 cities was around ₹2,200 per sq. ft, rising to approximately ₹2,800 per sq. ft by October 2024.
Affordable housing projects tend to involve the lowest costs per square foot, with standard materials and basic finishes, starting from ₹1,500–₹2,000 per sq. ft even in metros. Mid-range homes call for higher-grade materials and branded fixtures and fittings, with costs typically ₹2,000–₹2,800 per sq ft or higher. Luxury projects tend to use imported finishes and involve high-end architecture and advanced amenities. These push construction costs above ₹3,000–₹5,000 per sq. ft in top cities, the analysis showed.
On property buyers, most developers tend to pass on increased input costs, either in part or completely, to their buyers. Recent data shows that at least 5–6% of the total input cost increases are directly reflected in housing prices. In affordable housing, even a hike of ₹500–₹800 per sq. ft can sharply impact buyer access, since an increase of ₹5 lakh is a massive additional burden for price-sensitive buyers when compared to those who buy premium or luxury housing, the analysis showed.
On developers' profit margins, smaller players who develop affordable housing already face thinner margins and are often unable to absorb even small cost increases. Many such developers have slowed down their launches or cut corners on amenities. In contrast, larger developers and luxury segment players can absorb cost increases because they enjoy higher margins and wield higher brand value, the Anarock analysis showed.
Homebuyer agreements include escalation charges, letting developers adjust sale prices upward along with cost increases, especially for under construction projects. This legal flexibility in the absence of regulatory constraints is behind much of the price transmission to buyers.
The combined effect has resulted in residential real estate prices rising by between 9-12% annually in recent years, with the increased construction costs a major driver along with rising land costs and reducing inventory. Pricing power remains strongest in metro cities, with less pronounced effects in smaller towns and cities where demand is lower, the analysis added.
Frequently Asked Questions
What are the proposed GST reforms for construction materials?
The proposed GST reforms aim to streamline rates to just 5% and 18%, with the tax on construction materials like cement likely falling from 28% to 18%.
How will the GST reforms affect affordable housing?
For affordable housing, currently taxed at 1%, the impact of GST changes would be limited. However, lower input costs, particularly if input tax credits (ITC) are restored, could reduce prices by 2–4%.
What is the impact of GST reforms on mid-segment housing?
In the mid-segment, a GST cut from 5% to 3% could bring down prices by 2–3%, according to an analysis by Anarock.
How will the GST reforms affect luxury housing?
While input costs may reduce, luxury items used in such projects may be subject to the highest 40% rate, thus reducing the potential for price reductions.
How do construction costs impact property prices?
Most developers tend to pass on increased input costs to buyers, either in part or completely. This can result in a 5–6% increase in housing prices, with a significant impact on affordable housing.
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