GST for Home Loan

The Goods and Services Tax (GST) was introduced in India with the aim of simplifying the tax structure by replacing multiple indirect taxes with a single tax regime. This change has many impacts on several sectors, including home loan EMIs and interest rates.

In this article, we will look at the impact of GST on home loans, including EMI, interest rates, and the overall housing loan procedure.

Table of contents

• Explanation of GST (Goods and Services Tax)
• History and implementation of GST
• Importance of understanding GST implications on home loans
• How does GST affect home loan EMIs and interest rates?
• Calculation of GST on home loan EMIs
• Factors influencing changes in interest rates due to GST
• Conclusion
• FAQs

Explanation of GST (Goods and Services Tax)

GST is a tax reform introduced in India to simplify the taxation system. It replaced multiple indirect taxes levied by both the central and state governments, such as excise duty, service tax, and Value-Added Tax (VAT). The key idea behind GST is to have “One Nation, One Tax,” ensuring uniformity in the tax structure across the country.

Under GST, there are 3 main components: Central GST (CGST), State GST (SGST), Integrated GST (IGST). GST operates on the destination-base principle, meaning it is levied at each stage of the supply chain, from the manufacturer to the customer. This helps to reduce the tax burden on the end customer. Businesses can claim Input Tax Credit (ITC) for the tax paid on inputs, which reduces their overall tax liability and avoids double taxation.

History and implementation of GST

The idea of introducing GST in India was first suggested 16 years ago, back when the honourable Atal Bihari Vajpayee was Prime Minister. After several attempts and discussions, including the introduction of various bills in Parliament, the constitution was amended in 2016 to enable the introduction of GST.

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After the GST council approved various GST bills, like the CGST Bill, IGST Bill, UTGST Bill, and Compensation Bill, they were passed by the Lok Sabha on March 29, 2017 and by the Rajya Sabha on April 6, 2017. They were then enacted as acts on April 12, 2017.

Finally, GST was launched with effect from July 1, 2017 by the honourable Prime Minister Narendra Modi in the presence of then-President Pranab Mukherjee, marking an important milestone in India's tax system.

Importance of understanding GST implications on home loans

Understanding the implications of GST on home loans is important for you as a home buyer, as GST affects various aspects of the home loan process. Let’s look at some of them:

Processing Fees

GST is added to the processing fee charged by lenders when you apply for a home loan. This fee, which is typically a small percentage of the total loan amount, is subject to GST

Interest Rates

While GST itself doesn't directly change home loan interest rates, it can indirectly influence them. For example, if GST increases construction costs for developers, this may potentially lead to higher property prices and higher interest rates.

Tax Benefits

You can claim tax deductions on your home loan's principal and interest payments under Sections 80C and 24 of the Income Tax Act respectively. Changes in GST rates or property prices can affect these tax benefits, impacting the overall cost of your loan.

How does GST affect home loan EMIs and interest rates?

It's important to note that GST doesn't apply to ready-to-move-in houses, but for under-construction properties, there's a 12% GST rate. Before GST, a service tax of 15% was applicable on home loans, but now it's an 18% home loan GST rate. Additionally, GST is levied on the processing fee for a home loan, typically ranging from up to 3% of the total loan amount. It's worth mentioning that GST is charged on the processing fees and charges, not on the home loan amount itself.

The impact of GST on your home loan interest rates is indirect. When GST increases construction costs, developers may pass on these expenses to buyers, resulting in higher property prices. As a result, you may need larger loans, which might lead lenders to adjust interest rates to manage the increased risk. However, the final interest rate will also depend on several factors like your creditworthiness, loan tenure, and overall market conditions.

Calculation of GST on home loan EMIs

GST applies to the processing fees and/or any other home loan charges applied by the lenders, not the EMI amount. To calculate the GST you need to know the processing fee charged by your lender and apply the applicable home loan GST rate (currently 18%) to it. For under-construction properties, you have to calculate 12% of the total processing fee.

Let's say you're taking out a home loan for INR 5 crores*. The lender charges a processing fee of 0.5% of the loan amount.

To calculate the GST on the processing fee, you'd first find 0.5% of INR 50,00,000, which equals INR 25,000. Then, you'd apply the GST rate of 18% to this amount:

GST = 18% of INR 25,000

= (18/100) * INR 25,000

= INR 4,500

So, the GST on the processing fee would be INR 4,500.

Factors influencing changes in interest rates due to GST

The impact of GST on home loan interest rates is based on factors such as:

Construction costs

Home loan GST applies to under-construction properties, affecting the overall construction expenses. As property prices rise due to GST, you may require larger loans, which can lead to higher interest rates, depending on your overall eligibility

Input Tax Credits (ITC)

Previously, developers could benefit from ITC on construction materials, which helped lower their overall costs. However, under GST, the benefits of ITC have been reduced for real estate developers. As a result, developers may offset their increased costs by increasing property prices, indirectly affecting interest rates on your home loans.

Market Dynamics

Changes in property prices due to home loan GST can influence market dynamics. Lenders may adjust their interest rates based on market conditions, including changes in demand and supply of housing units.

Conclusion

From processing fees to interest rates, GST can influence multiple aspects of home loans. By understanding these implications, you can make informed decisions when applying for a home loan.

SMFG Grihashakti offers home loans up to INR 5 crores* at affordable interest rates with flexible repayment tenures. You can also benefit from tools such as an EMI calculator to foresee your monthly payments. Apply for a home loan online, or visit your nearest branch to learn more.