Introduction

Under-construction buildings, whether residential or commercial, attract specific tax implications in India. Buyers and developers must understand these taxes to avoid surprises and plan financial obligations accurately. The main taxes applicable include Goods and Services Tax (GST), stamp duty, registration charges, and eventually, property tax upon completion. Unlike ready-to-move-in properties, under-construction ones fall under a more regulated and taxed bracket, especially during the transaction and ownership transfer stage.

Applicability of GST

One of the most significant taxes on under-construction properties is GST. A flat 5% GST is levied on under-construction residential properties that are not part of an affordable housing scheme. For affordable housing, the GST rate is 1%. GST does not apply to fully completed or ready-to-move-in properties.

GST Input Tax Credit Not Available

Although GST is charged, developers are not allowed to claim Input Tax Credit (ITC) under the current GST regime for residential projects. This leads to an increased cost burden, which is usually passed on to buyers in the form of higher property prices.

Stamp Duty on Agreement Value

Stamp duty is a state-level tax that must be paid at the time of registering the agreement for an under-construction property. It is generally calculated on the higher of agreement value or the government-assessed value and varies between 4% to 7% depending on the state.

Registration Charges Apply

In addition to stamp duty, a separate registration fee is payable for executing the sale agreement. This is typically 1% of the transaction value, with a maximum cap set by each state. Both stamp duty and registration fees are compulsory, even for under-construction properties.

TDS on High-Value Transactions

If the total cost of the under-construction property exceeds ₹50 lakhs, the buyer must deduct TDS at 1% under Section 194-IA of the Income Tax Act and deposit it with the government. This TDS amount is part of the total consideration and not an additional charge.

No Property Tax Until Completion

Municipal property tax is usually not levied on under-construction buildings. It becomes applicable only after the issuance of an occupancy certificate or possession. However, developers may still pay taxes on land or partially constructed properties in some cities.

Impact on Income Tax Deductions

Buyers of under-construction properties can claim tax deductions on home loan interest under Section 24(b) only after possession is received. Deductions for principal repayment under Section 80C also start post-possession. No tax benefits can be claimed during the construction phase.

Booking and Cancellation GST Rules

If a buyer cancels an under-construction booking before possession, the GST paid may be refunded by the builder or adjusted in future transactions. However, refund rules are governed by timelines, and GST may not be returned after a certain period.

Taxation on Advance Payments

Any advance payments made to developers during construction are subject to GST at applicable rates. Even booking amounts or part payments are included under this rule, making it important for buyers to factor in this cost while budgeting.

Conclusion

Taxation on under-construction buildings involves multiple components including GST, stamp duty, registration charges, and future property tax. Buyers need to be aware that under-construction properties attract GST, unlike ready-to-move units. Delays in possession can also affect income tax benefits. Understanding these tax rules helps in financial planning and ensures compliance with legal obligations during property purchase.

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