GST on Building Construction: Rates, HSN Code and more

GST on Building Construction has revolutionized the real estate industry of India and also the tax structure for construction buildings. In case if you are an investor, a builder or a homebuyer, it is extremely important for you to understand the GST rules on building construction. GST on construction work is vital for maintaining financial prudence and ensuring smooth operations. However, understanding the nuances of GST is very much complicated. This is why here in this blog we have discussed everything regarding GST on Building Construction. Read to know more.

Understanding the Relevance of GST on Building Construction

GST is an indirect tax that is levied on the supply of goods and services. Check how GST affects in the context of building construction:

Construction services: When a builder or contractor is constructing a building no matter whether it is residential, commercial or infrastructure, their service will be taxed.

Construction materials: On construction materials like cement, steel, bricks, sand, tiles, etc. GST will be implied.

Contracts: Works contracts like (labour + materials) plays a major role construction engagement and their tax calculation under GST will be different.

Note: You must know that GST does not apply uniformly to everything that are involved in a building construction, for example, resale of completed properties or sales of bare land are typically exempt under GST.  Also, the new GST rate structure which has been effective from 22 September 2025 has simplified some of the previous complexity. 

Application of GST on Building Construction

Here are key conditions when GST on Building Construction is applicable:

1. Under Construction Properties: GST is applicable for under construction building meaning when a building or is being built, and the construction work is in progress.
2. Land Consideration Exclusion: While calculating the GST-taxable value, typically one-third of the total amount is considered to be the land component and is excluded for GST purposes. However, it is not a default approach. You can say that it is an optional method and in many cases the actual value of the land is considered for calculating the GST.
3. Works Contracts: Contracts where a contractor is providing construction service (labour + materials) are treated as a kind of work contract under GST. 
4. Public / Government Infrastructure Projects: There are certain notified infrastructure works which get concessional GST rates. 

Moreover, we can say that GST is applicable to major construction activities in India including private construction, commercial construction and construction of flats or Apartments. In short we can say that any kind of property under construction that is intended for sale is considered a supply of service and thus GST is applicable. However, GST is not applicable for ready-for-sale properties.

Note: The applicability of GST on Building Construction depends on multiple factors type of construction, nature of transaction and status of the parties involved.

GST Rates on Construction Services for the Year 2025

Here we have provided a detailed breakdown of GST on Building Construction for different construction services along with HSN Code after the GST rate rationalization on 22^nd September 2025. 

GST on Construction Materials

GST is not only applied to services, the materials used in building construction also carry GST. Here we have provided a breakdown of common construction materials and their GST rates:

Note: The GST on building materials highly impact the construction cost. This is why developers and contractors need to factor these into budgets along with cash flow, and costing.

Input Tax Credit (ITC): Who Can Claim

Another major aspect of GST on building construction is Input Tax Credit (ITC). This is because it determines whether a builder or contractor can offset the GST that they are paying on inputs (materials, services) against the GST they are collecting.

In case of commercial construction, where the GST rate is 18%, ITC can be claimed here on the inputs (materials, sub-contractor services, etc.). 

However, when it comes to residential construction under concessional schemes (1% / 5%), ITC is not applicable. But on certain compliance conditions like minimum procurement from some registered suppliers, project specific conditions and reverse charge on unregistered supplies, ITC can be applicable.

Also, certain costs are disallowed for ITC under Section 17(5) of the CGST Act. For example, when one is building an immovable property, the expenses on the building itself will not be eligible. Exception will be for plant and machinery or finishing services. 

Why Input Tax Credit Matters?

For a developer who is building a commercial property, the availability of ITC will lower the effective tax burden.

In case of housing projects, the absence of ITC (in concessional rate cases) will finalise the GST Cost which can be passed to buyers.

Proper ITC management is very much important. Remember incorrect claims or disallowed credits can cause compliance issues or tax liabilities.

How GST on Building Construction is calculated?

Calculating the GST on building construction for a construction contract is not always easy. Here check out the key valuation principles:

1. Land Component Exclusion: As we have mentioned previously, one-third i.e (33.33%) of the total contract value will be treated as land value and will not be considered for GST computation. But this is not a default approach, in many cases taxpayers can use the actual value of the land if they can prove it.
2. Taxable Value = Total Consideration – Land Value: The GST will be applicable on this type of taxable value. The rate (1%, 5%, 18%, etc.) will be applied.
3. Break-up in Invoices: Builders and contractors need to issue invoices which segregate the land and construction components for complying properly.
4. Works Contract Valuation: In case of work contract jobs which include (labour + material), the valuation will be more complex. It is the break-up of material cost along with labour cost, and the profit required and proper invoices should be maintained.

Compliance Requirements for Builders & Contractors

GST on Building Construction is rigorous. Here check out the key obligations and best practices:

GST Registration: Any contractor who crosses the threshold will be registered under GST.

GST-Compliant Invoices: Every supply need to have proper GST invoices, along with HSN / SAC codes (9954 for construction works in many cases) 

E-Way Bills: In case if construction materials are transported, and the value of the project exceeds Rs. 50,000, e-Way bills are required. 

Filing Returns: Monthly and quarterly GST returns like (GSTR-1, GSTR-3B, etc., as applicable) should be filed.

Maintain Detailed Records: All details should be maintained meticulously like contracts, break-up of costs, input purchase invoices, work-in-progress details, sub-contractor bills, etc.,

Audit & Reconciliation: Annual audit will be required. Reconciliation of ITC claims, revenue collected, and contract amounts is extremely important.

Examples

Here we are giving two examples on how GST on Building Construction is computed in practice:

Example 1: Residential Apartment (Non-Affordable)

• Total sale consideration including base + amenities Rs. 1.00 crore.
• Then assume land component will be1/3rd = Rs. 33.33 lakh.
• Taxable value in terms of GST = Rs. 66.67 lakh.
• Applicable GST rate is = 5% (no ITC) for non-affordable residential property projects. 
• GST = 5% of Rs. 66.67 lakh = Rs. 3.3335 lakh.
• Therefore, the total amount payable by buyer will be Rs.1.00 crore + Rs. 3.3335 lakh = Rs 1.033335 crore assuming that builder passes the tax.

Example 2: Commercial Office Building

• Suppose a contractor is working on a commercial contract worth Rs. 50 lakh including (labour + materials).
• GST rate is 18% with ITC. 
• The contractor’s input that includes (materials, sub-contracts, etc.) also has a GST, which he claims as ITC.
• Then he collects 18% GST from the client on his invoice 18% of Rs.50 lakh = Rs. 9 lakh.
• Net cash tax that must be deposited = 9 lakh minus the eligible ITC.

What are the Key Challenges?

Despite the clarity on GST Rates, contractors or builders often face challenges like:

1. Mis-classification of Rates: Contractors often use wrong GST slab which in many cases cause overcharging or compliance risk.
2. Non-availability of ITC for Residential Projects: As input credit is not available for projects under concessional GST (1% / 5%), , the cost burden will be higher and it has to be managed carefully.
3. Land vs Construction Value Dispute: Sometimes contactors do not clearly segregate the value of land and construction, making it difficult for buyers to verify and for tax authorities to assess if required.
4. E-Way Bill Non-Compliance: If one is not generating e-Way bills for high-value materials, it can cause penalties.
5. Refund / Reversal Issues: If a project fails or the contractual terms of a project change then adjusting GST that is collected can become complicated.
6. Audit Complexity: Maintaining a proper detailed records, cost break-ups, and claims for ITC will require proper bookkeeping.
7. Buyer Awareness: In case if homebuyers don’t realize that GST is chargeable on under-construction units and assume that stamp duty or registration covers everything, it can lead to dispute.

2025 Updates for GST on Building Construction

• From the date of 22 September 2025, India moved to a revised and rationalized GST rate structure that has simplified numerous slabs. 
• Under this rationalization, construction services fall into the 5% and 18% bracket of GST including (plus the 1% for affordable housing). 
• Material GST rates have also been revised.

For example, cement (earlier taxed at high rates) still remains taxed but under possibly revised slabs. 

• Clarifications have been issued on disallowed costs, ITC Claims and valuation method.

What are the Best Practices for Builders and Buyers?

To navigate GST on building construction smoothly, here we have provided some recommended best practices for you:

1. For Builders / Promoters
   1. You can segregate contract value into land and construction portions in your agreement.
   2. Make sure to issue GST-compliant invoices along with HSN/SAC codes.
   3. You must maintain a detailed cost breakdown of materials, labor, and subcontracts for supporting ITC claims or compliance.
   4. Monitor input sourcing for maximizing ITC. Also optimize it.
   5. Make sure to keep track of threshold limits for GST registration, e-Way bill triggering, etc.
2. For Contractors:
   1. Make sure to maintain proper purchase invoices in case of all goods and services.
   2. Always file returns timely and reconcile ITC.
   3. Make sure to generate e-Way bills when moving high-value materials.
   4. Also make sure to train your team about GST invoicing and compliance.

Conclusion

GST on building construction in India is not a simplified, one-fits-all rule. It varies depending on the nature of the project, the applicable GST rate, the input credit eligibility, and valuation methodology, etc. The changes in the GST slab from September 2025 has bring a rationalization. For builders and contractors, efficient GST management can make a huge difference. Make sure to avoid overpayments and ensure transparency. If you require information on GST rates and other GST related things or you want assistance to apply for GST registration, get in touch with Online Legal India.

FAQs (Frequently Asked Questions)

1. Is GST applicable on a completed building that has Occupancy Certificate?

No. In case if the full payment is made after getting t=the certificate, the transaction will be treated as sale of immovable property and not a “supply of service.” 

2. Why only 1/3rd of the contract value is regarded as “land component”?

GST rules has a notional division that exclude land from the taxable base, assuming one-third of the total consideration is attributable to land. 

3. Can I claim ITC if I build a residential building for myself (and then rent it out)?

 ITC is not available for all residential projects that are under concessional GST, but in case the building is used for leasing or commercial purpose, there may be cases to claim, subject to conditions.

4. What if my contractor is not providing GST invoices?

Don’t work with him. You may not be able to account for tax without GST compliant tax invoices. It can lead to compliance risk for both the parties.

5. Has the GST rate for construction changed recently?

Yes, from the date of 22 September 2025, GST slabs have been rationalized. Construction services has GST rates 5% or 18%, while affordable housing continues with 1%. 

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.