Introduction
The restriction on Input Tax Credit (ITC) in real estate arises from Section 17(5) of the CGST Act, 2017. This section classifies specific expenses as ineligible for credit. Further, amendments and notifications have added constraints, mainly affecting residential and commercial projects.
ITC under GST allows businesses to offset tax paid on inputs like raw materials, goods, and services. It eliminates the cascading tax effect, ensuring tax applies only to value addition. Initially, developers could claim ITC on construction materials such as cement, steel, and tiles. However, the government restricted ITC for residential projects from April 1, 2019, to simplify taxation and prevent misuse.
Currently, commercial projects are eligible for ITC, while residential projects under the new GST regime do not qualify. This guide covers ITC restrictions for developers, contractors, and buyers. It also highlights legal provisions, key court rulings, and compliance strategies.
1. ITC Restrictions for Developers & Builders
(a) ITC for Residential Real Estate Projects
Developers constructing residential apartments must choose between:
| GST Regime | Applicable GST Rate | ITC Availability |
| New GST Rates (Post-April 2019) | ||
| Affordable Housing | 1% GST | ❌ No ITC |
| Other Residential Projects | 5% GST | ❌ No ITC |
| Old GST Rates (Before April 2019 or Transitional Provisions) | ||
| Under-Construction Residential Properties | 12% GST | ✅ ITC available |
| Commercial Space within a Residential Project | 18% GST | ✅ ITC available |
Restriction: Developers cannot claim ITC under the new GST regime but must reverse ITC on ongoing projects transitioned to new rates.
(b) ITC for Commercial Real Estate (Shops, Offices, Malls)
For purely commercial projects, GST applies at 12% with ITC benefits.
| Category | GST Rate | ITC Availability |
| Commercial Real Estate (Shops, Offices, Malls) | 12% GST | ✅ ITC available |
No Restriction: ITC is allowed for commercial projects, provided they are sold before obtaining an occupancy certificate (OC).
Legal Update: Chief Commissioner of Central Goods and Services Tax (GST) vs. M/s Safari Retreats Private Ltd. [2024 (10) TMI 286]
- Background: A mall builder sought ITC on GST paid for constructing a mall intended for rental.
- Issue: GST rules normally deny ITC on the construction of immovable property unless it qualifies as “plant or machinery.”
- Decision: The Supreme Court introduced a functionality test to assess if the building plays an essential role in the business.
Now, definition is amended retrospectively from 01.07.2017 notwithstanding anything to the contrary contained in any judgment or order of any court or any other authority.
(c) ITC on Construction of Own-Use Property
As per Section 17(5) of the CGST Act, ITC is not available for any real estate property constructed for self-use (e.g., a builder constructing an office for its own use).
| Category | ITC Availability |
| Property Constructed for Self-Use (e.g., Developer’s Own Office) | ❌ No ITC |
Restriction: ITC cannot be claimed if the property is for self-occupation or leasing.
2. ITC Restrictions for Contractors
(a) ITC for Works Contract Services
Under Section 17(5)(c) of the CGST Act, ITC on works contract services is restricted except when used for providing another works contract service.
| Category | ITC Availability |
| Developer Hiring a Contractor for Construction | ❌ No ITC for Developer |
| Contractor Purchasing Cement & Steel | ✅ ITC Available |
Restriction: A builder cannot claim ITC on a contractor’s invoice, but the contractor can claim ITC on raw materials like cement, steel, and tiles.
Example:
- A developer hires a contractor for construction – No ITC for the developer.
- The contractor purchases cement & steel – ITC available to the contractor.
(b) ITC on Sub-Contracting
If a contractor outsources work to a sub-contractor, ITC is available to the contractor but not to the builder.
| Category | ITC Availability |
| Contractor Outsourcing Work to a Sub-Contractor | ✅ ITC Available |
| Developer Hiring a Contractor | ❌ No ITC |
3. ITC Restrictions for Buyers & Property Investors
(a) ITC for Homebuyers
| Category | ITC Availability |
| Homebuyers Purchasing a Residential Property from a Builder | ❌ No ITC |
| Commercial Buyers Purchasing Property for Business Purposes | ✅ ITC Available |
Restriction: Buyers cannot claim ITC on residential properties as tax is embedded in the price.
(b) ITC for Leasing Businesses (Malls, Co-Working Spaces, Warehouses)
| Category | ITC Availability |
| Leasing a Commercial Property (e.g., Mall, Office Space, Warehouse) | ✅ ITC Available |
| Leasing a Residential Property for Personal Use | ❌ No ITC |
Restriction: ITC is not available if the property is leased for residential use.
Summary:
| Aspect | ITC Allowed? | ITC Not Allowed? |
| Residential Projects (New GST rates – 1% & 5%) | ❌ No ITC | ✅ Tax included in cost |
| Residential Projects (Old GST rate – 12%) | ✅ ITC available | ❌ If opting for new rate |
| Commercial Projects (Shops, Offices, Malls, Warehouses) | ✅ ITC available | ❌ Only if for self-use |
| Works Contract Services | ✅ ITC for contractors | ❌ No ITC for developers |
| Leasing Commercial Property | ✅ ITC available | ❌ If leased for residential use |
| Self-Use Property (Built for own business) | ❌ No ITC | ✅ Tax cost absorbed |
Conclusion:
The real estate sector faces significant ITC restrictions, particularly for residential projects under the new GST regime. However, commercial projects, contractors, and leasing businesses can still benefit from ITC under specific conditions.
To maximize tax benefits while ensuring compliance, builders, contractors, and buyers must carefully structure their transactions and stay updated on legal developments and policy changes.
👉 For cases where ITC is availed but RCM calculation is mandatory, refer to the detailed blog here: Builders & Promoters: GST Rules for RCM and 80% Purchase Compliance
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This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.
Published on: February 26, 2025