Why does buying an under construction flat make more financial sense despite GST relaxation?

Why does buying an under construction flat make more financial sense despite GST relaxation?

As per the amendment to the GST law on residential flats, purchase of under construction flats under 90 square metre of carpet area and with agreement value less than 45 lakhs would be charged 1% GST and all other type of flats would bear 5% GST. The ruling also states that flats in apartments which have obtained Completion certificate would induce no GST. 

On the face of it, the relaxation of GST on completed projects gives a feeling that buying an under construction flat would be more financially prudent, but an in depth analysis might reveal otherwise. I would present two cases to back my claim.  

Disclaimer- Two equally good flats are considered for comparison with only difference being the construction stage. Interest and Rent are the only two varying costs in play  

Case 1: 3 BHK Flat costing 60 lakhs for an under construction flat (2 year project) and 5% GST 

Assessment done till completion of project
Under Construction Flat
Completed Flat
Assumption
Gross Value
60 L
66 L
10% premium for a completed project
GST
3 L
0
-
Net Value
63 L
66 L
-
Down Payment
13 L
13 L
-
Average Loan Value
25 L
53 L
50 L Averaged out over 2 years#
Interest Rate
7% pa
7% pa
-
Interest Value per month
14583
30916
-
Rent for a 3BHK
15000
0
Based on 3% rental yield
Total Outgo per month for the 2 year period
29583
30916
-

 * This difference in outlay is likely to get larger with increasing interest rates as can be expected in the near future 

** An under construction project is likelier to give an increased future value of the asset which has not been considered in the assessment 

*** Above interest calculations are based on simple interest on home loans, while in reality, compound interest on home loans will increase the difference in outlay 

Case 2: 2 BHK Flat costing 40 lakhs for an under construction flat (2 year project) and 1% GST 

Assessment done till completion of project
Under Construction Flat
Completed Flat
Assumption
Gross Value
40 L
44 L
10% premium for a completed project
GST
0.4 L
0
-
Net Value
40.4 L
44 L
-
Down Payment
10 L
10 L
-
Average Loan Value
15.2 L
34 L
30.4 L Averaged out over 2 years#
Interest Rate
7% pa
7% pa
-
Interest Value per month
8867
19833
-
Rent for a 2BHK
10000
0
Based on 3% rental yield
Total Outgo per month for the 2 year period
18867
19833
-

 * This difference in outlay is likely to get larger with increasing interest rates as can be expected in the near future 

** An under construction project is likelier to give an increased future value of the asset which has not been considered in the assessment 

*** Above interest calculations are based on simple interest on home loans, while in reality, compound interest on home loans will increase the difference in outlay 

 

# Bank releases loan on the basis of state of completion for an under construction flat; hence assumption of average loan value at the midway stage, i.e 50% of the total loan. 

 

After two years, i.e completion of project, the monthly outgo would be the same in both cases. Notwithstanding the fact that an under construction flat offers you the convenience of customization, it would make more financial sense too to buy an under construction flat. 

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