RERA Compliance & GST/Income Tax 2025-26: Builder & Buyer Guide

What Happened?

The Real Estate (Regulation and Development) Act (RERA) continues to tighten compliance requirements for builders and real estate projects across India in AY 2025-26. Recent enforcement actions and tax department scrutiny now focus on GST compliance in real estate transactions, escrow account management, and income recognition timelines. Builders and professionals handling property sales must now ensure alignment between RERA obligations and Income Tax Act 2025 provisions, particularly regarding advance receipts, project completion reporting, and GST invoicing.

Background & Legal Context

What is RERA and Why Should You Care?

RERA is a state-level regulation that governs real estate projects. While RERA itself is not a tax law, it creates critical compliance points that trigger Income Tax Act 2025 obligations and GST liabilities. Every builder, promoter, and agent must understand how RERA registration, project disclosures, and buyer agreements interact with tax filing and GST compliance.

Key Legal Sections Involved:

• Income Tax Act 2025, Section 54F / 54EC: Capital gains exemption for residential property sale (applies to buyers)
• Income Tax Act 2025, Section 49: Cost of acquisition for property held for different periods
• Income Tax Act 2025, Section 56(2)(x): Gift tax on property received without consideration
• Income Tax Act 2025, Section 94(7): Interest income recognition on advance deposits
• CGST Act 2017, Section 28: GST on sale of property (5% GST on under-construction property, 0% on completed residential)
• CGST Act 2017, Section 31: Input Tax Credit (ITC) eligibility for builders
• RERA State Rules: Mandatory registration, disclosure requirements, and escrow account maintenance

How RERA Links to Income Tax:

RERA requires builders to deposit 70% of received amounts into escrow accounts and maintain transparent accounting. Income Tax Act 2025 requires builders to recognize income on accrual basis (for corporates) or receipt basis (for individuals). RERA project registration certificates now form part of income proof during tax assessments. Non-compliance with RERA can trigger IT Department scrutiny under Schedule VI (real estate transactions).

What Does This Mean for You?

For Builders & Promoters (AY 2025-26):

• Escrow Account Reporting: Funds held in escrow are not your income under Income Tax Act 2025, Section 4(1). However, interest earned on escrow balances IS taxable. You must file Form 15G / 15H with the bank to prevent TDS on escrow interest. Maintain separate ledger accounts in your books showing escrow deposits separately from revenue.
• GST on Real Estate:
  • Under-construction residential property: 5% GST on total consideration (including land)
  • Completed residential property: 0% GST (till 31 March 2025 — check updates)
  • Commercial/office space: 5% GST always
  • Non-resident builders: Must obtain GSTIN and file monthly GSTR-1 returns with invoices to each buyer
• Income Recognition: Under Income Tax Act 2025, corporate builders must recognize income on accrual basis. Individual builders can opt for receipt basis if eligible. RERA completion certificate becomes your income recognition trigger. Advance/token money received before RERA approval is still your income and attracts Income Tax + GST.
• Section 80-IA Deduction: Real estate businesses may claim infrastructure deduction under Income Tax Act 2025, Section 80-IA if you have valid RERA registration and project qualifies as residential housing project. This requires separate project-wise accounting and IT filing with auditor's certificate.
• Documentation Requirements: Maintain RERA agreements, builder buyer agreements (signed by both parties), payment receipts, escrow statements (monthly), project completion reports, and occupancy certificates. Tax Department cross-checks these during audits, especially for high-value transactions (above Rs 50 lakhs).

For Buyers (AY 2025-26):

• Capital Gains Exemption (Section 54EC): If you sell a residential property bought under RERA compliance and held for 2+ years, you qualify for exemption up to Rs 50 lakhs if reinvestment is made. RERA registration and occupancy certificate are proof of holding period.
• Home Loan Interest Deduction (Section 24): Interest on home loan for property bought under RERA registration is deductible up to Rs 2 lakh per year for self-occupied property under Income Tax Act 2025.
• Receipt of Refund: If builder refunds advance/token money after project cancellation, this is NOT income under Income Tax Act 2025. However, interest earned on refunded amount during disputes IS taxable income for you.
• Stamp Duty & Registration: RERA-compliant transactions reduce litigation risk and ensure proper registration with Sub-Registrar. This creates clear ownership records for future capital gains calculation and Section 54F exemption claim.

For Real Estate Agents & Sub-brokers:

• GST Registration Threshold: If annual turnover exceeds Rs 20 lakhs (Rs 10 lakhs in special states), GST registration is mandatory. Real estate services attract 5% GST.
• Income Recognition: Commission received from builders is business income taxable in the year of receipt (for cash basis) or accrual (for audit-eligible firms). RERA registration of the project is proof of legitimacy during IT audit.
• Brokerage Invoicing: Under GST, you must issue tax invoice to builder for brokerage commission with 5% GST. Failure to issue invoice can result in CGST/SGST demand + penalty.

What Should You Do Now?

Immediate Action Items for AY 2025-26:

• For Builders: Verify RERA registration status with your state RERA authority. Download latest project disclosure document and master plan approval. Create separate cost center codes in your accounting software for each RERA-registered project. Reconcile escrow account balances monthly with bank statements and ensure 70% threshold is maintained. File amended tax return if escrow interest was missed in earlier years.
• For Buyers: Obtain copy of RERA registration certificate from seller. Request auditor's certificate confirming property qualifies for Section 54F exemption if applicable. Maintain all original agreements, payment receipts, and occupancy certificate in digital format. If claiming home loan interest deduction, ensure property is registered in your name within 90 days of receipt.
• GST Compliance: If you are a builder, ensure GST return reconciliation with RERA revenue receipts. File GSTR-1 with project-wise breakup. If you are a buyer receiving bills, verify GST rate matches property category (residential/commercial, under-construction/completed). Claim ITC only if invoice shows proper project classification.
• Documentation: Organize all RERA-related documents in chronological order: registration certificate, builder-buyer agreement, payment schedules, site completion reports, occupancy certificate, tax invoices (for GST), and bank/escrow statements. Keep for 6 years minimum for tax audit defense.

Key Takeaways

• RERA registration is not optional: It is a state-level compliance requirement that now triggers Income Tax Act 2025 audit scrutiny. Non-RERA projects face higher IT Department scrutiny and GST penalties.
• Escrow accounts are special: Funds in escrow are not your income, but interest earned IS taxable. File Form 15G to prevent TDS; maintain separate accounting to prove escrow status to IT auditor.
• GST rates differ by property type: 5% GST applies to under-construction residential (including land). 0% on completed residential (with conditions). Commercial always 5%. Builders must classify correctly in GSTR-1 or face demand.
• Income recognition timings matter: Advance money before RERA approval is income immediately. Post-approval amounts follow project schedule. Mismatching RERA completion date with income recognition triggers IT Department query.
• For buyers, RERA compliance reduces risk: Proper registration, escrow accounts, and occupancy certificates make capital gains claims stronger and Section 54F exemptions more defensible during IT audit.

Final Word: RERA compliance is no longer just a consumer protection measure—it is now a critical tax compliance tool. Whether you are a builder, buyer, or agent, aligning your RERA obligations with Income Tax Act 2025 and GST rules will protect you from audit notices, penalty demands, and litigation. The cost of proper RERA registration and documentation today saves significant headaches during tax audit tomorrow.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602