Cancelling a Bengaluru Flat Booking: GST on Forfeiture, Delay Penalties and Refunds

A Bengaluru buyer who booked an under-construction flat in a hurry decides, three months later, to cancel. The builder's cancellation letter lists the amount paid, a deduction under the cancellation clause, the GST already charged on the instalments, and a refund figure. Two tax questions sit inside that letter. Is there GST on the amount the builder keeps? And does the buyer get back the GST paid on the instalments that are being refunded?

Two Finance Ministry documents speak to these questions. The first is Circular No. 178/10/2022-GST dated 3 August 2022, which deals with GST on liquidated damages, compensation, penalties and cancellation charges. The second is the Tax Research Unit's FAQs on real estate dated 7 May 2019, which explain how a developer adjusts tax when a booking is cancelled. This guide reads both for a buyer. It is buyer guidance, not tax advice, and neither document settles every cancellation clause.

The short answer. Circular 178 says that forfeiture of earnest money by a seller when a buyer breaches an agreement to sell immovable property is a mere flow of money, not consideration for a supply, and not taxable. It also says that amounts forfeited on cancellation of a service by the customer, as contemplated by the contract as part of commercial terms, are consideration for a supply and taxable at the rate of the principal supply. The 2019 FAQ says a developer can issue a credit note on cancellation of a booking provided the excess amount is refunded to the buyer before September following the end of the financial year. The trade-off: the circular's two principles point in different directions, so the tax on a builder's cancellation deduction depends on how the clause is framed; ask for it in writing before you cancel.

Is GST charged on earnest money a seller forfeits?

Not where it is compensation for breach, according to the circular. Paragraph 7.1.5 says that forfeiture of earnest money by a seller in case of breach of an agreement to sell an immovable property by the buyer is a mere flow of money, as the buyer does not get anything in return for the forfeiture. It says forfeiture of earnest money is stipulated in such cases not as a consideration for tolerating the breach of contract but as compensation for the losses suffered and as a penalty for discouraging non-serious buyers. Such payments, the circular says, are not a consideration for any supply and are not taxable.

The circular gives the test it applies: whether the payment constitutes consideration for another independent contract to tolerate an act, refrain from an act or do an act. If yes, it is a supply. If not, it is not a supply.

Then when can a cancellation charge attract GST?

When it is part of the commercial terms for a service. Paragraph 7.1.6 says that amounts forfeited on cancellation of a service by the customer, as contemplated by the contract as part of commercial terms agreed by the parties, constitute consideration for supply of a facility, and are subject to GST where the supply is taxable. Its examples include a passenger ticket forfeited for a no-show and a security deposit forfeited when a package tour is cancelled.

The circular says such supplies are ancillary to the principal supply, are eligible to be assessed as the principal supply, and will not be taxable if the principal supply is exempt. In paragraph 11.4 it says earnest money forfeited when a customer fails to avail an intended supply should be assessed at the same rate as the service contract.

GST on an under-construction flat is levied on the construction of the apartment, as the 2019 FAQ describes it, so a builder may argue that its cancellation deduction falls in this second category. The circular does not discuss builder cancellations of under-construction flats specifically. That is why the wording of your agreement's cancellation clause, and the builder's stated basis for any GST line, matter.

Is the delay compensation a builder pays me taxable?

The circular says no. Paragraph 7.1.5 lists the penalty stipulated in a contract for delayed construction of houses as an example of liquidated damages that are not consideration for a supply. It describes this as a penalty paid by the builder to buyers to compensate them for the loss they suffer due to delayed construction, and not for getting anything in return from the buyers. Our guide on delay interest under RERA Section 18 covers how that compensation is claimed.

What about interest the builder charges on my late instalments?

The circular's reasoning points the other way. It says that where a contract provides that failure to pay by the due date attracts a late fee or penalty, that amount is consideration for supply of a facility of accepting late payment. Such ancillary supplies are assessed as the principal supply and at the same rate. On that reasoning, interest charged on late instalments under a flat purchase agreement could carry GST at the rate of the flat. Our guide on missed builder instalments under RERA covers the interest itself.

Do I get back the GST I paid on cancelled instalments?

The 2019 FAQ explains the developer's route. Question 22 says a developer can issue a credit note to the buyer under Section 34 in case of change in price or cancellation of booking, provided the amount received in excess, if any, consequent to issuance of the credit note is refunded to the buyer by the developer before September following the end of the financial year. The developer can then take adjustment of the tax paid in respect of that credit note.

The FAQ's worked example is a pre-2019 booking of Rs 10 lakh on which the developer paid GST of Rs 1.2 lakh at an effective 12 per cent. On cancellation, it says the developer is entitled to adjust that Rs 1.2 lakh against other GST liability, provided the entire amount received from the buyer is refunded. For a buyer, the practical point is timing: the credit note route in the FAQ is tied to refund before September following the end of the financial year, so a cancellation made late in a financial year is worth following up promptly.

Does the circular cover other property payments?

A few. Explaining what counts as agreeing to refrain from an act, it gives the example of a builder refraining from constructing more than a certain number of floors, even though permitted by the municipal authorities, against compensation paid by a neighbouring housing project that wants to protect its sunlight. In paragraph 7.1.6 it also lists an early termination fee under a lease of movable or immovable property, and a pre-payment penalty some banks charge when a borrower repays a loan before maturity, as payments that amount to consideration for a supply and are subject to GST where the supply is taxable.

For a buyer, the lease example matters if you are renting while your flat is being built and plan to leave the rental early when possession comes. The loan example matters only where a prepayment charge applies at all; our earlier guide on prepaying a floating rate home loan explains RBI's rules on that.

What should I ask the builder before cancelling?

Ask for a written breakdown. You want the total paid, the GST charged on each instalment, the deduction under the cancellation clause and the clause it relies on, whether GST is being charged on that deduction and why, and the date by which any credit note and refund will be issued. Compare that with your agreement and with the RERA routes for exit set out in our guide to cancelling a flat booking under RERA.

A seven-point checklist before cancelling a Bengaluru flat booking

1. Read the cancellation clause in your agreement and note how the deduction is described.
2. List every payment made, with the GST shown on each invoice.
3. Ask the builder whether GST is charged on the cancellation deduction, and on what basis.
4. Ask whether a credit note will be issued for GST on the refunded instalments.
5. Ask for the refund date, keeping in mind the September deadline in the 2019 FAQ.
6. Keep copies of the cancellation letter, credit note and bank receipt of the refund.
7. Check RERA exit routes before accepting a deduction you think is excessive.

Frequently asked questions

Is GST payable on earnest money forfeited when I cancel a property purchase?

Circular 178/10/2022-GST says forfeiture of earnest money by a seller when a buyer breaches an agreement to sell immovable property is a mere flow of money, not consideration for a supply, and not taxable. Amounts forfeited on cancellation of a service under commercial terms are treated differently and taxed as the principal supply.

Is GST charged on delay compensation a builder pays a flat buyer?

No, according to Circular 178/10/2022-GST. It lists the penalty stipulated in a contract for delayed construction of houses as compensation paid by the builder to buyers for their loss, not consideration for anything received from them, and therefore not a taxable supply.

Can I get back GST paid on instalments if I cancel my booking?

The 2019 Finance Ministry FAQ says a developer can issue a credit note under Section 34 on cancellation of a booking, provided the excess amount is refunded to the buyer before September following the end of the financial year. The developer can then adjust the tax paid on that credit note.

Can a builder charge GST on interest for late instalments?

Circular 178/10/2022-GST says a late fee or penalty provided in a contract is consideration for a facility of accepting late payment, assessed as the principal supply at the same rate. On that reasoning, late payment interest under a flat agreement could attract GST at the flat's rate.

Last updated 2026-11-05. PropNewz Team.