GST on Rent: GST Charges on Residential & Commercial Property

Understanding how GST applies to rent is crucial for tenants and landlords to fulfill their tax obligations and avoid penalties.

3,231 Views | Updated on: Jun 25, 2024

Secure Your Family Financially

The GST (Goods and Service Tax) introduced in India has brought several changes in rental income taxation. Earlier service tax structures offered different rates for commercial and residential segments, but GST has made this classification.

This blog explores the topic of GST on rent to better answer the question, “Is GST applicable to rent here?” It will also look at how GST is charged on houses and buildings for use by individuals and companies, the exceptions, how to calculate GST, the benefits of GST, and how to meet the legal requirements of GST.

What is GST on Rent?

GST considers renting out of immovable property as a supply of service. GST is applicable in the following situations:

Properties rented out, leased or licensed for use.
When any commercial, industrial, or residential property is let out, either wholly or partly, for business purposes.

It is important to note that any money from renting out a residential property for residential purposes only is not considered a supply of services and is therefore exempt from GST.

Tax on Rental Income Before GST

Before GST, landlords needed to register under service tax if their total taxable services, including rental income, exceeded ₹10 lakhs per annum. Service tax is applied only to commercial properties or residential properties used for commercial purposes. Commercial properties were taxed at a flat rate of 15%, while rental income from purely residential properties remained exempt from service tax. This system distinguished between commercial and residential rentals, taxing only business-related rental income.

GST on Residential Property Rentals

Rental income from residential properties is generally exempt from GST on residential property rent. This exemption applies if the residential land is let to a person in his personal capacity for own use for residential purposes. In such situations, the rental income does not come under the taxable base for GST.

GST on Commercial Property Rentals

When a property is let out for non-residential use, it is meant as a service and would attract GST at 18%. This rule applies for all types of properties be it industrial, commercial or residential properties let out for business purposes.

The exemption is applicable for properties managed and owned by registered religious or charitable trusts if they fulfill these specific conditions:

The rent of rooms should be less than ₹1,000 per day.
The rent of shops should be less than ₹10,000 per month.
The rent of any open area or community hall should be less than ₹10,000 per day.

Does Renting Out a Property Attract GST?

Renting out a property may trigger GST obligations under specific circumstances outlined in the GST Act. it is applicable in the following conditions:

Lease to Corporate Entities

GST becomes applicable when a landlord leases an industrial, commercial, or residential property to a corporate entity, either wholly or partially.

Rental, Lease, or License

If the landlord rents out, leases, or grants a license to occupy the property, it falls under the purview of GST.

GST on Rental Income

These rental arrangements are considered as supplies of services which means the tenant will be required to pay an 18% GST beside the rent. But, if the property is used only for residential purposes the GST levied on the rental income is NIL.

How is GST on Rented-out Properties Calculated?

GST on rented-out properties comes under the supply of services category which attracts an extra 18% GST apart from the normal rent. On the other hand, when the property is entirely used for residential purposes, the GST is nil or zero.

If a tenant uses commercial property for business, GST is applied to the rent. The landlord collects this tax from the tenant at agreed intervals and must include the GST on the invoice.

GST is recovered over rented property at 9%CGST and 9% SGST on the invoice.

According to GST rules, the landlord is entitled to deposit the collected amount from the tenant to the concerned tax department.

For example, for a commercial property rented at ₹1,00,000 per month, the GST would be calculated as follows:

GST on rented property= 18% of ₹1,00,000 = ₹ 18,000

Thus, the landlord must collect ₹18,000 as GST from the tenant in addition to the monthly rent and ensure it is paid to the tax authorities.

What are the ITC Provisions When GST is Paid on Rental Income?

When GST is paid on rental income, tenants registered under the GST Act can claim an Input Tax Credit (ITC) on the rent paid. ITC can only be claimed if the property is used for commercial purposes.

The GST charged must be deposited with the government before claiming ITC, so tenants should ensure this is done.

Is ITC on Repairs and Renovation of Property Given on Rent Allowed?

Some expenses are prohibited from claiming input tax credit and Section 17(5) of the CGST Act makes this clear. As the cost incurred with the construction of immovable property is not allowed ITC any other cost incurred by the taxpayer such as the cost of brokerage or a repair of rental property is allowed ITC.

As per the GST Act, with the receipt of the invoice amount, the landlords can utilize the paid GST amount for maintaining the property, repairs, and other equivalent expenses costs. By claiming ITC on these expenses, landlords get the best opportunity to handle the tax implications and guarantee the resourcefulness of the financial capital and the saving plan.

When the Property is Rented to Businesses, Who Has to Register?

As a landlord, you must collect GST from your tenant and deposit it with the GST department. If the annual rent exceeds ₹2.4 lakh, the tenant must deduct TDS before paying the rent. However, according to the GST Act, if your rental income is below ₹20 lakh per year, you are not required to register for GST or pay GST. This threshold is ₹10 lakh per year for special category states.

Place of Supply for Charging CGST, SGST, or IGST

When registering properties, these property rentals should indicate chargeable CGST (Central Goods and Services Tax), SGST (State Goods and Services Tax), or IGST (Integrated Goods and Services Tax). This depends on the place of supply section that is dependent on the place where the property is and the registration status of the landlord or tenant.

What are CGST, SGST, and IGST?

The following table will define the key aspects of CGST, SGST, and IGST.

Type of GST	Imposed and Collected By	Applicability
CGST	Central Government	Transactions involving supplies of goods and services within a state.
SGST	State Government	Transactions involving supplies of goods and services within the same state.
IGST	Central Government	Transactions involving supplies of goods and services across different states.

The table below provides a clear and concise summary of the scenarios for determining the place of supply and the applicable GST type.

Scenario	GST Type	Example
Landlord in a different state than the property	IGST	Ms. Priya (registered in Tamil Nadu) rents property in Karnataka. IGST at 18% is charged.
Landlord and tenant in the same state as property	CGST and SGST	Mr. Raj (registered in Gujarat) rents property in Gujarat. CGST at 9% and SGST at 9% are charged.
Landlord in the state of the property, tenant in another state	CGST and SGST	Ms. Anjali (from Punjab) stays at a hotel in Jaipur, Rajasthan. The hotel charges CGST and SGST.

What Clause Allows for the Rented Property’s Income Tax to be Deductible?

Indian law on the taxation of rental income is provided in Section 24B of the Income Tax Act, 1961 which permits deductions for it. It has been followed that the standard deduction rate on the Net Annual Value of the property is 30%. The most attractive feature of this deduction is that it is allowable even if the actual expense on the property is more or less. Besides, borrowing costs can also be claimed, including the interest on a home loan used for the acquisition, building, renovation, or improvement of the same. These are some of the provisions that assist in minimizing the assessable income from rental structures and the total tax burden.

Key Takeaways

In the pre-GST era, rental income was subject to service tax, with different rates applicable to commercial and residential properties.
Under GST, residential rental income is generally exempt, while GST on commercial rental income attracts an 18% rate.
Provisions regarding input tax credit (ITC) allow tenants to claim GST charged on rental premises under specific circumstances.
The correct identification of the place of supply is very important in order to charge the correct CGST, SGST or IGST for rental transactions.

Conclusion

Any money generated from a property rented out for the purpose of residence is tax-free, whereas income derived from commercial property is subject to an 18% GST. Proper identification of a supply location leads to accurate charging of CGST or SGST or IGST as per the case.

The calculation, collection and payment of GST to the government is mandatory for landlords to avoid penalties though tenants are allowed to claim input tax credit where such costs are incurred. It is, therefore, advisable to keep up with current GST guidelines to avoid breaching the law.

FAQs on GST on Rent

Is rental income subject to GST?

Right, the rental income from commercial properties is indeed subject to GST. Residential properties rented for residential purposes are usually exempt from GST.

How do I calculate GST on rental income?

To calculate how much of the rental income needs to be paid out in GST, multiply the GST rate (which is commonly 18%) by the rent paid for using a property. For instance, if the rent has been fixed at INR 50,000 a month, the GST would then be 18% of ₹50,000, thus totaling INR 9,000.

What is the GST rate applicable to rental income from commercial properties?

According to the GST Council meeting, the GST rate applicable to the Rental income from Commercial real estate property is 18%.

Are there any exemptions or special provisions for specific types of rental income?

Rental income from residential properties is used for residential purposes and exempted from Goods and Services tax. Similarly, there could be the possibility of giving exemptions on some extraordinary grounds related to government or charitable organizations

What are the penalties for non-compliance with GST on rental income?

The consequences of failure to adhere to the provisions regarding the GST on rental income may attract penalties, and interest charges on unpaid taxes in addition to legal actions. The specific number of points which may be deducted is also dependent on the nature and severity of the specified non-compliance.

GST on Rent: GST Charges on Residential & Commercial Property

What is GST on Rent?

Tax on Rental Income Before GST

GST on Residential Property Rentals

GST on Commercial Property Rentals