GST on Rent: GST Charges on Residential & Commercial Property

According to the Goods and Services Tax (GST) Act, the lease or renting of any immovable property to conduct business, such as shops, offices, or warehouses, is subject to GST on rent at 18%, as it is classified as a supply of service. However, for many individuals, a common question arises: is GST applicable on rent of residential property? The answer depends on the usage. GST is not applicable if the residential property is rented for personal use. Additionally, if the taxpayer’s annual turnover is less than ₹20 lakh, GST is not levied on their rental income.

17,601 Views | Updated on: Jun 25, 2024

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What is GST on Rent?

The Goods and Services Tax (GST) is applied on all goods and services applicable in India. When we talk about GST on rent, it means that renting a property for business or as a commercial space is considered taxable as it is a supply of service. Both the tenants and the landlords are required to fulfil these tax obligations. The rental income GST rate is fixed at 18%. The total rent of the property includes the rent amount paid along with the GST. The invoice is then deposited to the Income Tax Department of India by the landlord on behalf of the tenant.

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.

Is Rental Income from Property Taxed?

As we discussed above, according to the Goods & Services Act, rent on an immovable property is taxable as it is considered a supply of service. It is applicable in two cases:

An immovable property is allocated on rent, lease, easement, or licensed to occupy.
Any commercial, residential, or industrial property being let out either completely or partially for business purposes.

Note: The rental income from renting out a residential property for residential purposes is not treated as a supply of service and so, it is exempt from GST.

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 can attract GST liability in some situations as stipulated in the GST Act. It can be applied 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.

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, GST on rent of residential property is applicable only when the property is rented out for commercial use and the landlord’s annual rental income exceeds ₹20 lakh. In such cases, GST registration becomes mandatory. For special category states, this threshold is reduced to ₹10 lakh per year.

How is GST on Rented-out Properties Calculated?

Let’s consider an example to understand how GST is calculated for rented-out properties in India.

Rajeev (landlord) is the owner of a commercial property in Delhi. He rents out his property to Lalit (tenant) who runs a printing press from Rajeev’s premises. The two have agreed on the rent of ₹1,00,000 per month. As the said property is under business use, this rental income is liable to GST charged at rate of 18%.

The GST on this rented property would be calculated as:

GST = Monthly Rent × 18%

In this case, Rajeev collects GST = ₹1,00,000 × 18% = ₹18,000.

Therefore, Rajeev must charge Lalit ₹18,000 as GST in addition to the monthly rent of ₹1,00,000. This also means that the total amount payable by Lalit is ₹1,18,000. After collection, Rajeev is responsible for depositing the GST with the Income Tax Department, as per GST compliance rules.

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. Among the benefits of GST, the ability to claim ITC on business-related expenses like rent helps reduce the overall tax burden for registered businesses.

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

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.

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 ₹50,000 a month, the GST would then be 18% of ₹50,000, thus totaling ₹9,000.

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

As mentioned in the GST council meeting, the GST rate to be charged on the rental income of a commercial real estate property is 18%. This rate is charged in respect of commercial application but not the GST on house rent which is approached differently and usually not charged as long as the residential property is put to personal use.

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. For individuals exploring tax efficiency as part of their saving plan, understanding these exemptions can help in better financial planning and compliance.

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.

Is residential rent free from GST?

Yes, a residential property which is used as a personal/residential property is exempted against GST charges on rent. However, if a residential property is leased to be used for commercial purposes, then the GST must be imposed.

What is the ITC of GST on residential property?

The Input Tax Credit (ITC) on GST paid for residential property does not qualify if the property is used for personal/residential purposes. However, ITC can be claimed, subject to eligibility and GST rules, if a property is being used for business purposes.

GST on Rent: GST Charges on Residential & Commercial Property

What is GST on Rent?

Tax on Rental Income Before GST

Is Rental Income from Property Taxed?

GST on Residential Property Rentals

GST on Commercial Property Rentals

Does Renting Out a Property Attract GST?

Lease to Corporate Entities

Rental, Lease, or License

GST on Rental Income

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

How is GST on Rented-out Properties Calculated?

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

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

Conclusion

FAQs on GST on Rent

Is rental income subject to GST?

How do I calculate GST on rental income?

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

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

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

Is residential rent free from GST?

What is the ITC of GST on residential property?

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