GST on Rent: Decoding GST Charges on Residential and Commercial Rent

 

What is GST on Rent?

Goods and Service Tax or GST apply to all goods and services sold in India. For rent, GST is applicable as property renting is a supply of service. However, there are certain conditions under which you have to pay GST on your rent as a tenant.

GST is charged differently on rent paid for residential and commercial property. For any property used or meant to be used as a residence, no GST is charged. However, any leasing or renting of a commercial property is considered a service and applicable to GST.

GST was officially implemented on 1st July 2017. The finance minister introduced the GST bill in Lok Sabha in February 2015. With this implementation, several changes happened in the taxation of rental income.

The pre-GST rule - Tax Implications on Rental Income Before GST

In this phase, the landlord had to obtain a service tax registration, in case his total of taxable services including the rental income from all properties owned by him exceeded the basic limit of Rs 10 lakhs per year. So, anyone with rental income of less than Rs 10 lakh in a year was exempt from service tax registration as they were outside the purview of the service tax net.

Moreover, the law exempted the rent received, with respect to residential house property let-out for residential purposes, from the levy of service tax. Only commercial properties attract service tax levy, at present. However, any residential property used for commercial purpose attracted service tax. The limit of Rs 10 lakh was applied only for the taxable services. So, even if your rental of residential properties exceeded Rs 10 lakh, you did not have service tax liability, as long as your gross rentals from commercial property did not exceed Rs 10 lakh in a year. The service tax was being collected at 15 per cent of the rent of commercial properties.

Changes under GST

With the clubbing of taxes on goods and services, under the GST regime, the confusion about levy of separate tax on service and goods is done away with. Unlike the earlier regime, the threshold limit for applicability of GST has been increased from Rs 10 lakh to Rs 20 lakh. So, many of the landlords who were covered under the service tax regime, will be out of the indirect tax net with the implementation of GST.

Read the following sections to learn more about GST on rent and how much tax you are liable to pay under different conditions.

GST on Renting of Residential Property

As clarified by the 48th GST Council, GST on rent is not applicable on residential property. This means if a house owner rents his/her residential property to you and you use it only for residential purposes, you do not have to pay taxes. In this case, if the total income from rent of the owner is taxable, then he/she has to pay taxes based on the slab as per the Income Tax Act.

In other words, if you are staying in a residential property and you are not using the property for any commercial purposes, you don’t have to pay GST on residential property rent. Even if you are a business owner and you are staying in a rented property but using it only for household purposes, you are not liable to pay GST on your rent.

GST on Commercial Property Renting

Commercial property renting is considered as a supply of service and is taxable under the GST Act. The tenant (liable to pay rent) has to pay 18% as a GST with the rent received in case of a commercial property.

In case, a registered charitable trust or religious trust owns and manages the commercial property, the rent is tax-free and GST payment is not applicable. However, there are some conditions which must be fulfilled to get this exemption:

• Room rents cannot exceed Rs. 1,000 /day
• Community hall or open area rent must be below Rs. 10,000/day
• Shop rents must be below Rs. 10,000/month

Understanding Taxation Protocols in Property Leasing

It is interesting to note that for the purpose of computing the aggregate limit of Rs 20 lakh under the GST, all the taxable, as well as exempt goods and services supplied, will be taken into account. So, unlike the service tax regime, where it was only the taxable services, which were taken into account for determining whether you have crossed the basic threshold, under the GST, the value of all the service and goods supplied in India, as well as exported, whether taxable or exempt, will be taken into consideration for the Rs 20-lakh limit. Now read about GST on rent limit below:

The Rs 20 lakh limit is lowered to Rs 10 lakh in 11 special category states. Likewise, for computing aggregate supplies, turnover of all supplies made by you would be added. And, the GST will be levied at 18 per cent, on the letting-out of commercial properties. However, rental income received from residential house is exempt.

There is one more major tax implication under the GST, with respect to rent on commercial properties. The parliament has borrowed the concept of ‘reverse charge mechanism’ from the service tax regime, under the GST. However, unlike in the service tax regime, where the reverse charge mechanism is applicable in case of services and is not extended to the sale or manufacturing of goods, the same is made applicable for goods as well as services, under the GST regime.

So, a person who is registered under GST, who gets supplies of goods or services from a person who is not registered under GST, will have to pay the GST under the reverse charge mechanism. Under the service tax regime, there is no provision of reverse mechanism, with respect to the rent paid by the lessee. The proposed GST provisions, due to the increased rate and the levy under the reverse mechanism, will eventually make it costlier to take any commercial premises on rent.

Does Renting Out a Property Attract GST?

When a landlord rents his/her property, this is considered to provide services under certain conditions. According to the GST Act, in this case, GST is applicable when:

• In case the landlord is leasing an industrial, commercial, or residential property to a corporate entity (wholly or partly)
• In case, the landlord gives the property on rent, lease, or gives a licence to occupy

These types of renting out are considered supplying services. That is why, the tenant has to pay an additional 18% GST with the regular rent payments. However, if the property is used for residential purposes or just for living purposes, GST on rental income is not applicable.

How to Calculate GST on Rented-out Properties?

The GST is applicable on commercial properties only if the tenant is using it for commercial purposes. The tax is applicable on the rent amount and the landlord has to collect it periodically from the tenant. He/she needs to mention the GST amount every period during the preparation of the invoice.

Landlords must mention the GST on rent at the rate of 9% CGST+SGST on the invoice. Your landlord will deposit the GST to the income tax department on your behalf.

Here is an example of GST applicable on a rent of Rs. 50,000/month on a commercial property: GST- 18% of Rs. 50,000 = Rs. 9,000

The landlord bears the responsibility of paying GST on the rent.

Who Is Required to Register When the Property Is Rented Out to a Business?

If you have a property and you have rented it to a business and they are using it for commercial purposes, then only you have to register under GST. Therefore, you are liable to pay GST on commercial property rent.

If you are the landlord, you are responsible for collecting GST from the tenant and depositing it to the GST department. If the rent is more than Rs. 2.4 lakh/year, the rent payer is responsible for deducting TDS before paying rent.

However, if the income from your rent is below Rs. 20 lakh per annum, you do not have to pay taxes as per the GST Act. This is because the GST registration threshold limit is Rs. 20 lakh per annum and for special category states, this limit is Rs. 10 lakh per annum.

For instance- Suraj resides in Delhi and he owns a property in Hyderabad. Currently, ABC Ltd Company is a tenant of it. For the property in Hyderabad, Suraj earns a rent of Rs. 40,000 per month. His total annual rent collection is Rs. 4, 80,000 which is within the threshold limit as per the GST Act. So, Suraj does not need to register under GST and Suraj does not have to pay GST for rental income.

Note: GST rule will be applicable according to the location of the immovable property. Even if the owner is residing in another state, GST Law will be applicable according to the location of the property, which is Hyderabad in the above example.

What Are the ITC Provisions When GST Is Charged on Rent?

If you are a landlord (landlord) and GST applies to your rental income, you can claim an input tax credit (ITC) on it if you register yourself under GST. You can claim ITC on the GST you are paying on your rental income.

For instance- If your rent amount is Rs. 1 lakh and the applicable GST on rent is 18%, the GST payable on the rent you have received is Rs. 18,000. If you registered yourself under GST, you can claim the entire amount of Rs. 18,000 as ITC. You can use the amount to offset your GST liability on your output supplies.

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

The amount of GST a landlord pays for the maintenance, repairs, brokerage or other expenses of the property can be used for an input tax credit.

However, according to Section 17(5) of the CGST Act, a taxpayer cannot claim input tax credit on certain expenses. For example- if you purchase any products or services to construct an immovable property from your account, the GST Act does not allow you to claim ITC. Other expenses like brokerages and repairs on a rental property are eligible for ITC.

Is Rental Income from Property Taxed?

The GST Act describes renting out an immovable property as a supply of service. However, there are other conditions for implementing GST:

• Properties you are using for lease, rent, or you are giving a licence to occupy
• When any residential, commercial, or industrial property is let out either partly or wholly for business purposes

Keep in mind that if you rent out a residential property for residential purposes, it does not fall under GST and you do not need to pay GST on the rent you have earned.

FAQs on GST on Rental Income

Q: Is GST applicable on rent?

GST is not applicable on the rent of residential properties. For commercial immovable properties, GST is applicable on rent payments at an 18% rate, i.e., GST = (Rent x 18%)/100

Q: Is commercial rent exempt from GST?

No, there is no GST exemption on commercial rents. According to the GST Act, a commercial property leasing or renting is supplying a service which attracts a GST of 18% on the rental amount. However, small taxpayers with a yearly turnover that is less than Rs. 20 lakh do not need to pay GST on commercial property rent.

Q: Do I have to pay GST on rental income?

You need to pay GST on rental income if your total rental income exceeds the exemption limit of Rs. 20 lakh per year. Under this threshold, you do not need to pay GST on your rental income. The exemption limit is Rs. 10 lakh in some special category states.

Q: Is residential rent free from GST?

Yes. Residential rent is free from GST only if the landlord manages and owns the property in their capacity and the tenant is not using it for commercial purposes.

Q: What is the ITC of GST on residential property?

You can claim ITC only if you are using your property for commercial purposes or if it is a commercial property.

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ARN - INT/ED/04/24/10987