Understanding GST on Rent: Applicability and Tax Implications

A quick recap

First things first. Here’s a quick look at the pre-GST phase.

As a landlord, you had the responsibility to get registration for service tax in case your taxable services from all rental properties were over Rs. 10 lakhs annually.

On the other hand, if your rental income (from all sources) was below Rs. 10 lakhs, then you would not be charged any service tax.

Only commercial properties that were let out were being charged service tax. This also included if a residential property was being used for commercial goals.

A 15% service tax was applicable on rent for commercial properties, while rental income from residential properties was exempt from this tax.

 

What is the GST on rent?

The introduction of GST brought several changes to the rental income. Under this system, renting a property is now considered a supply of services. This brought the rental property to a taxable rate of 18%. This 18% is to be included in the total rent that is paid by the tenant. While GST is applicable on almost all goods and services, when it comes to rental income, the charges are different for residential property as compared to commercial property. Let’s take a look.

 

Pre-GST Rules: Tax Implications on Rental Income Before GST

Before the introduction of GST in July 2017, only commercial properties rented out for business purposes attracted service tax if the annual rental income exceeded ₹10 lakh¹. Residential properties were fully exempt from service tax, regardless of the rental amount¹.

Commercial rentals were taxed at 15% of the rent, and this applied even if a residential property was used for commercial purposes¹. This made the old system complicated and often confusing, as different rules applied based on the type and use of the property. With GST, these rules were simplified, and the GST rate on rent is now more clearly defined, making compliance easier for both landlords and tenants.

 

GST on rent of residential property

According to the 48th GST Council, no GST is applicable on the residential property rent. If you are a house owner and have rented your residential property for residential use, then you do not pay taxes. If your total income from the rent comes under taxability, then you have to pay the required tax as per the income tax slab you fall in.

Similarly, if you are staying in a residential property and not using it for any kind of business/ commercial use, you do not need to pay any GST on the property rent. This implies that if a registered individual is the owner of a proprietorship firm and rents out a residential property in their personal capacity (rather than through the proprietorship), and the property is intended for their own use as a residence, GST will not apply.

 

GST on rent of commercial property

As discussed earlier, when you rent out a commercial property, it is considered to be a supply of service. Therefore, this is taxable under the GST. The tenant becomes liable to pay 18% of a GST over and above the rent that is payable.

If the commercial property is a registered religious trust or a charitable trust and manages the place for the public, then the rent becomes tax-free, and GST does not apply. This is subject to following conditions:

• The room rent is under Rs. 1000 per day
• The rent of the hall/ open area is less than Rs. 10,000 per day
• The rent of the shops is less than Rs. 10,000 per month.

For those providing only services, the GST threshold is set at Rs. 20 lakh. This revision offers relief to landlords who were previously taxed under the Service Tax system, allowing them to earn an additional Rs.10 lakh before GST applies. For states with special category status, the threshold remains Rs. 10 lakh.

 

How Input Tax Credit (ITC) work on Rent When GST Is Charged?

When GST is charged on rent, the tenant paying the tax can usually claim Input Tax Credit (ITC), provided the rented property is used for business purposes². This means the GST paid on rent can be set off against the GST liability of the tenant on their sales or services².  For example, if a company rents an office space and pays GST along with rent, it can claim ITC to reduce its overall tax burden.

If GST is paid under Forward Charge Mechanism (FCM), the landlord is responsible for collecting the GST on rent and deposit it with the government. In this case, the tenant can claim Input Tax Credit (ITC) on the deposited GST. However, if the GST is paid under the Reverse Charge Mechanism (RCM), the tenant becomes responsible to pay GST directly to the government. In this case, the tenant can directly claim ITC on the rent paid.

 

How is GST calculated on properties that are rented out?

On a rented property, GST is charged based on the rent that is charged. The landlord pays GST on the rent income that they receive from the tenant. GST on the rent of an immovable property is 18%. Let’s take a look at this example. The rent of a commercial property is Rs. 20,000 a month.

The GST calculation will be done using this formula: GST = (Rent x 18%)/100.2

This will be Rs.20,000 X 18%= Rs. 3600

So, the landlord will pay GST of Rs. 3600 on the rent of Rs. 20,000.

 

How GST and Income Tax Apply Differently to Rent?

 

GST on Rent

1. Applies only when the rented property is used for business or commercial purposes².
2. Paid by the tenant or the landlord depending on the type of property and whether the landlord has registered under GST on not²
3. GST paid can be claimed as Input Tax Credit (ITC) by the tenant if conditions are met.
4. Must be deposited with the government for ITC to be claimed by the tenant.
5.  Rental income earned from a house property is categorised under ‘Income from house property’ for taxation purposes when the main purpose of owning the property is to rent it out. However, if the property is leased out as a part of business, the rental income would be categorised under ‘Profits from Business or Profession’³. 
6. The rental income would be taxed basis the Gross Annual Value (GAV). The GAV is higher of  the actual rent or the fair market rent³.
7. Municipal taxes paid, standard deduction of 30% to cover repairs and other associated costs, and any home loan interest paid for the property would be allowed as a deduction from the taxable rental income³.
8. If rental income is your only source of income, then the total rental income, up to the threshold limit specified under the tax regime, would be tax-free³.

 

Key Takeaways

1. Residential property is fully exempt from GST, while commercial property rent attracts 18% GST¹.
2. Even under GST 2.0, the rules for rent remain unchanged
3. Tenant can claim Input Tax Credit (ITC) on GST paid for commercial rent if the landlord has deposited the tax and all conditions are met².
4. ITC can also be claimed on construction costs for commercial rental properties under certain rules².
5. The income tax rules for rental income are different from the GST rules.

 

Conclusion

The GST Act clearly states that renting of property (immovable property) is treated as a supply of a service. Even with GST 2.0, the rules regarding rent remain unchanged. GST is applicable only on commercial property such as offices, shops, stores, warehouses, etc. As a property owner, it is essential for you to be well aware of your tax liabilities and the GST on rent. 

 

FAQs

 

1. Is there any GST on rent?

For residential properties, there is no GST on rent. However, in the case of commercial property, an 18% GST is applicable on the rental payments.

 

2. What is the place of supply for charging GST?

There are cases where the property owner is registered in a state which is different from the state where the property is situated. Here, it is for the landlord to choose/ identify the place of supply to decide whether CGST and SGST are charged or IGST applies.

 

3. Is Commercial Rent Excused from GST?

No, commercial rent is subject to GST¹.

 

4. Do I Have to Pay GST on Rental Income?

Yes, if you are a landlord earning rental income from commercial property, you have to pay 18% GST on the same if the total rental income exceeds ₹20 lakhs in a year (₹10 lakhs for special category states).

ITC on GST is not available for residential property rent, since renting a house for residential use is fully exempt from GST².

 

5. What Is the GST Exemption Limit on Rent?

The GST exemption limit on rent of commercial property is ₹20 lakh of annual rental income (₹10 lakh for special category states)². If your total rental income stays below this limit, GST does not apply². The GST on rent earned from residential property is completely exempt from GST².

Source –

1. https://cleartax.in/s/impact-gst-on-rent
2. https://tax2win.in/guide/gst-on-rent-of-residential-commercial-property
3. https://cleartax.in/s/rental-income-tax-implications-house-property-vs-business-profits