In the Indian economic landscape, property rental holds significant weight, both as a vital income source for individuals and businesses, and as an unavoidable expense component for countless firms. The spectrum of rental scenarios is broad, spanning from residential leases for personal use to commercial property rentals for business purposes. In this complex setup, an important but perplexing element often comes into play – the Goods and Services Tax (GST).
GST Impact on Renting Out Property
Property rental, through the lens of the GST Act, is treated as a supply of services. However, not all property leases attract GST. Notably, if a residential property is rented out purely for dwelling purposes, it remains exempted from GST. This exemption is a systematic relief for countless tenants seeking a home, aiming to simplify their tax landscape.
At the opposite end of the spectrum, commercial, industrial, or any property rented out for business purposes (either partially or wholly) faces the levy of GST. The use of property in this manner qualifies as the supply of services, calling for GST at the prevailing rate of 18%.
Tax on Rental Income in the Pre-GST era
During the pre-GST era, the landlord had to obtain a service tax registration if their total taxable services (including the rental income from all properties) exceed Rs.10 lakh per year. As long as the rental income (from all the properties that have been rented out) does not exceed Rs.10 lakh per year, the landlord would not be attracted to service tax.
Under the previous tax regime, commercial properties alone, that were let out would attract service tax. This applies even if a residential property is used for commercial purposes. Service tax was levied at 15% of the rent, for commercial properties. Moreover, the rental income from residential properties did not attract service tax.
Does renting out a property attract GST?
According to the GST Act, renting out an immovable property would be treated as a supply of services. GST, however, will be applicable only to certain types of rent such as:
- When a property is given out on lease, rent, easement, or licensed to occupy
- When any property is leased out (or let out) including a commercial, industrial, or residential property for business (either partly or wholly)
This type of renting is considered a supply of services and would thus attract tax. When you rent out a residential property for residential purposes, it is exempt from GST. Any other type of lease or renting out of the immovable property for doing business would attract GST at 18%, as it would be treated as a supply of service.
No GST on residential property rented in personal capacity for use as a residence
In the 48th GST Council meeting, the Council clarified that no GST is payable where a residential dwelling is rented to a registered person if the same is rented it in their personal capacity and for use as their own residence.
This means that where a registered person is a proprietor of a proprietorship firm and they have rented out a residential property in their personal/own capacity (and not that of the proprietorship) and the property is for use as their own residence, then no GST will be applicable.
GST Registration Requirements for Property Rented to Businesses
Navigating the property rental landscape becomes particularly intriguing when the lessor steps into the business sphere. A fundamental question arises: “Who needs to register under GST when property is rented out to businesses?”
In essence, the onus is on the property owner to register under GST if the total income—comprising of both rent from the leased property and any other business revenue—surpasses the exempted threshold of Rs 20 lakh annually. This limit is elevated from the former service tax regime’s ceiling of Rs 10 lakh, bringing a breather to many landlords who might otherwise have been encumbered by compliance requirements.
How to check Place of Supply for charging CGST, SGST or IGST
The landlord or owner of the property can be registered in a state different from the state in which the property is situated. It is left to the option of the landlord. They must identify place of supply to decide if CGST and SGST is charged or IGST applies. Following are some of the cases compiled for you.
Scenario 1: One case has the taxpayer located in a state different from the state in which the rented property in situated.
The place of supply shall be the place of property. Accordingly, it is interstate supply and IGST shall be charged.
For example, If Mr. ABC, registered under GST in Bangalore, has given a commercial property on rent in Haryana, then an IGST at 18% would be charged. He doesn’t have to also register under GST in Haryana.
Scenario 2: Both the landlord and tenant are registered in the same State in which the property is situated.
If the landlord is registered under GST in the same state in which the property is situated, then both CGST and SGST at 9% each would be charged.
For instance, If Mrs XYZ who is registered in Maharashtra gives her commercial property in Hyderabad on rent, then CGST and SGST of 9% each would be charged.
Scenario 3: Landlord is registered under GST in the same state where the property is located but the tenant is registered in another state
If the landlord has taken GST registration in the same state in which the property is situated, then it is a case of intrastate transaction. So, both CGST and SGST would be charged irrespective of the location of GST registration of the tenant.
In such cases, the tenant cannot take the input tax credit of CGST and SGST if he is not registered in the same state where the property is situated.
For instance, Mr. PQR from Kochi travels to Bhopal for a client meeting and stays in ABC Hotel. He books a room and pays rent of Rs. 15,000.
The owners of ABC Hotel are registered in Bhopal and the hotel is also located the same city. So, both CGST and SGST would be charged in this case. However, both the tax components are different.
Mr. PQR cannot claim the ITC of this GST paid as CGST and SGST of a different state since it is not of the state in which he is registered.
GST treatment if property is rented out for commercial purposes
- For all commercial spaces that are on rent, GST will be applicable at 18% on the taxable value and rent would be treated as a taxable supply of service.
- If a registered charitable trust or a religious trust owns and manages a religious place meant for the public, it is exempt from GST. This can happen only if-
- The rent of these rooms is less than Rs. 1,000 per day
- The rent of shops and other spaces for business is less than Rs 10,000 per month
- The rent of community halls or any open area is less than Rs 10,000 per day
What is the provision for a tax deduction on income tax for the rented property?
The owner of the property (which is given on rent) has to collect the GST from the person paying rent. This GST will be on the rent charged. The payer of rent has to deduct income tax at source at 10% if the rent for the property exceeds Rs.2.40 lakh per year from the AY 20-21 onwards. The TDS is applicable both to residential and commercial properties. There will no GST on TDS.
FAQs
Who pays the GST on rent, landlord or tenant?
The landlord collects the GST from the tenant. The tenant on the other hand deducts 10% TDS from the rent in case the annual rent amount exceeds Rs 2.40 lakh.
Is input tax credit allowed on repairs done for a rented property?
Yes, input tax credit allowed on repairs done for a rented property as long as this is not done to generate further income.