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The implementation of the Goods and Services Tax (GST) in 2017 brought about a significant transformation in the taxation landscape, particularly in relation to rental income. Renting a property, whether it's residential or commercial, is now considered a taxable supply of service under GST. Therefore, understanding the nuances of GST on rent becomes crucial. This article explores the tax rates and provisions applicable to GST on commercial property rent, GST on rental income of residential property, calculation of GST on rented properties, ITC for GST on rent, etc.
Goods and Services Act, or GST, was first introduced in 2017. The introduction of GST brought a lot of changes in the taxation system of rental income. Under GST, renting a property is considered a supply of service that is taxable, and both tenants and landlords have to fulfill their tax obligations. Rental income earned by the landlords attracts GST. The tax is calculated as a percentage of the rental income received. The tenants who pay the rent also have to pay GST on the rent amount. This tax is included in the total rent and deposited to the tax department by the landlords on behalf of the tenant.
Before the introduction of GST, landlords were required to register themselves under service tax if the value of total taxable services, including rental income, exceeds Rs.10 lakhs per annum.
Service tax on rental income was only applicable to let out commercial properties or residential properties used for commercial purposes. While commercial properties attracted a service tax of @15%, rental income from residential properties does not attract a service tax.
As per the GST Act, renting out an immovable property is treated as a supply of service. However, GST is applicable only on -
Note: Rental income on letting out of a residential property for residential purposes is not considered a supply of services and, therefore, is exempt from GST. Any other type of leasing or renting out of immovable property for commercial purposes will attract GST @18%, as it is treated as a supply of service.
GST is not applicable if a residential property is rented out to a registered person in their personal capacity and used as their own residence. In other words, if a residential property is rented out, that too for residential purposes, then the rental income from such property does not attract GST. In such cases, the rental income of the owner is taxable at the slab rates applicable to him/her.
However, it is important to note that this exemption only applies when the property is rented out in a personal capacity and used as a residence. Even if a business owner rents out a property and uses it for residential purposes only, it is exempt from GST. If the same property is rented for commercial purposes or to a business entity, it will attract GST.
If any commercial property is rented out, it attracts GST @18% on the taxable value, and the rent is considered a taxable supply of service.
If a registered religious trust or charitable trust manages and owns the propertya, it is exempt from GST. However, to avail of this exemption, it has to fulfill the following conditions -
GST on the rent of commercial property is only applicable if the property is rented out and is used for commercial purposes. GST on commercial property also applies if a residential property is rented out and used for commercial purposes.
GST on rented properties is calculated on the basis of the rent charged to the tenant for the property. The landlord has to pay GST on the rent income received from the tenant. The GST rate on renting an immovable property is 18%.
Therefore, GST on rented-out properties will be -
GST = (Rent x 18%)/100.
Let’s understand this with an example.
Let’s say the rent of a rented commercial property is Rs.30,000 per month. Then, the GST will be calculated as follows -
GST = Rs.30,000 x 18% = Rs.5400
So, the landlord will have to pay Rs.5400 as GST on the rent of Rs.30,000 per month.
When GST is applicable on rent, the tenant paying the rent is entitled to claim an Input Tax Credit if they are registered under the GST Act. The taxpayer can claim a credit of the GST paid on the amount of rent.
However, ITC can be claimed only if the property is a commercial property or used for commercial purposes. At the same time, if a residential rented property is used for commercial purposes, the GST payer can claim an Input Tax Credit for the tax paid.
Also, the GST charged should be deposited with the government to claim ITC. Therefore, the tenants must make sure that the GST collected has been deposited with the government before claiming ITC. It is also important to fulfill all the conditions for claiming ITC before claiming it.
ITC on Repair and Renovation
GST paid on repairs, maintenance, brokerage, and similar expenses for rented properties qualifies as an input tax credit (ITC) only if these costs are not capitalized. Section 17(5) of the CGST Act restricts taxpayers from claiming ITC on certain expenditures.
For instance, ITC cannot be claimed for goods or services used to construct immovable property on one’s own account, even if used for business purposes. However, expenses like repairs and brokerage related to rental properties are eligible for ITC, provided they are not capitalized in the landlord’s books.
The property owner renting out the property must collect GST on the rent charged from the tenant. If the annual rent exceeds ₹2.40 lakh (effective from AY 2020-21), the tenant must deduct 10% income tax at source (TDS). This TDS applies to both residential and commercial properties. Notably, GST is not applicable to the TDS amount.
Now that you have learned about the GST on rent, you might be wondering how to calculate and pay the tax on your rental income. Whether you are a landlord or a tenant, you need to comply with the GST provisions and avoid any penalties or interest. Don’t worry, we have got you covered. Tax2win can help you with GST registration, GST and ITR filing, and payment. Contact us and get expert guidance on any Tax related matters. Book online eCA Now!
A residential property is a house or a property that is used or intended to be used for residential purposes by a family or an individual. For the purposes of GST, residential property means a house, flat, or property that is rented to anyone who intends to use it as a place of residence and is exempt from GST.
No, commercial rent is not exempt from GST. Under the GST Act, leasing or renting of commercial property, including shops, offices, or warehouses, falls under the category of supply of services and attracts GST @18%. However, small taxpayers who have an annual turnover of less than Rs.20 lakhs are exempted from GST on rental income.
Yes, rent earned from letting out residential property or to an individual who uses the property as a place of residence is free from GST.
GST does not apply to rent from residential properties. However, for commercial immovable properties, GST is charged at 18% on the rent amount. The formula to calculate GST is:
GST = (Rent × 18%) ÷ 100
You are required to pay GST on rental income if your total rental income exceeds ₹20 lakh per year. If your rental income is below this threshold, GST is not applicable. For certain special category states, the exemption limit is reduced to ₹10 lakh per year.
You can claim the Input Tax Credit (ITC) only if the property is used for commercial purposes or is classified as a commercial property.
If you pay GST on rent, typically for commercial properties, you may be eligible to claim Input Tax Credit (ITC) on the GST amount. This ITC can help offset other GST liabilities, providing a financial advantage.
If you rent out property to a business and your total annual income (including rent and other earnings) exceeds ₹20 lakh, you must register for GST and pay tax on the rent. This requirement applies to both landlords and tenants, provided the tenants are registered businesses.
