Impact of GST on Rent: GST on House Rent and Commercial Property Rent

Are you wondering if you must charge and collect Goods and Services Tax (GST) on the rent received by you? The treatment of GST differs between residential and commercial renting. On the other hand, if you run a business, then rent payment is one of those prominent expenses and you may want to know your eligibility for claiming Input Tax Credit (ITC) on GST paid on the rental expense. Let’s understand all these in detail.

Latest Updates on ITC

3rd October 2024
The Supreme Court clarifies GST input tax credit can be claimed on construction for rental services for commercial purpose. The apex Court ruled that if a building’s construction is essential for providing services like leasing or renting for commercial activity, it could fall under the ‘plant’ exception to Section 17(5)(d) of the CGST Act. Section 17(5)(d) of the CGST Act prohibits ITC claims on construction materials used in construction of immovable property except for plant and machinery.

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:

1. When a property is given out on lease, rent, easement, or licensed to occupy
2. 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.

Who is required to register when the property is rented out to businesses?

A taxpayer earning more than the exempted threshold will have to register under GST and pay taxes. So, if you have given your property to a business, then it is taxable. If you are earning income from business, including rent and any other exempted income of more than Rs 20 lakh per annum, you will have to register yourself under GST.

The threshold limit for applicability of GST for those providing only services is Rs.20 lakh, more than the Service Tax limit of Rs.10 lakh. This makes many landlords – who were covered under the Service Tax regime be at ease now up to another Rs.10 lakhs earned.

(Please note that the threshold limit of Rs.20 lakh excludes special category states, where the limit remains at Rs.10 lakh.)

Let us look at an example- Manish resides in Bangalore and has a property in Hyderabad that is rented out to B ltd. for use as a guest house. For the Hyderabad property, he is getting a rental income of Rs. 30,000 monthly, or Rs. 3,60,000 per annum alone. Under GST, the place of supply shall be the location of the immovable property.

Therefore, even though the person resides in Bangalore, the place of supply will always be where the property is situated, which is Hyderabad in this example. Here, the total income is below Rs. 20 lakh a year, thus Manish is excluded from GST applicability.

It needs to be noted that, though this property is used for residential purposes, it cannot be said that the rent that is received is that from the residential property as this property is given to a company for their use. How they use the said property is not the deciding factor.

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

How to calculate GST on rented out properties?

In case of commercial properties given on rent, the GST is calculated and charged on the total rent amount to be collected periodically.

Where invoice is raised every period, the GST (either 9% CGST and SGST or 18% IGST) will be computed on the rent payable.

What are the ITC provisions when GST is charged on rent?

The person paying GST on rent can usually take credit for the tax paid to pay his other tax dues. In other words, If all the provisions to claim Input tax credit are fulfilled, ITC on GST paid on rent can be claimed.

Is ITC on repairs and renovation of property given on rent allowed?

GST paid for carrying out the repairs and maintenance expenditure, brokerage etc of the property given on rent is allowed as input tax credit, only to the extent it is not capitalised. The Section 17(5) of the CGST Act disallows a taxpayer from claiming ITC on amount spent on a few expenses.

Any purchase of goods or services used for constructing an immovable property on own account, including for furtherance of business by a taxable person is one such expenditure where ITC is ineligible for claims. Rest of them such as repairs and brokerage on rental property is allowed for ITC claims, if it is not capitalised in the books of the landlord.

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. 

Important Point to remember: GST on the rent charged for immovable properties by the government or local authority to a registered person will be under Reverse Charge Mechanism. However, when the property is rented to an Unregistered person, the government would themselves deduct GST (Forward charge mechanism).

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