The implementation of Goods and Services Tax (GST) has chalked out a structured approach to collect taxes from various sectors. In this article, let us talk the impact of implementation of GST on rent, Let us also see if GST varies for commercial properties and residential properties.
Will renting out a property attract any tax?
According to the Schedule 2 of the GST Act, renting out of an immovable property would be treated as a supply of services. GST, however, will be applicable only on 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)
These type of renting are considered as a supply of services.
Under Service Tax regime
Pre-GST, the landlord had to obtain a service tax registration, if his total taxable service (including the rental income from all properties exceeds) Rs. 10 lakh limit per year. As long as your rental income (from all the properties you have rented-out does not exceed Rs 10 lakh per year, the landlord would not fall under the bracket of service tax.
Under previous tax regime, commercial properties let-out would attract a service tax. This applies even if a residential property is used for commercial purposes. It would still attract a service tax. Service tax was set at 15% of the rent for commercial properties.
GST on Rent
Under GST regime
When you rent out a residential property for residential purpose, it is exempt from GST. Any other type of lease or renting out of immovable property for business would attract GST at 18%, as it would be treated as a supply of service.
After GST was implemented, the threshold limit for applicability of GST has been increased to Rs.20 lakh from Rs.10 lakh. This makes many landlords – who were earlier covered under the service tax regime – will go out of the indirect tax bracket.
Let us look at an example:
Manish resides in Bangalore and has a property in Hyderabad. For the Hyderabad property, he is getting a rent of Rs. 30,000 monthly, or Rs. 3,60,000 per annum.
Under GST, the place of supply shall be the address 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.
Also, because the rental amount is lesser than Rs. 20 lakh a year, it is exempted.
Who is required to register when renting out property 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 unit to businesses, then it is taxable if you are getting more than Rs 20 lakh as rent.
How is GST calculated when you rent out a property for commercial purposes?
GST council has laid out GST rates on renting out the property for commercial use. For all other 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 renting rooms are charged Rs 1,000 or less per day
- The renting shops and other spaces for business are charged Rs 10,000 or less per month
- The renting community halls or an open area are charged Rs 10,000 or less per day
What is the provision for a tax deduction on income tax for the rented property?
The registered landlord or the owner of the property has to collect the GST from the lessee on the rent charged. The lessee has to deduct income tax at source at 10% if the rent for the property exceeds Rs.1.80 lakh per year. The TDS is applicable both on residential and commercial properties. It will be deducted by all lessees except individuals & HUFs (unless the individual or HUF required to get his accounts audited under Section 44AB of the Income Tax Act.)
For an individual or a Hindu Undivided Family (HUF), who are not required to get their accounts audited, the Budget 2017 has introduced a special provision. These individuals and HUF will have to deduct tax at source @5% at the end of the year or the end of the tenancy period if the monthly rent exceeds Rs. 50,000 .
What is the impact of GST and TDS on rental income?
For a rental income from a real estate investment, it is taxed under the ‘income from house property. This is a form of direct tax. Properties that are let-out are subject to indirect taxation (in the form of GST).
When the property is leased-out, the lessee of the property is required to deduct TDS (tax deducted at source). Under GST, there will no GST component on TDS.
Let us explain in detail. Tax is deducted at 5% (for an individual and HUF), and at 10% for commercial properties. Now, an individual or HUF, or even companies will deduct tax (at the respective rates) and pay the rent. Hence, there is no GST on TDS to avoid tax cascading effect.