GST on Rent - Applicability, Exemptions and Key Rules

GST (Goods and Services Tax) is a tax imposed on rental income, categorising renting out a property as a taxable service. Introduced in 2017, GST requires landlords to collect tax on rental income.

The tax is calculated as a percentage of the rent charged to tenants. The rate of GST on rental income is set at 18%. While landlords are responsible for collecting and remitting the tax to the authorities, tenants indirectly bear the cost as it is included in the total rent they pay. GST applies mainly to commercial properties and residential properties rented for business purposes. However, residential properties rented for personal use are exempt from GST, providing relief to landlords in these cases.

Tax on Rental Income Before GST

Before the GST system came into effect, rental income was subject to service tax if the landlord’s taxable services exceeded Rs.10 lakhs annually. Under the Service Tax regime, only commercial properties or residential properties used for commercial purposes were taxed.

The applicable rate for service tax on commercial property rentals was 15%, whereas residential rentals for personal use were completely exempt from this tax. This created a significant difference in the tax treatment of residential and commercial rental income, with residential properties used solely for living purposes benefiting from an exemption.

Is Rental Income from Property Taxed Under GST?

The introduction of GST fundamentally redefined how rental income is taxed. Under the GST Act, renting immovable property is now classified as a taxable supply of service. GST is applicable only to certain types of rental arrangements. It is charged on properties rented out for commercial or business purposes, including industrial premises, office spaces, shops, and warehouses.

Similarly, when residential properties are rented out for business activities, even if partially, GST becomes applicable. However, residential properties rented exclusively for personal accommodation are exempt from GST, as they are not considered a taxable supply of service. This distinction is important to understand for landlords looking to determine their GST obligations.

GST on Renting Residential Property

GST is not applicable when a residential property is rented out solely for residential use. This exemption applies even if the landlord is a registered business entity. As long as the property is used by the tenant for personal purposes, no GST will be charged. This rule applies universally, whether the landlord is an individual or a business.

For instance, if a landlord rents out their residential property to a tenant for personal accommodation, and no commercial activities are conducted on the property, no GST will apply. This holds true even if the tenant is a business owner or a company, as long as the property is not used for any business purposes. However, if the residential property is rented for business use or is leased to a business entity for commercial activities, then GST at the rate of 18% will be applicable.

The key factor determining whether GST is charged is the intended use of the property, rather than the status of the landlord or the tenant. If the property is being used for business purposes, GST will apply. If it is used solely for personal residential purposes, the rental income remains exempt from GST.

GST on Renting Commercial Property

GST is applicable to the rental income earned from commercial properties, charged at a rate of 18% on the taxable rent. Commercial properties include spaces rented for business purposes, such as office spaces, retail shops, and warehouses. When a commercial property is rented out to a registered business, GST must be paid on the rental income.

However, certain exceptions apply to properties owned by registered religious or charitable trusts. To avail of an exemption in such cases, specific conditions must be met, including certain rent limits:

1. Rooms: Rent must be less than Rs. 1,000 per day.

1. Shops or Open Spaces: Rent must not exceed Rs. 10,000 per day or month.

These exemptions are designed to provide tax relief to non-profit organisations and religious or charitable trusts. However, the exemption is only available if the property is managed by the trust and meets the specified criteria.

Supreme Court Ruling on GST Input Tax Credit (ITC) for Construction

On 3rd October 2024, the Supreme Court clarified that businesses engaged in commercial rental services can claim GST Input Tax Credit (ITC) on construction costs for properties intended for commercial use. The Court ruled that if the construction of a building is essential for providing rental services, such as leasing or renting for commercial purposes, it could fall under the ‘plant’ exception to Section 17(5)(d) of the CGST Act.

Typically, Section 17(5)(d) of the CGST Act restricts the claim of ITC on construction materials used in building immovable property. However, there is an exception for plant and machinery, which allows for ITC claims on construction expenses for property used for commercial services.

This landmark ruling allows businesses that are engaged in commercial rental services to claim ITC on construction costs, provided the construction meets the criteria for the ‘plant’ exception. This helps businesses reduce their tax liabilities by enabling them to recover the GST paid on construction-related expenses for properties used in commercial rental activities.

GST Applicability on Property Rentals to Businesses

If you rent out your property to a business (e.g., for use as a guest house, office, etc.), the rental income will be taxable under GST, irrespective of the property's residential nature. The place of supply for GST purposes is the location of the immovable property, which determines whether GST applies based on the income threshold. The key factor is how the property is used (commercial use), not whether it is residential or non-residential property.

The GST registration threshold for businesses providing services (like property rentals to businesses) is Rs. 20 lakh per annum. If your rental income from the business exceeds this threshold, you must register under GST and pay taxes. Special category states (e.g., Jammu & Kashmir, Himachal Pradesh, etc.) have a lower threshold of Rs. 10 lakh.

Example: Prasad owns a property in Bangalore, which he rents out to a business. He receives Rs. 36,000 per month as rental income. Let’s calculate the total income and see if Prasad needs to register for GST based on the threshold limits.

Monthly and Annual Rental Income Calculation:

1. Monthly rental income = Rs. 36,000.

1. To calculate the annual rental income: Rs.36,000 x 12 = Rs.4,32,000.

GST Registration Threshold: The GST registration threshold for rental income from property to businesses is Rs.20 lakh per annum. This means that if a landlord's total rental income from business exceeds Rs.20 lakh annually, they are required to register for GST.

GST Implications: Since Prasad's total annual rental income is Rs.4,32,000, which is under the Rs.20 lakh threshold, he is not required to register under GST.

How to Calculate GST on Rented-Out Properties

To calculate GST on rental income, it is important to apply the GST rate of 18% to the rent charged for commercial properties or properties rented for business purposes. The calculation is simple and based on the formula below:

Formula for GST Calculation:

GST = (Rent x 18%) / 100

Let’s go through an example to understand this process clearly:

Example:

Consider a commercial property with a monthly rent of Rs.35,000. To calculate the GST on this amount:

1. Step 1: Identify the rent amount: Rs.35,000

1. Step 2: Apply the GST rate of 18%: Rs.35,000 x 18%

1. Step 3: Perform the calculation:

GST = Rs.35,000 x 18 / 100 = Rs.6,300

So, for a monthly rent of Rs.35,000, the landlord must pay Rs.6,300 as GST to the tax authorities.

Key Points to Remember:

1. GST is only applicable to commercial or business-related rental properties. Residential properties rented out for personal use are exempt from GST.

1. The landlord collects GST as part of the rent charged to the tenant and is responsible for remitting it to the tax authorities.

1. GST on commercial property rentals is calculated at 18% of the rent, and specific exemptions apply for properties managed by charitable or religious trusts.

Determining Place of Supply for Charging CGST, SGST, or IGST

Under the Goods and Services Tax (GST) regime, the taxation on property rental depends on the place of supply. The Place of Supply determines whether the transaction is considered an intra-state supply (within the same state) or inter-state supply (across different states). This, in turn, dictates whether CGST (Central GST) and SGST (State GST) or IGST (Integrated GST) should be applied.

1. Interstate Supply (IGST): If the landlord is registered in one state and the property is located in another state, IGST is charged. The landlord is not required to register in the state where the property is located.

1. Intrastate Supply (CGST and SGST): If both the landlord and the tenant are registered under GST in the same state as the property, CGST and SGST are charged. Even if the tenant is registered in another state, the transaction is treated as intra-state if the property is located in the same state as the landlord's GST registration.

The rules around the Place of Supply can be complex, especially when the landlord and the tenant are registered in different states. It’s important for property owners to understand these provisions in order to correctly charge GST and comply with tax regulations. Below are some common scenarios that illustrate how GST is applied based on the Place of Supply.

Scenario 1: Landlord Registered in a Different State from the Property’s Location

In this scenario, the place of supply will be the location of the property, regardless of where the landlord is registered under GST.

Example: Mrs. Sanya, registered under GST in Bangalore, rents out a commercial property located in Chandigarh to business.

The property is situated in Chandigarh, so the place of supply for the rental transaction will be Chandigarh.

Since this is an inter-state supply, IGST (Integrated Goods and Services Tax) at 18% will be applicable to the rental income.

Sanya does not need to register under GST in Chandigarh because the supply is considered inter-state, and IGST is charged.

Thus, Mrs. Sanya will charge 18% IGST on the rental payments made by the tenant.

Scenario 2: Landlord and Tenant Registered in the Same State as the Property

If both the landlord and the tenant are registered under GST in the same state where the property is situated, the rental income is considered an intra-state supply. In this case, both CGST (Central GST) and SGST (State GST) will be charged.

Example: Mrs. Kavita, registered under GST in Hyderabad, rents out a commercial property located in Hyderabad, Telangana, to Ms. Neha, who is also registered under GST in Hyderabad.

The property is located in Hyderabad, and both the landlord (Kavita) and the tenant (Neha) are registered under GST in Telangana.

Since the supply is intra-state, both CGST and SGST at 9% each will be charged on the rental income, making the total GST applicable 18%.

In this case, Mrs. Kavita will charge 9% CGST and 9% SGST on the monthly rental payment made by Ms. Neha.

Scenario 3: Landlord Registered in the Same State as the Property, but Tenant Registered in Another State

If the landlord is registered in the same state as the property but the tenant is registered in a different state, the transaction remains intra-state, and both CGST and SGST will be charged. However, the tenant cannot claim Input Tax Credit (ITC) on the taxes paid because they are not registered in the state where the property is located.

Example: Ms. Aruna, who owns a hotel in Kochi, rents out a room to Mrs. Priya, who is registered under GST in Delhi.

The property is located in Kochi, and Ms. Aruna is registered under GST in Kerala.

Since the rental income is from a property in the same state as the landlord's GST registration, this transaction is considered an intra-state supply.

Therefore, CGST and SGST, both at 9% each, will be charged on the room rental.

However, Mrs. Priya, who is registered under GST in Delhi, cannot claim Input Tax Credit (ITC) for the CGST and SGST paid in Kochi, as these taxes are from a different state from her GST registration.

In this scenario, Ms. Aruna will charge 9% CGST and 9% SGST on the rent paid by Mrs. Priya.

ITC Provisions When GST is Paid on Rental Income

When GST is applicable to rental income, tenants who are registered under the GST Act have the right to claim Input Tax Credit (ITC) on the GST paid on rental payments. This allows tenants to offset the tax paid on rental income against their output tax liability, effectively reducing the overall tax burden for businesses. However, tenants must ensure that certain conditions are met in order to claim ITC successfully.

Conditions for Claiming ITC on Rental Income:

1. Commercial Property or Business Use: To claim ITC, the rented property must be commercial property or must be used for business purposes. If a residential property is rented out but used for business activities (for example, as office space or for manufacturing purposes), the GST paid on the rent is eligible for ITC. This is especially beneficial for businesses that operate from leased properties, as they can recover the GST paid on rent, reducing their overall tax burden.

Example: A company rents a residential property to use as office space. Although the property is residential, the company can still claim ITC on the GST paid on the rent, as the property is being used for business purposes.

1. GST Remittance by Landlord: For the ITC claim to be valid, the landlord must have remitted the GST collected from the tenant to the government. Tenants cannot claim ITC if the GST paid on rent has not been duly deposited by the landlord. Therefore, tenants should verify that the GST collected on rental payments has been properly remitted to the authorities before proceeding with the ITC claim.

1. Business Use of Rental Property: The rented property must be used for legitimate business purposes. If the property is not being used for business, the tenant will not be eligible to claim ITC. For instance, if the rented commercial property is used for personal purposes, the tenant cannot claim the input tax credit.

Example: A business rents a commercial property for use as an office. If the property is used solely for business activities such as meetings, client interactions, or as workspace, the tenant can claim ITC on the GST paid on rent.

By ensuring these conditions are met, tenants who are registered under GST can effectively reduce their tax burden by claiming ITC on the GST paid for rented properties used in business activities.

ITC on Repairs and Renovations

Under the Goods and Services Tax (GST) regime, both tenants and landlords can claim Input Tax Credit (ITC) on the GST paid for services related to the rented property, such as repairs, maintenance, brokerage, and other similar services. However, this is only possible if the costs incurred for these services are not capitalised.

Section 17(5) of the CGST Act specifies the conditions under which ITC cannot be claimed. For instance, if expenses for repairs or improvements are added to the property’s capital account (i.e., the costs are capitalised), ITC cannot be claimed on these expenses.

However, if the repair or maintenance expenses are treated as operating expenses (i.e., expensed out) and are directly related to the rental property used for business purposes, both tenants and landlords can claim ITC on the GST paid for these services. Eligible expenses include costs like brokerage fees, regular repairs, and property management services, provided these are not capitalised.

1. Example: If a tenant incurs repair costs to maintain a rented commercial property, they may claim ITC on the GST paid for these services. However, this is only applicable if the repair costs have not been capitalised in the tenant’s or landlord’s books of accounts. If the expenses are capitalised as part of the property's cost, then ITC cannot be claimed.

This provision allows tenants and landlords to reduce their overall GST liability by offsetting the GST paid on expenses directly related to the rental property, as long as those expenses are treated as operational rather than capital.

Tax Deduction for Income Tax on Rented Property

In addition to GST, rental income is also subject to income tax deductions at source, known as Tax Deducted at Source (TDS). Landlords must collect GST on the rent charged to tenants as per the prevailing tax rates. However, when the annual rent exceeds Rs. 2.40 lakh (from Assessment Year 2020-21), tenants are required to deduct 10% TDS from the rental payments before remitting them to the landlord.

This TDS provision applies to both residential and commercial properties, and the tenant is responsible for withholding the tax and remitting it to the government. The landlord can then claim the TDS amount as a credit while filing their income tax return. It is important to note that GST is not applicable to the TDS amount; the GST is only applicable to the rent portion of the payment. Therefore, TDS is calculated on the rent excluding GST.

1. Example: If the monthly rent is Rs. 35,000 and the GST on the rent is Rs. 6,300, the tenant will calculate TDS on Rs. 35,000 (the rent amount) and not on Rs. 36,300 (rent + GST).

1. TDS: 10% of Rs. 35,000 = Rs. 3,500.

Tenants must ensure compliance with the TDS provisions by deducting the correct amount before making rental payments to the landlord. This system enables the government to collect a portion of the tax on rental income in advance, which helps prevent tax evasion by landlords. The TDS amount can be claimed as a credit against the landlord’s total tax liability when filing their income tax returns.