Impact of GST on rent and rental income

The goods and services tax law in India treats renting of commercial as well as residential property as a supply of service if the premises are being used for commercial purposes. As a result of this, GST is levied on this service.

GST on renting of residential property

The GST law came into effect on July 1, 2017. GST on rent on residential property became applicable from that date. However, a significant change was made with effect from July 18, 2022.

GST on renting of residential property from 1 July 2017 to 17 July 2022

While the GST on rent was prescribed at 18%, the effective rate was zero in case a residential unit was given on rent for residential purposes only. In any other case, 18% GST on renting of residential property was applicable.

GST on renting of residential property from 18 July 2022

Based on the 47^th recommendation of the GST Council, changes were made in the existing law. To  avail of the exemption on GST on renting of residential property, the following conditions must be fulfilled:

• The residential property is owned by a GST-registered person
• The residential property is being used for residential purposes only
• The tenant is not a GST-registered entity

In case the tenants is GST-registered, GST will be applicable at 18%.

Also read all about GST on real estate

Renting of residential unit taxable only when it is rented to business entity️

In a move that would increase the cost of offering company guest houses or employee accommodations by GST-registered companies, the GST Council has done away with an exemption earlier granted to renting of residential units under the GST regime.

After the amendment, which was announced after the 42nd meeting of the GST Council on July 13, 2022, and came into effect from July 18, 2022,  GST-registered tenants will be liable to pay GST at 18%, irrespective of whether the landlord is GST-registered or not if the unit is rented for business use.

The Press Information Bureau (PIB) issued a detailed clarification on August 12, 2022, on the subject.

“Renting of residential unit taxable only when it is rented to business entity. No GST when it is rented to private person for personal use. No GST, even if proprietor or partner of firm rents residence for personal use,” the PIB tweeted about GST applicability on rent, which came into effect from July 18, 2022.

This means GST-registered proprietors or partners in GST-registered firms will not have to pay GST on rent if they take rented accommodation for their personal use.

However, no GST will have to be paid if the home is being used by the owner of a business entity in his personal capacity, the finance ministry has clarified through a notification issued on December 30, 2022.

“The exemption will cover “services by way of renting of a residential dwelling to a registered person where – (i) the registered person is proprietor of a proprietorship concern and rents the residential dwelling in his personal capacity for use as his own residence; and (ii) such renting is on his own account and not that of the proprietorship concern,” the Central Board of Indirect Taxes and Customs said in a notification .

 

GST on renting of commercial property

In case the landlord is a GST-registered, 18% GST on rent will be applicable. GST does not apply in case the landlord is not GST-registered.

Input tax credit on GST on rent 

According to the new rule, a GST-registered tenant will have to pay GST on rent under the reverse change mechanism and then, claim input tax credit (ITC) on the payment made. However, Section 17(5)(g) of the Central Goods and Services Tax Act does not allow input tax credit of GST paid for any services for ‘personal consumption’. It is only applicable in case on supplies for ‘business purposes’.

Also, a recent ruling by the Tamil Nadu Authority for Advance Ruling (AAR) has paved the way for allowing of input tax credit on GST paid on upfront lease premiums. So far, tax authorities have been not allowing tax credit on GST paid on upfront lease premiums, based on the logic that upfront payments made for repair or improvement of premises are similar to real estate transactions and since there is no ITC available on such transactions, no such relief should be extended in such cases.

Upfront premiums, also known as premium, salami, cost, price, development charges, etc., are payable for long-term lease of 30 years or more of industrial plots or plots for development of infrastructure for financial business. For a tenant, this non-refundable amount is quite similar to the down-payment that a home buyer makes, at the time of property purchase.

The Tamil Nadu AAR ruling also clarified that ITC is available for upfront lease premiums used for construction property categorised as ‘plant and machinery’.

 

ITC on repairs and renovation of property

Section 17(5) of the CGST Act, which lists scenarios in which ITC can and cannot be claimed, established that the GST paid on repairs and renovation of the property is allowed as ITC as long as it is not capitalised.

When is GST registration mandatory?

Under the GST law, registered persons include individuals and corporate entities. A person or company has to register under the GST, if they earn more than the set threshold limit per annum. For an individual service provider, the threshold is Rs 20 lakh per annum while it is Rs 40 lakh for businesses across the country, barring the northeastern states (where the limit is set at Rs 20 lakh).

What will be the place of supply for charging GST?

Tax under the GST is levied through three components: CGST, SGST and IGST. While same-state transactions attact the central tax, the SGST is applicable on inter-state transactions.

If the landlord and the rented property are registered in the same location: 9% CGST and 9% SGST will be charged.

If the landlord and the rented property are registered in diffrent locations: The place of supply will be where the property is located. The service will be considered interstate supply and IGST will be applicable.

If the landlord is registered in the same state where the property is, but the tenant is registered in a different state: 9% CGST and 9% SGST will be charged; tenant can’t claim input tax credit.

GST on rent: Impact on rental housing

The decision may hinder the expansion of rental real estate in India by increasing the tax burden on businesses that rent out residential properties to be used as guest houses and accommodations for their employees, says Vivek Rathi, director-research, Knight Frank India.

“If someone pays a monthly rent of Rs 1 lakh, the property value would be in the range to Rs 5 crore-Rs 6 crore. The GST, which will be around Rs 18,000, will burn a hole in the pocket of the tenant and eventually, the property owner, as the tenant may want to negotiate the rent. That means there would be a lesser number of people coming forward to provide properties for rental, as their rental income might be adversely impacted. This may also impact luxury housing demand and projects, as investors may not want to invest,” Pankaj Kapoor, founder and MD of Liases Foras, was quoted by the media as saying.

Experts are of the view that the move will be highly detrimental to the government’s stated position of rental housing promotion in India. On one hand, it will increase cost and compliance for companies. On the other, it may also result in revenue loss for the government.

How so?

To avoid paying the GST, companies would prefer to rent the premises in the name of their employees — who will not be GST-registered — in place of having their names on the rent lease.

The move to impose 18% GST will also have an adverse impact on the co-living segment in the country. Most co-living operators rent out resident homes from individual owners and use those as student accommodations. Since, in a majority of cases, they are GST-registered, the application of 18% GST will eat into their already negligible profit margins.

Know that salaried individuals are neither liable to register under the GST nor have to pay the 18% tax on the rent they pay to their landlords.

GST on rent vs GST on rental income

Note that GST on rent and GST on rental income are different. GST on rental income is applicable when a landlord receives an annual rent of Rs 20 lakh, and effectively becomes liable to pay GST on rental income.

GST on rent, on the other hand, is the tax liability on the tenant if they are a GST-registered entity, and using a residential property for business purposes. In simpler terms, GST on rental income is paid by the landlord while the GST on rent is paid by the tenant.

This also means that in a scenario where a residential property is let out for business purposes to a GST-registered person, and where the GST-registered landlord is earning an annual rental rent of Rs 20 lakh, the landlord as well as the tenant will have to pay 18% GST, taking their mutual GST liability  at 36%.

Know all about HRA exemption on rent paid. Also know about  rent receipt & its role in saving tax

Applicability of GST on rent

Applicability of GST on rent is determined by two factors:

Property type

GST on rent is applicable to properties rented for commercial/business purposes. Even if a residential property is rented for commercial/business purposes, the rental income and rent paid both can be liable for tax under the GST regime. It is important to mention here that GST liability would remain intact as long as you have given your property on rent for business, irrespective of the nature of its usage.

If a landlord has rented his residential property for residential purposes to an individual, not registered under the GST, the GST on rental income would not be applicable.

Check out the difference between Leave and license agreement

Rental income threshold under GST

Under the GST regime, the need to pay GST on rent arises when you get an annual rental income of Rs 20 lakh or more from your service providing business. Earlier, this threshold was kept at Rs 10 lakh. In case you are a business, the limit is Rs 40 lakh per annum.

Check out our guide on GST search and GST verification

How to pay GST on rent?

In case GST on rental income is applicable, the landlord will have to register himself and pay tax.

Also read all about TDS on house rent, under the income tax laws.

 

GST on rent latest updates

Latest news

GST applies if electricity charges added to rent, maintenance fee 

When electricity charges are bundles with rent or maintenance fee imposed by real estate developers, mall operators or airport operators, such a service qualifies as a composite supply under the Goods and Services Tax (GST) regime. As a result of this, such a service would attract 18% GST, the Central Board of Indirect Taxes and Customs (CBIC) has clarified. Even if electricity is billed separately, the supplies will constitute a composite supply, it added.  The new clarification by the CBIC means tenants of commercial properties will have to pay 18% GST on electricity charges if the service is bundled with renting of property or its maintenance charge. According to tax experts, this would result in increased cost of renting for tenants as landlords would factor in a higher rate while offering the supply.

One-time premium received on allotment of completed commercial units to attract 18% GST: AAR

Developers receiving a one-time premium on allotment of commercial units of building will have to pay goods and services tax (GST) at 18%, the Gujarat Authority for Advance Ruling has said. Such a supply is taxable under Section 7 of the CGST Act, 2017, the AAR added. The AAR also clarified that leasing of commercial property in lieu of a one-time premium or an annual premium would quality as “supply” as prescribed under Section 7(1) of the CGST Act.

Read full coverage here. 

GST would apply if a rented residential building is sublet as hostel: AAAR

Renting residential properties to business entities that sublet them to educational institutions will attract GST on rent, the Andhra Pradesh Appellate Authority for Advance Rulings (AAAR) has ruled.  This arrangement is not exempted from paying the goods and services tax under the notification issued by the Centre in July 2022. The notification provides relief to owners of residentials properties who rent properties for residential use from paying the GST.

The exemption to families or individuals was on the grounds that the transaction of supply ends with the recipient. In the case of commercial entities, the tenant will not use the rented property as ‘residence’ but will sub-lease or rent it out to others, the order explained.

To enjoy the relief under the new government notification, the arrangement must meet the twin requirements of ‘renting of residential dwelling’ for ‘use as residence’, it explained further.

 

FAQs

What is the rate of GST on rent?

The rate of GST on rent is 18%.

Do landlords have to pay tax on rent before GST?

Landlords had to pay service tax on rent before the GST era.

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.

Do I have to pay GST on rental income if I have rented a property for residential purposes?

No, if you rent a property for residential purposes, it is exempted from GST. However, your tenant may have to pay 18% GST if he is a GST-registered person.

Is rent considered as a taxable supply of services or goods under GST?

Rent is considered as a taxable supply of services under GST.

What is the GST rate on income from commercial properties?

The GST rate on rent is 18% of the monthly rental income in case the annual income is Rs 20 lakh or more.

What is the GST rate on rent from commercial properties if income is less than Rs 20 lakh?

GST is not applicable if rental income is less than Rs 20 lakh in a year.

Is TDS on rent the same as GST on rent?

No, the two taxes are different.

Which are the states where the threshold for GST registration is Rs 10 lakh?

The states where the threshold for GST registration is Rs 10 lakh include Arunachal Pradesh, Assam, Jammu & Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, Uttarakhand.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected]