GST on Rent: Understanding Its Impact and Rules

GST on rent has been the topic of discussion in the legal world and household spheres. GST was implemented on the 1st of July, 2017, but it has been in talks in Parliament for several years now. Every one of us looks to rent a place or to give a place on rent, GST now goes hand in hand with your plans. Not sure of the GST rates on rent? This article will help you with the information you need. To make it easier for you, the information in this article is backed by examples. 

The Positive Impact of GST on Rental Transactions

Payment of rent is of the utmost priority in any commercial business or personal life. The impact of GST on rent has been positive, it is a more structured method of collecting taxes from various sectors. Through the years we have seen that rent has been the source of income for many people. And GST on rental income has enabled a fair system of payment of taxes. 

Does Renting Out a Property Incur GST?

Renting out an immovable property is categorised under the GST Act as providing a service. This means that GST applies to certain rental scenarios, such as:

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Leasing, renting, licensing, or allowing an easement on any property.

Letting out any property, whether it be for commercial, industrial, or residential use, for business purposes in full or in part.

This categorisation deems such activities as services, hence subject to GST. Notably, renting a residential property purely for living purposes escapes GST imposition. Conversely, any form of property rental aimed at business operations attracts a GST rate of 18%, recognised as a service supply.

There's a notable exemption: residential properties leased in a personal capacity for use as a residence do not attract GST. This exemption was highlighted during the 48th GST Council meeting, specifying that no GST is levied on residential dwellings rented by registered individuals for their personal use as a residence. For instance, if a person running a proprietorship rents a residential property for personal use, distinct from business operations, such rental is exempt from GST. This clarification ensures a clear distinction between personal and commercial property rentals under the GST framework.

Does Renting Out a Property Incur GST?

Renting out an immovable property is categorised under the GST Act as providing a service. This means that GST applies to certain rental scenarios, such as:

• Leasing, renting, licensing, or allowing an easement on any property.
• Letting out any property, whether it be for commercial, industrial, or residential use, for business purposes in full or in part.

This categorisation deems such activities as services, hence subject to GST. Notably, renting a residential property purely for living purposes escapes GST imposition. Conversely, any form of property rental aimed at business operations attracts a GST rate of 18%, recognised as a service supply.

There's a notable exemption: residential properties leased in a personal capacity for use as a residence do not attract GST. This exemption was highlighted during the 48th GST Council meeting, specifying that no GST is levied on residential dwellings rented by registered individuals for their personal use as a residence. For instance, if a person running a proprietorship rents a residential property for personal use, distinct from business operations, such rental is exempt from GST. This clarification ensures a clear distinction between personal and commercial property rentals under the GST framework.

What is the effect of GST on Rent?

The advent of GST, or Goods and Services Tax, has made collecting taxes from diverse sectors much easier and more organised. Rent is one such business that has provided money for countless people throughout the years. In this essay, we'll look at how GST has affected rent since its implementation. Let's look at several circumstances where the GST is different for commercial and residential properties.

Previously, if a landlord's total taxable services (including rental revenue from all properties) exceeded Rs.10 lakh per year, they had to register for service tax. The landlord will not be drawn to service tax as long as the rental revenue (from all rented properties) does not exceed Rs.10 lakh per year.

Commercial properties that were let out alone were subject to service tax under the former tax regime. Even if a residential property is used for business reasons, this rule applies. For commercial properties, a service tax of 15% of the rent was imposed. In addition, rental revenue from residential homes was exempt from service tax.

Who is required to Register when the Property is Rented to Businesses?

A taxpayer who earns more than the exemption amount must register for GST and pay taxes. So, if you've given your property to a company, it's taxable. You must register for GST if you earn more than Rs 20 lakh per year from your business, including rent and any other exempted revenue.

The GST threshold limit for those offering simple services is Rs.20 lakh, which is higher than the Service Tax limit of Rs.10 lakh. Many landlords who were previously subject to the Service Tax regime will now be able to earn an additional Rs.10 lakh.

(Please note that the Rs.20 lakh threshold limit does not apply to special category states, which have a maximum of Rs.10 lakh.) 

How is GST calculated when you rent out a property for commercial purposes?

GST on the rent of commercial property will be charged at 18% on the taxable value of all business spaces that are rented, and rent will be recognised as a taxable supply of service.

GST on rent on commercial property limit (GST on rent limit)– ₹20 Lakhs

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

The person who pays GST on rent can normally use the money to pay his other tax obligations. In other words, ITC on GST paid on rent can be claimed if all of the requirements for claiming ITC are met.

What is the provision for a tax deduction on income tax for the rented property?

The owner of the property (which is rented) is responsible for collecting GST from the renter. This GST will be applied to the rent. From AY 2020-21 onwards, the rent payer must deduct 10% TDS on rent for the property that exceeds Rs.2.40 lakh per year. Both residential and commercial properties are covered by the TDS. TDS will not be subject to GST.

Important Note: The GST on immovable property rent charged by the government or local authority to a registered person would be subject to the Reverse Charge Mechanism. When the property is rented to an unregistered person, however, the government deducts GST (Forward charge mechanism).

GST on Renting an Immovable Property

Before we discuss GST on renting immovable property, certain concepts relating to GST on rent have to be understood. The terms/concept are 'taxable services under GST' and 'place of supply under GST (service)' -

• Taxable Services under GST - The GST law (Schedule 2 of the CGST Act) states that if an immovable property is rented, it will be treated as a supply of services. But GST on rental properties is only applicable to a certain type of property included under taxable services. They are mentioned below:

1. Any tenancy, easement, lease, license to occupy land
2. Rent or leasing out of an immovable property (building) including a residential complex, commercial or industrial building for business or business purposes, either completely or partially.

(The above-mentioned fall under taxable service, hence, is applicable for payment of GST.)

• Place of Supply of Services under GST – IGST act (Section 12(3)) characterises the place of supply in case of services provided that fall under the immovable property. Therefore, in the event of administrations like giving rights to utilise the immovable property, the spot of supply would be the location of the said property. (For example, Mr A lives in Delhi and owns a property in Hyderabad, which he rents out. Then Hyderabad, where the property is situated, is the spot where GST will be applicable).

GST on Residential Property Rent

GST on residential property rent as per notification no. 12/2017 – Central Tax (Rate), attracts 'Nil Rate' of GST. But if the residential property is rented out for commercial purposes, then GST on rent is applicable as the GST on commercial property rent.

Let us say, Mr A owns an apartment and wants to rent it out. He rents it out to a person who uses it as an office for his call centre. Then this property is used for commercial purposes. It will not attract the ‘nil rate’ of GST, which is applicable for GST on rental income from residential property. The GST on residential rental income here will be applicable as the GST on rent paid on commercial property.

GST on Commercial Property Rent

The GST on commercial rent exemption limit has been increased to 20 lakhs than that of 10 lakhs that was applicable in the Pre-GST times. The landlords who were applicable to pay under the Service tax law can now ease a bit as the limit has been pushed up to another 10 lakhs. 

For example, Mr A who lives in Delhi owns property in Hyderabad and decides to rent it out. Now a company XYZ Ltd. rents it out from him and uses it as a guesthouse. Rent per month of the above-said property is Rs. 20,000, this makes the annual rental income of Mr A would Rs. 2,40,000. Therefore, Mr A is not applicable to pay GST on rent paid, as it falls under the limit. GST on rent on commercial property is only applicable if the annual rental income exceeds 20 lakhs.

GST On Renting of Immovable Property for Commercial Purpose

If any immovable property is rented out for a business or commercial purpose, then the Landlord has to be pay GST on commercial rental income. The rate of GST on renting commercial property is 18% on the taxable value. The owner (Mr A) will apply GST on rent and also the division of GST on rent on commercial property in the following manner:

Inter-state Transaction

Intra-State Transaction

Therefore, the GST on rental income from commercial property is already applicable. The above charts are just for your understanding that how GST is applicable on rent and the breakdown on GST of rent received by Mr A.

GST on Lease Rent

If you take a property on lease – residentially or commercially, then GST on rent will be charged according to the purpose of your renting the property. If you lease a property for residential purposes then the GST on rent of a residential property is applicable. The GST on renting residential property is ‘nil’. While, if you lease for commercial purposes, the GTS on rent will be 18% of the total amount payable monthly (the GST on rent paid will be added to the amount of the decided price for the lease).

GST Limit for Rental Incomes 

GST has proven to be a fair and structured form of tax evaluation and collection. Below are a few exceptions where GST on rent does not have to be paid:

1. On an immovable property that is used for residential purposes.
2. If the total rental income (commercial) is less than 20 lakhs.
3. If rent is being paid to a registered charitable or religious organisation for the public and –

• rent of the room is charged per day as Rs 1000 or less than that.
• the rent of the shops assigned is charged less than Rs 10,000 monthly.
• the rent of the community hall for a function is charged less than Rs. 10,000.

Maintaining your financial health becomes more complex with additional obligations like GST on rent. If you're seeking clarity on this subject or have other property-related inquiries, NoBroker's Legal Services are ready to assist. Our experts are dedicated to providing guidance and support, ensuring you're well-informed. Should you have any questions, simply drop a comment below, and our team will reach out to help. Explore NoBroker for direct and efficient assistance tailored to your needs.

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