The Goods and Services Tax (GST) has transformed the taxation landscape in India, bringing several indirect taxes under a unified regime. One area where GST has raised questions is its applicability on rental income from both residential and commercial properties. In this blog, we will delve deep into the concept of GST on rent, exploring the nuances of its application for both residential and commercial properties, providing examples to clarify the subject.
Before diving into GST on rental income, let's first understand what GST is. GST, or Goods and Services Tax, is an indirect tax that replaced several former taxes like service tax, VAT (Value Added Tax), excise duty, and others. It is levied on the supply of goods and services and is applicable across the country, with few exceptions. The objective of GST is to simplify the taxation process and to make the system more transparent.
Under the GST regime, the rate of tax depends on the type of goods or services being offered. In terms of real estate, GST affects both the sale of under-construction properties and rental income.
GST on rent is governed by specific provisions that distinguish between residential and commercial property rentals. It's essential to understand this distinction, as the tax implications differ significantly.
As per the GST law, residential properties used for personal purposes are exempt from GST. In other words, if you're renting out your house or flat for someone to live in, you don’t have to worry about paying GST.
When is GST Not Applicable on Residential Rent?
1. Residential Property for Residential Use: If you are leasing a residential property solely for living purposes, no GST will be charged. This exemption applies even if the owner is registered under GST for other activities.
2. Renting Residential Property to Unregistered Persons: If the tenant is not registered under GST and the property is being used for residential purposes, the rent is exempt from GST.
Example 1: No GST on Residential Rent
Suppose Mr. Rajesh owns an apartment that he rents to a family for living purposes. As the rent is for residential use, no GST will be charged, and the tenant is also not required to pay any GST.
When is GST Applicable on Residential Rent?
Although renting out a residential property for personal use is exempt from GST, certain conditions trigger the GST liability:
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Residential Property for Commercial Use: If a residential property is rented out to a business or for any commercial purpose, GST will be applicable. This could be the case when the residential property is used as a guesthouse or rented out to a company for its employees.
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Renting to a Registered Business Entity: Even if the property is residential, if the tenant is a registered business entity using the property for commercial purposes (e.g., office accommodation for staff), the rental income becomes liable for GST.
Example 2: GST on Residential Rent for Commercial Use
Mr. Shyam rents his flat to a company, XYZ Pvt. Ltd., for use as a guest house for its employees. Since the property is being used for commercial purposes, Mr. Shyam must charge GST at 18% on the rent, as XYZ Pvt. Ltd. is a registered business entity.
Commercial property rent is more straightforward compared to residential property rentals. Any rental income generated from commercial properties (e.g., shops, office spaces, warehouses) is subject to GST, provided the annual turnover exceeds a specific threshold.
GST Applicability on Commercial Property
• Threshold Limit: As per GST regulations, if a person's aggregate turnover exceeds ₹20 lakhs (₹10 lakhs for Special Category States) in a financial year, they are required to register under GST and pay the applicable tax on commercial rent. If their turnover is below this threshold, they do not need to register for GST, and hence, no GST is applicable on the rent received.
• GST Rate: The current GST rate applicable on commercial property rentals is 18%. This includes 9% CGST (Central GST) and 9% SGST (State GST) for intra-state rentals or 18% IGST (Integrated GST) for inter-state rentals.
Example 3: GST on Commercial Rent
Mr. Rohit owns a commercial property that he rents out for ₹50,000 per month to a retail store in Mumbai. His annual rental income exceeds ₹20 lakhs, so he is liable to charge 18% GST on the rent. The monthly GST charge would be:
- Rent: ₹50,000
- GST (18%): ₹50,000 x 18% = ₹9,000
- Total amount payable by tenant: ₹50,000 + ₹9,000 = ₹59,000
Reverse Charge Mechanism (RCM) on Rent
The reverse charge mechanism (RCM) under GST means that the recipient (tenant) pays the tax instead of the supplier (landlord). This provision applies in specific cases of rental transactions.
- Residential Property Rented to a Registered Person for Business: Effective July 2022, GST under RCM is applicable when a residential property is rented to a registered person for business purposes. The tenant must pay GST under RCM, even if the property is residential.
Example 4: Reverse Charge on Residential Rent
Mr. Arjun rents his residential property to a registered business entity, which uses it as a guest house for visiting employees. The entity is liable to pay GST under RCM, as the property is being used for commercial purposes.
Input Tax Credit (ITC) on Rent
Input Tax Credit (ITC) allows businesses to claim credit for the GST paid on inputs, thus avoiding the cascading effect of tax. ITC can be claimed on the GST paid for renting commercial properties but not for residential properties.
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Commercial Rent ITC: A tenant can claim ITC on the GST paid on commercial rent if the property is used for business purposes and the tenant is a registered taxpayer under GST.
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Residential Rent ITC: No ITC is available for GST paid on the rent of residential properties, even if they are used for business purposes.
Example 5: ITC on Commercial Rent
ABC Pvt. Ltd. rents an office space in Delhi and pays ₹1,00,000 in rent, along with ₹18,000 GST. Since the office is used for business purposes, ABC Pvt. Ltd. can claim ₹18,000 as ITC while filing its GST returns.
Landlords renting out commercial properties are required to register under GST if their total turnover exceeds ₹20 lakhs. Even if the rent is the only source of income and exceeds ₹20 lakhs annually, the landlord must register for GST.
- If the rental income from commercial property is below the threshold limit, the landlord is not required to register for GST.
- Renting residential properties solely for residential purposes does not require GST registration, irrespective of the rental income.
Landlords registered under GST must comply with regular GST filings, including monthly or quarterly GST returns (depending on the type of registration) and annual returns. They are also required to issue GST-compliant invoices to tenants, mentioning the rental amount and GST charged.
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Form GSTR-1: Landlords must report outward supplies of rental services in GSTR-1. This return contains details of all the rental income along with GST collected.
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Form GSTR-3B: This is the monthly self-declaration form, where landlords must declare the GST liability and pay the tax.
Failure to register under GST or comply with GST laws can result in penalties. These penalties can range from 10% of the tax due (subject to a minimum of ₹10,000) to 100% of the tax due if there is deliberate fraud.
Key Takeaways
• Residential Rent: GST is not applicable on residential properties used for living purposes, but it applies when rented for commercial use.
• Commercial Rent: GST is applicable on all commercial property rentals, provided the landlord's annual rental income exceeds ₹20 lakhs.
• Reverse Charge Mechanism: If a residential property is rented to a registered business entity, the tenant must pay GST under RCM.
• Input Tax Credit: ITC can be claimed on commercial rent but not on residential rent.
• Threshold for Registration: Landlords must register for GST if their aggregate turnover from rent and other income exceeds ₹20 lakhs annually.
• Compliance: Landlords must file regular GST returns and issue proper invoices for rentals where GST is applicable.
Understanding the GST implications on rental income is crucial for both landlords and tenants. While residential rents are mostly exempt from GST, commercial rents are subject to the tax, and compliance is essential to avoid penalties. By staying informed about the rules, both parties can ensure smooth transactions and proper GST compliance. Whether you're renting out property or leasing one, keeping track of GST regulations will help in avoiding legal hassles and benefiting from available tax credits.