When it comes to real estate, owning rental properties is a common custom in India. Be it citizens or NRIs, earning passive income via rents is considered a safe route, but there’s more to it than just that.
In India, the government implemented the Goods and Services Tax (GST) to create a unified tax framework that would improve openness and accountability. This GST had a significant impact on the real estate industry, including construction, sale, and purchase, lease, and rent, to name a few.
Using the Real Estate Regulation and Development Act (RERA) as an example, standardization, greater governance, and disclosure procedures have all been established in the real estate sector. GST concessions have also been extended to dwellings built for a variety of groups, including those who are economically weak or who live in slums.
In addition, numerous provisions were established for assessing GST on rental income, such as the definition of GST-taxable services, the location of supply, and GST exemption limitations for services, among others. In this article, we are going to discuss the impact of GST, which includes GST on residential rent as well as GST on commercial rent. What that means for Indian property investors, both residential and commercial, is unclear.
Also read: Impact of GST on Rental Income
Tax on Rent before GST implementation
Before the implementation of GST, property owners or landlords needed to register for service tax before renting their property out. However, this only applied if the total of the taxable services, including the revenue from rent on all of his properties, exceeded the basic exemption level of Rs. 10 lakhs per year.
Individuals with rental income exceeding Rs. 10 lakhs per year were required to register for service tax. As a result, everyone with a yearly rental income of less than Rs. 10 lakhs was excluded from registration under the service tax and was not required to pay tax.
GST on rent
Before diving into the GST rental of immovable property, it’s critical to have a firm grasp on a few key GST concepts. These include ‘taxable services under GST’ and ‘place of supply under GST in the case of services’.
Taxable Services under GST
Schedule II of the CGST Act, 2017 treats immovable property rental as taxable services for GST purposes. However, only a specific sort of immovable property rental is covered by the definition of taxable services. These include:
- Any type of land tenancy, easement, or permit
- Leasing or renting out a structure, whether a commercial, industrial, or residential complex, for business or commercial uses, in whole or in part
Since the above-mentioned operations are considered ‘taxable services,’ they are subject to GST.
Place of Supply of Services under GST
12(3) of the IGST legislation defines where services are supplied when they relate to moveable property. The site of supply would therefore be the location of the immovable property in cases like granting rights to use the immovable property. Let’s look at the rules for GST applicability on commercial and residential rental revenue now that these notions are in the background.
GST on Residential Property Rental Income
Because of this, residential homes rented out solely for habitational purposes are not subject to GST. As a result, under Central Tax (Rate) Notification No. 12/2017, services provided by renting a residential home for personal use are exempt from GST at the ‘Nil rate.’ The only exception to this rule is residential premises rented out for business purposes, which are subject to the Goods and Services Tax (GST).
GST on Commercial Property Rentals of Immovable Property
The subsumption of various taxes levied individually on goods and services is one of the significant developments brought about by the implementation of GST. On both products and services, there is a single GST to be paid. Immovable properties that are rented for business or commercial purposes are liable to GST, as previously stated.
GST Application On Commercial Rent & Residential Rent
Service Tax on Residential Rent
Residential property rent collected on a rental basis for personal use was exempted from service tax under the provisions of the service tax statute. Rent received from the residential property given on a rent-to-own basis was not included in the definition of taxable services under the service tax.
As a result, even if an individual earned more than Rs. 10 lakhs in home rental income in a year, he or she was exempt from paying service tax. However, any residential property rented for commercial purposes was subject to service tax and hence taxable.
Service Tax on Commercial Rent
Rental income from commercial property was subject to service tax under the terms of the service tax statute. As a result, everybody with a yearly rental income from commercial premises that exceeds Rs. 10 lakhs was required to pay service tax. Rent from commercial premises was subject to a 15 per cent service tax.
Also read: Latest GST Reforms in India for Homebuyers
When does GST become applicable to commercial leases?
In comparison to the previous indirect tax regime, the GST exemption limit has been enhanced for services. While the former indirect tax structure had an exemption limit of Rs. 10 lakhs, the GST now has one of Rs. 20 lakhs.
As a result, everyone with a commercial rental income of more than Rs. 20 lakhs per year must pay GST on it. As a result of the adoption of GST, many people who were previously subject to indirect tax have been exempted.
GST on commercial rent
An 18 percent GST is applied to the rental of any immovable property for commercial purposes. As a result, a GST of 18% is charged on the taxable value. If you own commercial property, your taxable value is the amount of rent you receive. The annual commercial rent must be greater than Rs. 20 lakhs, as previously mentioned. GST will not be applied to commercial rents under Rs. 20 lakhs per year.
As a side note, GST will not be charged on the rental of religious facilities owned and managed by a recognized charitable or religious Trust for the public. However, under the following circumstances, an exemption may not be available to you:
- The daily room rental is around Rs. 1000.
- The daily rental fee for properties, such as a community hall or open space, is at least Rs. 10,000.
- Business areas cost at least Rs 10,000 per day to rent.
How GST is calculated for commercial property rentals?
All rented commercial spaces will be subject to GST at a rate of 18% on the taxable value, and rent will be recognized as a taxable supply of service.
GST does not apply to religious places owned and managed by a registered charitable trust or a religious trust for the benefit of the general public. So long as the following three requirements are met:
- Rooms are available at a cost of less than Rs 1000 per day
- Businesses pay less than Rs 10,000 per month
- Community halls and other open places cost less than Rs 10,000 per day
ITC on Rent
The person who pays GST on rent has the option of claiming an input tax credit, which he can then use to the GST he must pay. To put it another way, if a person qualifies for ITC, they can claim it for the GST they paid on their rent.
TDS on Lease
The owner of a piece of real estate that is rented out must collect GST from the renter. GST is levied by the owner of the property on the rent charged to the tenant. In addition, the individual paying the rent is obligated to deduct income tax at the source at a 10% rate. TDS, on the other hand, is imposed if the annual rented amount exceeds Rs. 1.80 lakhs. Moreover, TDS is applicable on both private and public properties alike. On top of that, there’s no GST to pay on TDS.
In light of GST, it’s difficult to see how a renter’s income will ever be able to exit the property. In comparison to other Indian tax systems, GST is a far more contemporary and well-structured revenue collection process. As nothing is perfect, measures are constantly being implemented to fix the tiniest of GST’s shortcomings. Assetmonk is India’s fastest online platform offering real estate investment opportunities in cities such as Bangalore, Hyderabad, and Chennai. We offer properties in three main categories namely Growth, Growth Plus and Yield. Our opportunities have an IRR of 14-21%. Visit us to know more.
According to the Income Tax Act, a property’s rental income is taxed under Section 24 in the hands of the owner, under the heading ‘income from house property. The rental income becomes taxable in your possession on an accrual basis, not a receipt basis. Only the owner is responsible for paying taxes on the rented space.
If you own a rental property and need to file an income tax return, make sure you use the income tax calculator correctly to figure up your gross rental revenue for the year. In addition, the property owner is entitled to a 30% standard deduction on the gross rental income.
Rental real estate is considered a passive activity by the IRS until you actively participate in it. As a result, if you don’t have any other sources of passive income, you won’t be able to deduct your rental payments.