Impact of GST on Rental Income
GST was implemented on 1st July 2017 and is perceived to be the most significant tax regime post-independence. It has given a structured approach to the tax regime by merging multiple indirect taxes and bringing out a GST composite tax.
Though GST has eased the taxing on entire business associated transactions, here in this article, let us streamline the impact of goods and service tax on rental income from residential, commercial properties.
Let us go through the earlier form of tax superficially to understand the tax composition under GST better.
Service tax on properties in the pre-GST era
In the pre-GST era, the rent from any property, whether residential or commercial property attracted service tax if and only if the property was rented for a commercial purpose.
The landlord had to get the service tax registration done if the rental income from the properties exceeded Rs.10 Lakhs per annum. So, as long as the rental income did not exceed the 10 Lakh limit, the landlord need not register for service tax.
If the rental income had exceeded Rs.10 Lakhs, the service tax of 15% was charged on the rental income from commercial properties also from the residential properties let-out for commercial purposes. The deciding factor for the service tax charge was the purpose of the let-out rather than the property. To iterate, rental income from the properties for residential purposes was exempted from the service tax.
GST on Rental Income
Implications of GST in Real Estate
According to the GST Act, renting out an immovable property is classified as providing services, and hence the GST is applicable. The following are the conditions for the rental income to attract the Goods and Service Tax.
- The property must be given on rent, lease, easement, or licensed to occupy.
- Any property, including commercial, residential, or industrial, must be leased out for business purposes partly or wholly for the GST to be imposed.
The condition of exempting the rental income from residential purposes stands the same. The threshold limit for GST application has been extended up to Rs. 20 Lakhs from Rs. 10 Lakhs earlier. This has helped the landlords fall in the range of Rs.10- 20 Lakhs who had paid the service tax in the pre-GST era.
The GST is charged at a new rate of 18% on the rental income exceeding Rs.20 Lakhs, earned through leasing or renting properties for business objectives.
It is a point to be noted that the threshold of Rs. 10 Lakhs remains intact in 11 special category states across India. Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, and Uttarakhand.
Who Should Get Registered Under GST?
Any landlord who earns more than the exempted limit, i.e., Rs 20 Lakhs on the rental income per annum, has to register under GST and pay the required taxes.
You might have few properties that you have given on rent and earn individual returns less than the threshold. If the total rental returns from all the properties exceed the limit, you are liable to pay the GST.
For instance, you have five properties that you have leased for business goals, each of which generates an average income of Rs 5 Lakhs totaling Rs.25 Lakhs. Though you are not earning through a single property, you still have to register and pay GST as your total income sums up to exceed the exemption limit.
Specifications on GST Calculation for Commercial Properties
- GST is charged at 18% on all the commercial properties that generate taxable income.
- If a registered charitable or religious trust owns a space meant for the public, it will not be categorized under the property that attracts GST under the specifications mentioned below.
- The rent of the rooms must be below Rs. 1000 per day.
- The rent of other business spaces like shops and stalls in the vicinity must be less than Rs.10,000 per month.
- The rent on larger spaces like community halls and open area spaces like gardens in the religious precincts must be less than Rs. 10,000 per day.
Consideration of Place of Supply of GST
The renting out of a property for commercial purposes is considered providing services. The property’s location is regarded as the place of supply irrespective of the residence of the property owner.
For instance, if you reside in Telangana and hold commercial property in Karnataka, the place of supply would be considered as Karnataka. The GST would then be split into CGST and SGST, each 9% between the central and Karnataka.
To sum up, GST has destressed the customers with the simplified tax regime removing multiple complicated taxes. Now, the customers pay a single tax called Goods and Service Tax with the least confusion. The new tax regime has also exempted the GST on residential purposes of the rental property. The threshold limit has been extended up to Rs.20 Lakhs from Rs.10 Lakhs. This eased the stress of a significant sector of consumers from paying service tax in the pre-GST era, which has now been exempted, making it more affordable. Also, with the latest GST reforms, GST is favoring the homebuyers, click here to know more!
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GST on Rental Income FAQ's:
Rental income on residential properties rented for residential purposes is not subjected to GST. The properties that are rented or leased for commercial purposes are subjected to GST of 18% above Rs.20 Lakhs.
GST on rental income from residential purposes is exempted. By renting the residential property for residential purposes, you can avoid GST.
The rule says the landowner should collect the GST from the tenant, and the tenant can deduct the tax at the source at 10%.
Whether the residential or commercial property leased out for business, i.e., commercial purposes, the rental income from any property is taxable.