GST on Real Estate: Know the Tax Rates on Commercial and Residential Property Rentals

Top Stories GST on Real Estate: Know the Tax Rates on Commercial and Residential Property Rentals By Aiswarya Krishnadas – On March 5, 2024 10:00 am – 4 mins read What is GST on Rent? The introduction of the Goods and Service Tax ( GST ) in July 2017 brought about significant changes to the taxation of rental income in many countries. Renting a property is now considered a taxable supply of service under the GST regime, and both landlords and tenants are subject to tax obligations in specific circumstances.

Landlords who rent out their properties are required to pay GST on the rental income they earn. This tax is calculated as a percentage of the rent received and must be paid to the tax authorities on a regular basis. The rate of GST applicable on rental income may vary depending on the country and the specific circumstances of the rental agreement. On the other hand, tenants who rent a property are also required to pay GST on the rent they pay to the landlord. The amount of GST paid by the tenant is usually included in the total rent amount and is remitted to the tax authorities by the landlord on behalf of the tenant. However, it is essential to note that not all rental agreements are subject to GST.

The applicability of GST on rental income and rent paid depends on various factors such as the location of the property, the type of property, and the purpose for which it is rented. Tax on Rental Income in the Pre-GST era During the pre-GST era, the landlord had to obtain a service tax registration if their total taxable services ( including the rental income from all properties ) exceed Rs.10 lakh per year. As long as the rental income ( from all the properties that have been rented out ) does not exceed Rs.10 lakh per year, the landlord would not be attracted to service tax. Under the previous tax regime, commercial properties alone, that were let out would attract service tax. This applies even if a residential property is used for commercial purposes. Service tax was levied at 15% of the rent, for commercial properties. Moreover, the rental income from residential properties did not attract service tax. Does renting out a property attract GST?

According to the GST Act, renting out an immovable property would be treated as a supply of services. GST, however, will be applicable only to certain types of rent such as: When a property is given out on lease, rent, easement, or licensed to occupy When any property is leased out (or let out) including a commercial, industrial, or residential property for business ( either partly or wholly ) This type of renting is considered a supply of services and would thus attract tax. When you rent out a residential property for residential purposes, it is exempt from GST. Any other type of lease or renting out of the immovable property for doing business would attract GST at 18%, as it would be treated as a supply of service. GST on Renting of Residential Property GST is not applicable if a residential property is rented out to a registered person in their personal capacity and for use as their own residence.

In other words, if a residential property is rented out, that too for residential purposes, then the rental income from such property does not attract GST. However, it is important to note that this exemption only applies when the property is rented out in a personal capacity and used as a residence. If the same property is rented for commercial purposes or to a business entity, it will attract GST. GST on Commercial Property Renting If any commercial property is rented out, it attracts GST @18% on the taxable value, and the rent is considered a taxable supply of service. If a registered religious trust or charitable trust manages and owns a religious place that is meant for the public, it is exempt from GST. However, to avail of this exemption, it has to fulfill the following conditions – The rent of the rooms should be less than Rs.1000 per day. The rent of shops should be less than Rs.10,000 per month.

The rent of any open area or community hall should be less than Rs.10,000 per day. Input Tax Credit The owner of property who is collecting GST can take input tax credit of any GST paid by him in respect of such property. For example: The owner of property has build furniture for the purpose of giving furnished office on rent. The GST paid on such furniture is allowed as input tax credit. Note that GST paid on construction of building is a blocked credit under Section 17(5) and therefore it’s input credit cannot be taken. The lessee can also take the input tax credit of such GST paid. What are the ITC Provisions when GST is Paid on Rental Income? When GST is applicable on rent, the tenant paying the rent is entitled to claim an Input Tax Credit if they are registered under the GST Act. The taxpayer can claim a credit of the GST paid on the amount of rent.

However, ITC can be claimed only if the property is a commercial property or used for commercial purposes. At the same time, if the rented property is put to personal use, ITC can be claimed. Also, the GST charged should be deposited with the government to be able to claim ITC. Therefore, the tenants must make sure that the GST collected has been deposited with the government before claiming ITC. 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 GST on rent vs. GST on rental income 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. 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%. Conclusion The implementation of GST in India has not spared the rental property market. While the taxation of rental income has undergone significant changes, the revised threshold for GST applicability and exemptions for residential and charitable or religious purposes have provided some relief to property owners. As the impact of GST on rental properties continues to evolve, property owners and businesses need to stay informed and adapt to the changing tax landscape.

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