GST on Rent

What is GST on rent?

The introduction of the Goods and Services 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. 
 

Content Defining GST on rent

The GST Council has recently announced a change in the taxation of residential units rented by GST-registered companies. Previously, there was an exemption for renting residential units under the GST regime. However, this exemption has now been removed, meaning that renting of residential units by GST-registered companies will now be subject to GST.

The change in the GST law came into effect on July 18, 2022, and means that GST-registered tenants will now be liable to pay GST at a rate of 18%, regardless of whether the landlord is registered for GST or not. This applies if the residential unit is rented for business use.

The Press Information Bureau (PIB) issued a detailed clarification on August 12, 2022, to provide further clarity on the subject. According to the PIB, the rental of a residential unit is taxable only when it is rented to a business entity. There will be no GST charged if the residential unit is rented to a private person for personal use. Additionally, no GST will be charged if a proprietor or partner of a GST-registered firm rents a residence for personal use.

The finance ministry has also issued a notification on December 30, 2022, clarifying that the exemption from GST will cover the "services by way of renting of a residential dwelling to a registered person where – (i) the registered person is the proprietor of a proprietorship concern and rents the residential dwelling in his personal capacity for use as his own residence; and (ii) such renting is on his own account and not that of the proprietorship concern."

This notification means that GST-registered proprietors or partners of GST-registered firms will not have to pay GST on rent if they take rented accommodation for their personal use. However, if the proprietor or partner rents the residential unit for business purposes, then GST will be charged at the standard rate of 18%.
 

Tax on rental income in the pre-GST era

Prior to the implementation of the GST, the landlord was required to obtain a service tax registration if their total taxable services, including rental income from all properties, exceeded Rs.10 lakh per year. If the rental income did not exceed Rs.10 lakh per year, the landlord was not liable to pay service tax.

Under the earlier tax regime, only commercial properties that were let out were subject to service tax, even if a residential property was used for commercial purposes. Service tax was charged at a rate of 15% of the rent for commercial properties. However, rental income from residential properties did not attract service tax.

This meant that landlords who owned commercial properties and rented them out were required to register for service tax and pay the tax on the rental income received. On the other hand, landlords who owned residential properties and rented them out were not required to register for service tax or pay tax on the rental income they received.

However, with the introduction of GST, the tax regime for rental income has undergone a significant change. Under the GST regime, renting both commercial and residential properties is treated as a taxable supply of service. GST is applicable on rental income received by landlords as well as rent paid by tenants.

With the removal of the exemption for renting of residential units, GST-registered tenants are now required to pay GST at a rate of 18% on the rent for residential units rented for business use. On the other hand, landlords are required to register for GST and pay tax on rental income from both residential and commercial properties, regardless of the amount of rental income received.
 

Does renting out a property attract GST?

Renting out an immovable property is classified as a provision of services under the Goods and Services Tax (GST) Act. However, only certain kinds of rent are subject to the GST.

If a property is given out on lease, rent, easement, or licensed to occupy, then it is considered as a supply of services and thus liable to attract tax. Also, if any commercial, industrial, or residential property is leased out for business, whether partly or wholly, then it would also attract GST.

On the other hand, if a residential property is rented out for residential purposes, it is exempt from GST. This means that if a person rents out his/her residential property to another person for their living, then there is no GST applicable on the rental income.

However, if a person rents out any other type of immovable property for doing business purposes, it would attract GST at a rate of 18%. In this case, the renting out of the property is treated as a supply of service, and thus liable for taxation under the GST regime.
 

No GST on residential property rented in personal capacity for use as a residence

Under the Goods and Services Tax regime, renting out of immovable property is considered a supply of services and therefore, attracts GST. However, the GST Council has clarified that GST will not be applicable on residential property rented in a personal capacity for use as a residence.

This means that if an individual rents a residential property for their own use as a residence, they will not be required to pay GST on the rent amount. However, if the same residential property is rented out for business purposes, GST will be applicable at the rate of 18%.

It is important to note that the exemption is applicable only when the residential property is rented in a personal capacity for use as a residence. If the same property is rented out to a business entity or used for commercial purposes, GST will be applicable. Additionally, if the landlord is a GST-registered entity and rents out a residential property to another GST-registered entity for business purposes, GST will be applicable.

Overall, the exemption from GST on the rent of residential property rented in a personal capacity for use as a residence provides relief to individuals who rent such properties for their own residential use.

Who is required to register when the property is rented out to businesses?

As per the Goods and Services Tax (GST) Act, if an individual rents out a property to a business entity for commercial purposes, the landlord is required to register for GST if their annual rental income exceeds the threshold limit of Rs. 20 Lakhs. This applies regardless of whether the landlord is an individual, a company, or any other type of entity. The landlord must also collect and pay GST on the rental income at the applicable rate of 18%.

For example, let's say that Mr. X owns a commercial property and rents it out to a business entity for Rs. 25 Lakhs per year. In this case, Mr. X is required to register for GST since his rental income exceeds the threshold limit of Rs. 20 Lakhs. He must also charge and collect GST at the rate of 18% on the rental income and deposit it with the government.

It is important to note that if the landlord is already registered for GST due to other business activities, they do not need to register separately for the rental income. In such cases, the rental income must be included in the total turnover of the landlord for GST purposes.
 

How to calculate GST on rented out properties?

GST on rented out properties is calculated based on the rent charged to the tenant. The landlord is required to pay GST on the rental income received from the tenant. The rate of GST applicable on renting immovable property is 18%.

To calculate the GST on rented out properties, the following formula can be used:

GST = (Rent x 18%)/100

For example, if the monthly rent of a commercial property is Rs. 50,000, the GST payable on it would be calculated as follows:

GST = (50,000 x 18%)/100
GST = Rs. 9,000

Therefore, the landlord would have to pay Rs. 9,000 as GST on the monthly rent of Rs. 50,000.

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

When GST is charged on rent, the person paying the rent is entitled to claim an input tax credit (ITC) if they are registered under GST. The ITC can be claimed on the GST paid on the rent amount.

For example, if the rent amount is Rs. 1 Lakh and the applicable GST rate is 18%, the GST payable on the rent would be Rs. 18,000. If the tenant is registered under GST, they can claim the entire amount of Rs. 18,000 as ITC, which can be used to offset their GST liability on their output supplies.

It is important to note that the ITC can only be claimed if the rented property is used for business purposes. If the rented property is used for personal purposes, ITC cannot be claimed.

Moreover, the ITC can only be claimed if the landlord has deposited the GST charged on the rent to the government. The tenant must ensure that the landlord has filed their GST returns and deposited the GST with the government before claiming ITC.

It is also important to maintain proper documentation to claim ITC. The tenant must keep a copy of the invoice issued by the landlord, which contains details such as the GST registration number, the amount of rent charged, and the GST amount charged.
 

Is ITC on repairs and renovation of property given on rent allowed?

As per Section 17(5)(d) of the CGST Act, Input Tax Credit (ITC) on goods and services used for the construction of immovable property that is meant for renting out is not allowed. However, it is essential to understand that repairs and renovation of the property that is given out on rent are eligible for ITC.

According to the GST law, if a landlord has to carry out any repair work or undertake renovations for the rental property, they would be able to claim ITC on the GST paid for such services. However, it is crucial to note that the landlord must be registered under the GST Act to claim the ITC.

For example, if a landlord has to renovate a property that is given out on rent, and the GST charged on the renovation work amounts to Rs. 10,000, then the landlord can claim the entire Rs. 10,000 as ITC while filing their GST returns. This ITC can be adjusted against the GST payable on the rental income earned from the same property.
 

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

In India, taxpayers who earn income from rental properties can claim tax deductions on their income tax returns. The amount of the deduction depends on various factors, such as the type of property and the amount of rent received.

Under Section 24 of the Income Tax Act, taxpayers can claim a deduction for the interest paid on a home loan taken for the purpose of acquiring, constructing, repairing, or renovating the rented property. The maximum amount of deduction that can be claimed is Rs.2 Lakhs per year. In the case of a let-out property, the entire amount of interest paid on the home loan can be claimed as a deduction.

Additionally, taxpayers can claim a deduction for the municipal taxes paid during the financial year on the rented property under Section 24. The amount of deduction is equal to the actual amount of municipal taxes paid during the financial year.

In the case of a let-out property, taxpayers can also claim a deduction for the amount of rent paid to the landlord under Section 80GG of the Income Tax Act. However, the amount of deduction is subject to certain conditions and limitations. For example, the taxpayer cannot own any other residential property at the time of claiming the deduction.

It is important to note that the taxpayer must maintain proper records of all the expenses incurred in relation to the rented property to claim the tax deductions. These records may include rent receipts, bills for repairs and maintenance, and receipts for municipal taxes paid, among others.