GST On Rent: Tax Rate On Residential Property - What to Know?

Understanding GST Implications on Residential Property

It doesn't matter whether you are a landlord or a tenant - it pays to know the Goods and Services Tax (GST) implications on rental income in India. When renting out a residential property, knowing the applicable GST rates, exemptions, and compliance requirements can help you manage your finances more effectively.

In this post, we'll examine the specifics of GST on rent, focusing on residential properties and the scenarios where GST applies.

What is GST on Rent?

GST on rent refers to the tax that landlords must pay on the rental income they receive from their tenants. The GST is calculated as a percentage of the rent charged and applies to both residential and commercial properties under certain conditions. GST is generally not applicable for residential properties unless specific criteria are met. However, the rules are more stringent when it comes to GST on rental income from commercial property.

GST Rate on Renting Immovable Property

The standard GST on rental income for renting out immovable properties, including commercial spaces, is 18%. This tax is calculated based on the rent amount received from the tenant. In this context, the landlord, considered a service provider, is responsible for collecting and paying this GST to the government.

For example, if the monthly rent for a commercial property is ₹ 30,000, the GST would be calculated as follows:

GST = (₹ 30,000 x 18%) = ₹ 5,400

In this scenario, the landlord is required to pay ₹ 5,400 as GST on the rent received.

GST on Residential Property Rent

For residential properties, the situation is slightly different. Generally, GST on rent is not applicable when the property is rented out for residential purposes. However, there are exceptions to this rule, particularly when a registered business entity rents out the property.

When is GST on Residential Property Rent Applicable?

GST on rent becomes applicable on residential properties when the following conditions are met:

1. The property is rented to a registered business entity: If the tenant is a business that is registered under GST and the property is being used for residential purposes, GST is applicable at the standard rate of 18%.
2. The landlord is registered under GST: If the landlord's total taxable supply, including rental income, exceeds the GST threshold limit (currently ₹ 20 Lakh annually in most states), the landlord must register for GST and pay GST on rental income.

Exemptions from GST on Residential Property Rent

For most individuals who rent out residential properties, GST is not applicable as long as the property is used solely for residential purposes and the landlord's total income from taxable services does not exceed the threshold limit. This exemption significantly relieves small landlords from engaging in large-scale commercial renting.

GST on Commercial Property Rent

Unlike residential properties, GST on renting commercial property is always applicable, irrespective of the rental amount or the landlord’s income threshold. This includes office spaces, retail outlets, warehouses, and other commercial establishments.

How GST is Calculated on Commercial Property Rent

The calculation of GST on rental income from commercial property is straightforward:

GST = (Rent x 18%)

For example, if a commercial property is rented out for ₹ 50,000 per month, the GST payable would be:

GST = (₹ 50,000 x 18%) = ₹ 9,000

The landlord must collect this amount from the tenant and remit it to the government as part of their GST compliance.

Who Bears the Cost of GST on Commercial Rent?

In practice, the tenant usually bears the cost of GST on renting commercial property. The landlord includes the GST amount in the monthly rent invoice, which the tenant pays along with the rent. The landlord then remits this GST to the government.

How to Pay GST on Rental Income

If you are a landlord who is required to pay GST on rental income, you must first ensure that you are registered under GST. Once registered, you will need to follow these steps:

1. Collect GST from the Tenant
   When issuing a rent invoice to your tenant, ensure the GST amount is mentioned and included in the total amount due. The tenant pays GST along with the rent.
2. File GST Returns
   As a GST-registered individual or business, you must file regular GST returns (usually monthly or quarterly, depending on your registration type). In these returns, you must report the GST collected on rental income.
3. Pay GST to the Government
   After filing your GST returns, you must remit the collected GST to the government within the specified due dates. Failure to do so can result in penalties and interest charges.
4. Claim Input Tax Credit (ITC)
   If you are also paying GST on business expenses or other inputs related to your property, you may be eligible to claim Input Tax Credit (ITC). This credit can offset the GST you owe on rental income, reducing your overall tax liability.

Penalties for Non-Compliance

Non-compliance with GST regulations on rental income can result in significant penalties. If a landlord fails to collect GST, file returns, or pay the required GST to the government, they may face fines, interest on the unpaid amount, and even legal action. Therefore, staying informed and ensuring timely compliance with all GST requirements is crucial.

How to Determine if You Need to Pay GST on Rent

Determining whether you need to pay GST on rent involves assessing the following factors:

1. Nature of the Property:
   Is the property being rented out for residential or commercial purposes? GST is only applicable to commercial properties.
2. Type of Tenant:
   Is the tenant a registered business entity? If so, GST may apply even to residential properties.
3. Total Taxable Income:
   Does your total taxable income, including rental income, exceed the GST threshold limit? If yes, GST registration and payment are required.

Conclusion

While GST on rental income from commercial property is applicable, the rules for residential properties can be a bit more nuanced. By staying informed about the applicable rates, exemptions, and compliance requirements, landlords can avoid penalties and ensure they meet all legal obligations.