Property owners often question whether Goods and Services Tax (GST) applies to their rental income. The application of GST varies significantly for residential and commercial properties. For businesses, rent is a key expenditure, and understanding eligibility for Input Tax Credit (ITC) on GST paid for rental expenses is crucial. This guide will explore these details. The lease or rental of immovable property for business activities is subject to 18% GST as a service. Specifically, commercial property rentals incur an 18% GST rate, categorized as a taxable service. Recent updates indicate that as of October 3rd, 2024, the Supreme Court has clarified that Input Tax Credit can be claimed on construction for commercial rental services. The court stated that if building construction is vital for providing services like commercial leasing, it may qualify under the 'plant' exception of Section 17(5)(d) of the CGST Act. This section generally restricts ITC claims on construction materials for immovable property, with an exception for plant and machinery.

Pre-GST Rental Income Taxation

In the period before GST implementation, landlords needed to register for service tax if their total taxable services, including rental income from all properties, surpassed Rs. 10 lakh annually. Service tax was not applicable if the total rental income remained below this threshold. Under the previous tax system, only commercial properties leased out were subject to service tax, even if a residential property was utilized for commercial activities. Service tax on commercial properties was charged at 15% of the rent. Conversely, rental income from residential properties was exempt from service tax.

Does Property Rental Fall Under GST?

The GST Act categorizes renting immovable property as a supply of services. However, GST applies only to specific rental scenarios, including:

• Properties provided on lease, rent, easement, or licensed for occupation.
• Any property, whether commercial, industrial, or residential, leased for business purposes (in part or full).

Such rentals are classified as a supply of services and are therefore taxable.

Renting a residential property for residential use is generally exempt from GST. All other types of leases or rentals of immovable property for business activities are subject to an 18% GST, as they constitute a taxable service.

No GST on Residential Property Leased for Personal Residence

The 48th GST Council meeting clarified that GST is not applicable when a residential property is rented to a registered individual for their personal use as a residence. This exemption holds true if a registered individual, such as the proprietor of a firm, leases a residential property in their personal capacity for their own dwelling, rather than in the name of their business.

GST Registration Requirements for Business Property Rentals

Taxpayers whose income exceeds the exemption threshold must register for GST and pay the applicable taxes. If you rent your property to a business, the income is taxable. If your total business income, encompassing rent and any other exempt income, surpasses Rs. 20 lakh per year, GST registration becomes mandatory.

The threshold limit for applicability of GST for those providing only services is Rs. 20 lakh, an increase from the Rs. 10 lakh limit under the previous Service Tax regime. This higher limit eases the burden for many landlords who were previously subject to Service Tax. (It is important to note that this Rs. 20 lakh threshold does not apply to special category states, where the limit remains at Rs. 10 lakh.)

Example: Consider Manish, who lives in Bangalore but owns a property in Hyderabad rented to B Ltd. for use as a guest house. This property generates Rs. 30,000 monthly, or Rs. 3,60,000 annually. Under GST, the place of supply is determined by the property's location. Thus, even though Manish resides in Bangalore, the supply location is Hyderabad. Since his total income is below Rs. 20 lakh per year, Manish is exempt from GST registration.

It is crucial to understand that even if a property is used for residential purposes by a company, the rental income is not considered residential rent if the property is leased to a business entity. The tenant's use of the property is not the sole determinant.

Determining Place of Supply for CGST, SGST, or IGST

The landlord or property owner can choose to register for GST in a state different from where the property is located. It is essential to determine the place of supply to ascertain whether Central GST (CGST) and State GST (SGST) or Integrated GST (IGST) should be applied. Here are various scenarios:

Scenario 1: Taxpayer and Property in Different States

When the taxpayer is registered in a state distinct from the property's location, the place of supply is considered the property's location. This constitutes an interstate supply, and IGST is applicable. For instance, if a GST-registered individual in Bangalore rents a commercial property in Haryana, 18% IGST would be charged. The individual is not required to register for GST in Haryana.

Scenario 2: Landlord and Tenant Registered in the Same State as Property

If both the landlord and the tenant are registered in the same state where the property is situated, then 9% CGST and 9% SGST will be levied. For example, if a Maharashtra-registered individual rents out a commercial property in Hyderabad, then 9% CGST and 9% SGST would be charged.

Scenario 3: Landlord Registered in Property State, Tenant in Another State

If the landlord has taken GST registration in the same state in which the property is situated, then it is a case of intrastate transaction. So, both CGST and SGST would be charged irrespective of the location of GST registration of the tenant. In such cases, the tenant cannot take the input tax credit of CGST and SGST if he is not registered in the same state where the property is situated.

For instance, Mr. PQR from Kochi travels to Bhopal for a client meeting and stays in ABC Hotel. He books a room and pays rent of Rs. 15,000. The owners of ABC Hotel are registered in Bhopal, and the hotel is also in Bhopal. Thus, both CGST and SGST would be applied. However, Mr. PQR cannot claim ITC on this GST since the CGST and SGST pertain to a different state than his own GST registration.

GST Rules for Commercial Property Rentals

All commercial properties leased out are subject to an 18% GST on their taxable value, as rent is categorized as a taxable service supply. However, specific exemptions apply to religious or charitable trusts that own and manage public religious places, provided certain conditions are met:

• Room rentals must be below Rs. 1,000 per day.
• Shop and business space rentals must be less than Rs. 10,000 per month.
• Community halls or open area rentals must be under Rs. 10,000 per day.

Calculating GST on Rental Properties

For commercial properties given on rent, GST is computed and applied to the total rent amount due in each billing cycle. When an invoice is issued periodically, the applicable GST (either 9% CGST and SGST or 18% IGST) is calculated based on the rent payable.

Input Tax Credit (ITC) Provisions on Rent with GST

Generally, individuals or entities paying GST on rent are eligible to claim Input Tax Credit for the tax paid. This allows them to offset their other tax liabilities, provided all conditions for claiming ITC are met.

Is ITC Permitted for Property Repairs and Renovations?

Input Tax Credit (ITC) is allowed for GST paid on expenses like repairs, maintenance, and brokerage related to rented properties, provided these costs are not capitalized.

However, Section 17(5) of the CGST Act prohibits taxpayers from claiming ITC on certain expenditures. This includes the purchase of goods or services for constructing an immovable property on one's own behalf, even if for business purposes. Other expenses, such as non-capitalized repairs and brokerage for rental property, are eligible for ITC claims by the landlord.

Income Tax Deduction Provisions for Rental Property Owners

The property owner is responsible for collecting GST on the charged rent from the tenant. Additionally, the tenant must deduct income tax at source (TDS) at a rate of 10% if the annual rent exceeds Rs. 2.40 lakh, effective from Assessment Year 20-21. This TDS applies to both residential and commercial properties, and GST is not levied on the TDS amount.

Key Consideration: When immovable properties are rented by the government or a local authority to a registered individual, GST is applied under the Reverse Charge Mechanism. Conversely, if the property is leased to an unregistered person, the government will collect GST using the Forward Charge Mechanism.