Understanding GST On Rental Income

GST implementation in 2017 brought significant changes regarding taxes on rental income. Before GST, taxes on rental income were referred to as service tax. Understanding GST on rental income is vital if you are involved in real estate transactions.  

Real estate has an emerging trend; people are investing in commercial and residential properties for rental income. They extract substantial rental income, but not being aware of GST compliances, they get penalised or pay more taxes than they should. This article will simplify GST on rental income and answer all your queries.

What are the rules for tax deductions on rental income before GST?

If you are in India and earning rental income on your property, then you are liable to obey all the rules and regulations under GST. However, some criteria should be met; you are only liable to pay GST; otherwise, you will be exempted. 

Before the introduction of GST, landlords were required to register them under service tax if the value of total taxable services, including rental income, exceeds Rs.10 lakhs per annum.

Service tax on rental income applied only to commercial or residential properties used for commercial purposes. In simple terms, if a property was rented out for business activities, a service tax of 15% was charged on the rental income. 

Is GST applicable on rental income?

Under the GST Act, renting out an immovable property is treated as providing a service. This means GST is applicable when you rent, lease, or give someone the right to use a property. However, GST is only charged in specific situations:

When commercial, industrial, or residential properties are rented out for business purposes, GST applies if a property, whether a shop, office or even a house, is rented out for business activities. This can be a part or the whole of the property. For example, if you lease out an office space to a company, GST will be charged on the rent.

Exceptions for residential properties: If you rent out a house or apartment for someone to live in, it does not count as providing a service under GST rules. This rental income is exempt from GST so that no tax will be charged. If the property is used for living, there is no GST. But GST will be applied to the rent if it's used for business.

Is GST applicable to the rent of residential property in India?

Yes, GST is exempted on rentals from residential properties regardless of whether a person is registered under GST. But if you rent out your residential property for commercial use, you will be liable to pay GST. 

GST on rental income from commercial property

GST on Commercial Property Renting

When a commercial property is rented out, it attracts GST at 18% on the rent amount. This means renting out commercial spaces, such as offices, shops, or warehouses, is considered a taxable service, and GST must be added to the rent. Property owners must be registered under GST to collect and pay this tax.

Exemption for Religious and Charitable Trusts

Certain exemptions apply to religious and charitable trusts if they own or manage a place meant for the public. For these trusts to benefit from the GST exemption, they must meet specific conditions:

       •  Room Rentals: If the rent for rooms is less than 1,000 per day, GST will not apply.
       •  Shop Rentals: No GST is charged if the rent for shops is less than 10,000 per month.
       •  Open Areas or Halls: If the rent is less than 10,000 per day, it is exempt from GST for renting open spaces or community halls.

These conditions help ensure that religious and charitable places remain affordable for the public without the added cost of GST. When renting out a property, the landlord has to pay GST (Goods and Services Tax) on the tenant's rent. 

How to calculate GST on rental income?

The current GST rate for renting an immovable property is 18%. You must add 18% of the rent amount as GST if you rent a property. To understand how this works, let’s look at a simple example. Suppose you rent out a commercial property, which is Rs.25,000 per month. 

To determine how much GST you need to pay, multiply the rent amount by 18%. In this case

       •  it would be 18% of Rs.25,000
       •  which equals Rs.4,500

So, the landlord will have to pay Rs.4,500 as GST each month along with the rent.

GST clause in rent agreement

A rent agreement for GST registration should clearly outline important clauses related to the use of the property, maintenance, subletting, and termination. These clauses ensure clarity between the landlord and tenant regarding their rights and responsibilities. As you know GST on rent is only applicable in case of commercial property. So it will only include clauses regarding to that.

Purpose of Use
The agreement must specify that the property is being used for business purposes.

Subletting
Clearly state whether subletting the property is allowed or prohibited.

Maintenance and Repairs
Outline the responsibilities for maintaining and repairing the property.

Termination
The agreement should define the conditions under which either party can terminate the agreement.

GST Registration
A rent agreement is required for GST registration if the annual rental income exceeds 50 lakhs. Landlords must register under GST if their annual rental income exceeds 20 lakh (10 lakh in special category states).

GST on Rent

•  Renting a residential property for residential purposes is exempt from GST.
•  Renting out a property for commercial purposes attracts a GST rate of 18%.
 

New Updates regarding GST and TDS on Rent

New GST Rules For Rent

As per the 48th GST Council's clarification, GST is not applicable on the rent of residential properties. This means that if a property owner rents out their house to you for residential use, you will not be required to pay any GST on the rent. 

However, keep in mind that if your total income, including income from rent, falls within the taxable income bracket, it will be subject to tax according to the applicable tax slabs.

New TDS rules For Rent

The annual TDS threshold for rent has increased from ?2.4 lakh to ?6 lakh, meaning no TDS is required for rent up to ?6 lakh. For monthly rent, the threshold is ?50,000. TDS rates remain 10% for land and buildings and 2% for plant and machinery. This reduces compliance burdens.

Conclusion 

Understanding the GST on rental income is essential for property owners to avoid penalties and ensure compliance. GST applies to commercial properties rented out for business purposes at a rate of 18%, while residential rentals used for living are exempt. 

Property owners should know the rules and conditions to manage their tax obligations efficiently and avoid unnecessary expenses. Being informed will help you make better financial decisions.