Discovering the GST on Rent of Residential Property

Renting properties is one of the secondary sources of income for people. Whether renting your residence to tenants or leasing it as office space to businesses, knowing the rules regarding it is essential.

GST, i.e., Goods and Services Tax, is imposed on most goods and services sold in India. Here is a detailed thesis on GST on rents of residential property. In this guide, you can understand GST better, how to calculate it, and what are the exemptions.

What is GST on Rent?

GST stands for Goods and Services Tax, which is charged on goods and services. This tax replaces other indirect taxes, like VAT, service tax, excise duty, etc. GST on rent is the tax payable on the rental income.

Before July 17, 2022, GST was applied to commercial rental places. However, from July 18, 2022, it also applies to renting homes if the person or company renting is registered under GST. The 47th GST Council meeting suggested that the person renting should pay 18% GST, but they can subtract this from their GST returns.

The new GST laws started on July 18, 2022. Renting a home is only taxable if it's rented for a business purpose. There is no GST when it's rented to an individual for personal use. Even if the owner or partner of a company rents a home for personal use, there is no GST.

What is GST on Renting a Property?

Renting out a property is considered a service supply, so GST applies to such income. GST is also applicable to rent, easement, or when it is given on lease for commercial, residential, or industrial purposes. The GST charge on renting a property differs between July 1, 2017, and July 17, 2022, and after July 18, 2022.

GST on Renting a Residential Property

GST does not apply when a residential property is leased to a registered individual for their personal use as their residence. If a residential property is rented out exclusively for residential purposes, the rental income generated from such property is exempted from GST.

GST on Renting of Commercial Property

When leasing any property for commercial purposes, a GST of 18% is levied on the taxable value, and the rent is considered a taxable supply of service.

Difference Between GST on Rent and GST on Rental Income

The GST on rental income arises when a landlord's annual rent income reaches Rs. 20 Lakh, for which they are liable to pay GST on their rental income. Meanwhile, the GST on rent is payable by the tenant if he/she is a GST-registered person and the rent is a residential property used for business activities.

The landlord pays GST on rental income, while the rent is on the tenant. When a residential property is leased for business purposes to a GST-registered individual and the GST-registered landlord earns an annual rental income of Rs. 20 Lakh, both the landlord and the tenant are required to remit 18% GST each, resulting in a combined GST liability of 36%.

Guide to GST on Rent of Residential Property

GST Applicability on Rent of Residential Property Till 17th July 2022

Before 17th July 2022, renting residential properties for residential purposes was typically exempted from GST. This means that if you were renting out a residential property solely for residential purposes, you wouldn't need to charge GST on the rent.

GST Applicability on Rent of Residential Property From 18th July 2022

From 18th July 2022, the government removed renting residential property from the exempt notification. So, a GST of 18 % is applicable on renting a residential property if the tenant of the residential property is registered under GST.

Exception from 1st January 2023

CBIC has clarified certain aspects of leasing residential properties effective 1st January 2023. If an individual who is the proprietor of a sole proprietorship registered under GST rents a residential property for personal use, GST will not be applicable starting from 1st January 2023.

Taxes on Renting a Commercial Property

As per the GST Act, 18% GST is charged on leasing or renting a property for commercial purposes. However, this ruling exempts small taxpayers with an annual turnover of less than Rs. 20 Lakh.

GST on Rent of Residential Dwellings

No GST is charged after July 18, 2022, if any property is used for residential and personal purposes. If a GST-registered individual uses any residential property, 18% GST is chargeable on the total rental income.

GST on rent of non-residential dwelling

When leasing any property for non-residential purposes, a GST of 18% is levied on the taxable value, and the rent is considered a taxable supply of service.

Impact on Landlord of Residential Property (If the tenant is registered under GST)

If the supplier (landlord/lessor) is GST registered, the rental income is considered outward supplies subject to taxation under the reverse charge mechanism. The recipient (tenant/lessee) is responsible for GST payment, eliminating any additional GST liability.

According to Section 17(2), the question of availing input tax credit does not arise, as the outward supply is taxed under RCM. If the supplier (landlord/lessor) is not GST registered, the recipient (tenant/lessee) is responsible for GST payment without incurring additional GST liability or requiring compliance under GST.

Impact on Tenant of Residential Property (If the tenant is registered under GST)

If a registered tenant leases a residential property from any individual, whether registered or unregistered, GST becomes applicable under the Reverse Charge Mechanism (RCM). The liability to pay GST is 18% with the service recipient (tenant/lessee). Additionally, the recipient can claim an Input Tax Credit (ITC) for the GST paid under reverse charge, as the rent payment qualifies as a business expenditure and is not listed among the blocked ITC items under section 17(5).

How to Calculate GST on Rented Out Properties

The rules concerning the rental of residential property were modified on 18th July 2022, following the 47th GST council meeting. Starting from 18th July 2022, GST applies to renting residential properties for residential use, but only to registered individuals. Renting a residential property for residential purposes to a registered person now falls under the Reverse Charge Mechanism (RCM) for GST payment.

GST on rented-out properties: (Rent x 18%)/100

Exemption From GST on Rent of Residential Property

Rent paid for renting residential property for use as a residence is exempt from GST. However, if the same residential property is rented for any other purpose, such as office/commercial, GST at 18% would be applicable. GST is not payable on maintenance charges for residential property.

Before July 17, 2022, no GST is applicable where a residential property is rented to a registered person in their capacity for use in their residence. However, from July 18, 2022, GST exemption is applicable only if the property is rented to a non-registered individual for personal use.

Conclusion

What is the GST on rent?

GST is a Goods and Services Tax charged on goods and services. This tax replaces other indirect taxes, like VAT, service tax, excise duty, etc. GST is also charged on renting commercial and residential property.

What is the GST on renting a property?

GST is applicable on income from rental property. GST applies to rent or easement or when it is given on lease for commercial, residential, or industrial purposes. The GST charge on renting a property differs between July 1, 2017, and July 17, 2022, and after July 18, 2022.

Difference between GST on rent and GST on rental income

• GST on rent is payable by the tenant, whereas GST on rental income is payable by the landlord.
• GST on rent is payable by the tenant if the tenant is a GST-registered person and the property is a residential property used for business activities. GST on rental income arises when a landlord's annual rent income reaches Rs. 20 Lakh, for which they are liable to pay GST on their rental income.

Guide to GST on Rent of Residential Property

• Before July 17, 2022, no GST was applicable on properties used for residential purposes.
• From July 18, 2022, a GST of 18% is applicable on renting a residential property if the tenant is registered under GST.
• If an individual who is the proprietor of a sole proprietorship registered under GST rents a residential property for personal use, GST will not be applicable starting from January 1, 2023.
• 18% GST is charged on the rental income for a property used for commercial purposes.

How to calculate GST on rented out properties?

GST on rented-out properties= (Rent x 18%)/100

Exemption from GST on rent of residential property

• Rent paid for renting residential property for use as a residence is exempt from GST.
• Before July 17, 2022, no GST is applicable when a residential property is rented to a registered person in their personal capacity for use as their own residence.