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Impact of GST on Rent

Impact of GST on Rental Income

With the implementation of GST or Goods and Services Tax, collecting taxes from various sectors has become extremely convenient and structured. One such sector that has been the source of income for many over the years is rent. In this article, we shall highlight the impact that GST has had on rent post implementation. Let us also understand scenarios where GST varies for commercial as well as residential properties.

Pre-GST Rules

Before the introduction and implementation of GST, the owner of the property had to get a service tax registration done, in case his total taxable service exceeds Rs.10 lakhs per year, inclusive of the rental income from all his properties. On the other hand, if his taxable income from all properties did not add up to more than Rs. 10 lakhs, then the landlord would not be charged with service tax. Another significant rule was that only commercial properties that have been rented out would be obliged to pay service tax @ 15%. This would be applicable even if a residential space has been rented out for commercial use. While rental income from residential properties did not levy service tax, the same tax of 15% was applicable on rent for commercial properties.

Post GST Rules

After the introduction of GST, a significant transformation has been seen in the tax collection process. Not only has it become streamlined, but has also become uniform in a lot of sectors, thereby affecting rental income in the same way. Now, for renting out a residential property, one would not have to pay any GST as it is exempt from the same. Also, post implementation of GST, the threshold limit of applicability has been revised from Rs. 10 lakhs to Rs. 20 lakhs for businesses and any other type of lease or renting.

What is the effect of GST on rent?

GST has positively affected the rental income of an individual. As mentioned earlier, when a property is rented out, only for residential purpose, the same is exempt from Goods and Services Tax. However, it is important to note that any type renting out (except residential) or lease of immovable asset for commercial reasons attracts a GST at 18%, as it is considered a supply of service.

As it is aforementioned before, the applicable threshold limit of GST has been increased to Rs.20 lakh from Rs.10 lakh, after GST was implemented. This has favoured land owners, thereby relaxing them of another Rs. 10 lakhs income earned.

Let us understand this with an example-

Mr. Sharma, who lives in Mumbai, has let out his property in Goa. As a rental income, he receives Rs. 5 lakhs annually. Now, Mr. Sharma is not obliged to register himself under GST as his rental income does not exceed Rs. 20 lakhs. Also, his place of supply is Goa, which is an immovable asset.

However, if Mr. Sharma had rented out his property in Goa for a commercial purpose for Rs. 2 lakhs per month, he would have to register for GST as his annual rental income would come to Rs. 24 lakhs.

How to calculate GST when you rent out a property for commercial purposes?

Following are the ways to calculate GST when a property is rented out for commercial purposes-

  • In case of commercial spaces on rent, the applicable GST will be calculated at 18% on the taxable income as rent here is treated as supply of service.
  • Rent for shops and other business spaces is Rs. 10,000 or less per month
  • Rent for community halls or any open area is Rs. 10,000 or less per day
  • In case a registered charitable trust or religious trust owns and manages a religious place that is open for the common folk, such spaces are exempt from GST. However, this is applicable only if, the rent of these rooms is less than Rs. 1000 per day.

In case of a rented property, what are the provisions for a tax deduction on income tax?

By rule, the landlord or owner of the property given on rent needs to collect applicable GST from the tenant or person paying rent. The amount of GST will be levied on the rent charged. The person paying the rent needs to deduct TDS at 10%, in case the rental amount for the property is more than Rs.1.80 lakh per year. Moreover, TDS applies for both residential and commercial properties. On TDS, there will no GST.

It is vital to note that GST on rent charged for immovable properties by local authorities or the government for a registered person features under Reverse Charge Mechanism. But in case the property is rented to a non- registered person, the government has the right to deduct GST on their own which is called the Forward charge mechanism.

Frequently Asked Questions

What is GST?

Goods and Services Tax (GST) can be defined as ‘an indirect tax (or consumption tax) imposed in India on the supply of goods and services.’

How much TDS is applicable on Rental income?

An individual paying the rent needs to deduct income tax at source at 10%, in case the annual rent of the property is more Rs.1.80 lakhs. Moreover, TDS applies for both residential and commercial properties.

How does GST affect Rent?

The landlord or owner of the property that has been rented out needs to collect GST from the person who pays the rent. This GST will be on the amount of rent payable.

Are individuals required to register when they rent the property to business? If yes, who needs to do so?

A taxpayer who earns excess of the exempted threshold needs to register under GST and pay taxes. So, in case the individual has given the property for commercial use, then he/she will have to register themselves under GST, if he/she gets more than Rs. 20 lakhs as annual rent.

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