GST on Rent: Residential vs Commercial and the RCM Twist
The 18% GST on commercial rent, RCM on renting from unregistered persons, and residential exemptions.
GST on Rent: Residential vs Commercial and the RCM Twist
Understanding GST on rental income in India is crucial for property owners and tenants alike. Generally, renting out commercial property attracts 18% GST. However, residential property rentals are usually exempt, unless rented to a GST-registered person, in which case the registered tenant must pay GST under the Reverse Charge Mechanism (RCM). This article clarifies these nuances, including Input Tax Credit (ITC) implications and TDS provisions.
Is GST applicable to rental income from residential property?
Generally, GST is not applicable to rental income from residential property when it is rented out for residential purposes. However, a significant exception exists: if a residential dwelling is rented to a person registered under GST, the GST will be applicable under the Reverse Charge Mechanism (RCM).
Prior to July 18, 2022, renting a residential dwelling for residential use was entirely exempt from GST. However, Notification No. 04/2022 – Central Tax (Rate) dated July 13, 2022, amended Notification No. 12/2017 – Central Tax (Rate) dated June 28, 2017, to remove this exemption when the recipient is a GST-registered person. This means if you, as a GST-registered individual or business, rent a residential property for your own or your employees' residential use, you are liable to pay GST at 18% under RCM. The property owner, if unregistered, does not need to charge GST. If the property owner is registered, they still do not charge GST; the liability remains with the registered tenant under RCM.
Is GST applicable to rental income from commercial property?
Yes, GST is applicable to rental income from commercial property at a standard rate of 18%. This applies regardless of whether the landlord or the tenant is GST-registered, provided the landlord's aggregate turnover exceeds the GST registration threshold.
Renting of commercial property, such as office spaces, shops, or warehouses, is classified as a 'supply of service' under the GST regime. As per Entry 17 of Notification No. 11/2017 – Central Tax (Rate) dated June 28, 2017, "Renting of immovable property" is subject to GST at 18%. The landlord, if registered under GST, is responsible for collecting and remitting this GST to the government. If the landlord's turnover is below the threshold for GST registration (e.g., ₹20 lakhs for services in most states), they are not required to charge GST.
What is the Reverse Charge Mechanism (RCM) for residential rent?
The Reverse Charge Mechanism (RCM) for residential rent means that when a GST-registered person rents a residential dwelling, the GST liability shifts from the landlord (supplier) to the tenant (recipient). The tenant is then responsible for paying the GST to the government.
This mechanism was introduced by Notification No. 04/2022 – Central Tax (Rate) dated July 13, 2022. Specifically, it amended Notification No. 13/2017 – Central Tax (Rate) dated June 28, 2017, to include "Service by way of renting of residential dwelling to a registered person" under the ambit of RCM. This means:
- The landlord does not issue a GST invoice or collect GST.
- The registered tenant must calculate the GST (18% on the rent amount), issue a self-invoice, and pay the GST to the government.
- The tenant must report this transaction in their GST returns (GSTR-3B).
This RCM provision applies even if the registered person is renting the residential dwelling for personal use or for the use of their employees, as long as the tenant entity itself is GST-registered.
Can tenants claim Input Tax Credit (ITC) on rent paid?
The eligibility to claim Input Tax Credit (ITC) on rent paid depends on whether the rent is for commercial or residential property, and the purpose for which it is used.
For commercial property rent, a GST-registered tenant can generally claim ITC on the GST paid, provided the property is used for business purposes and is not subject to any specific ITC blocking provisions. The GST paid on commercial rent is a direct business expense, and therefore, the ITC can be utilised to offset the tenant's outward GST liability.
For residential property rent, when GST is paid under RCM by a registered tenant, the eligibility for ITC is more nuanced. If the residential dwelling is rented for the personal use of the proprietor or partners, or for the personal use of employees, ITC is generally not allowed. This is because Section 17(5)(g) of the CGST Act, 2017, blocks ITC on goods or services used for personal consumption. However, if it can be demonstrated that the residential dwelling is used for business purposes (e.g., as a temporary accommodation for business operations, though this is rare for a 'residential dwelling'), ITC might be permissible, but this is a grey area and subject to interpretation. Most commonly, ITC on residential rent paid under RCM is not available.
How does Section 194-IB of the Income Tax Act interact with GST on rent?
Section 194-IB of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on rent payments exceeding ₹50,000 per month, but it operates independently of GST provisions. This section requires individuals or Hindu Undivided Families (HUFs) who are not subject to tax audit to deduct TDS at 5% on such rent payments.
The key points of interaction and distinction are:
- Applicability: Section 194-IB applies to individuals/HUFs paying rent above ₹50,000/month, regardless of whether the property is commercial or residential, and irrespective of GST applicability.
- Threshold: The ₹50,000 monthly threshold for TDS under 194-IB is distinct from the GST registration thresholds.
- Deduction Basis: TDS under Section 194-IB is to be deducted on the total rent payable, which includes the GST component if the rent agreement specifies GST as part of the rent. However, if the GST component is separately shown and the recipient is a GST-registered person, TDS should ideally be deducted on the rent amount excluding GST, as per CBDT Circular No. 23/2017 dated July 19, 2017. This circular clarifies that if GST is indicated separately in the invoice, TDS should be deducted on the amount excluding GST.
- Compliance: The person deducting TDS under 194-IB must deposit the tax using Form 26QC and issue a TDS certificate in Form 16C. This is a separate compliance requirement from GST.
Therefore, a tenant might be liable to pay GST under RCM (if registered and renting residential property), pay GST to the landlord (if renting commercial property), and also deduct TDS under Section 194-IB, all on the same rental transaction, depending on the specific circumstances.
Comparison of GST on Residential vs. Commercial Rent
| Feature | Residential Property Rent (to Unregistered Person) | Residential Property Rent (to Registered Person) | Commercial Property Rent |
|---|---|---|---|
| GST Applicability | Exempt | Applicable | Applicable |
| GST Rate | N/A | 18% | 18% |
| Payer of GST | N/A | Registered Tenant (under RCM) | Landlord (under Forward Charge) |
| Landlord's GST Registration Required? | No, for this specific supply | No, landlord is exempt for this supply | Yes, if turnover exceeds threshold |
| Tenant's ITC Eligibility | N/A | Generally not available (if for personal use) | Generally available (if for business use) |
| Relevant Notification | Notification No. 12/2017 – Central Tax (Rate) (as amended) | Notification No. 13/2017 – Central Tax (Rate) (as amended by 04/2022) | Notification No. 11/2017 – Central Tax (Rate) |
| TDS under 194-IB | Applicable if rent > ₹50,000/month | Applicable if rent > ₹50,000/month | Applicable if rent > ₹50,000/month |
How SP & SC helps
Navigating the complexities of GST on rental income, including RCM, ITC, and TDS provisions, can be challenging. SP & SC Legal and Taxation Services provides expert guidance and comprehensive support for GST compliance, including accurate GST return filing. Our services ensure you meet all statutory obligations, avoid penalties, and optimise your tax position, whether you are a property owner or a tenant. Visit our GST Return Filing service page for more details.
Frequently asked questions
What happens if an unregistered landlord rents a residential property to a GST-registered tenant?
If an unregistered landlord rents a residential property to a GST-registered tenant, the landlord does not need to register for GST or charge GST. The GST-registered tenant is solely responsible for paying GST at 18% under the Reverse Charge Mechanism (RCM) and fulfilling all associated compliance requirements, including self-invoicing and reporting in their GST returns.
Is GST applicable if a company provides residential accommodation to its employees and pays rent for it?
Yes, if a company (which is a GST-registered person) pays rent for a residential dwelling to house its employees, the company is liable to pay GST at 18% under the Reverse Charge Mechanism (RCM). The company will act as the recipient of the service and must remit the GST to the government, even if the landlord is unregistered.
Can a landlord charge GST on residential rent if they are GST-registered?
No, a landlord, even if GST-registered, cannot charge GST on residential rent if the tenant is also GST-registered. In such a scenario, the liability to pay GST shifts entirely to the GST-registered tenant under the Reverse Charge Mechanism (RCM). The landlord's supply of residential dwelling for residential use to a registered person is specifically covered under RCM.
What is the GST rate on renting out a hotel or guest house?
Renting out a hotel, guest house, or similar commercial accommodation is generally subject to GST. The GST rate depends on the declared tariff per unit per day. If the declared tariff is up to ₹7,500, the GST rate is 12%. If the declared tariff is above ₹7,500, the GST rate is 18%. This is considered a supply of service and falls under different GST rate schedules than general immovable property rentals.
Does GST apply to renting out vacant land?
Yes, renting out vacant land for commercial purposes, such as for hoardings, parking, or temporary structures, is considered a supply of service and is subject to GST at 18%. However, if the vacant land is rented as part of a composite supply of construction services or for agricultural purposes, specific exemptions or different rates might apply.