GST on Residential Rent Paid by Registered Businesses

Short answer: When a GST-registered entity, like a company or LLP, rents a residential dwelling for use as a residence (for a director or employee), it must pay 18% GST directly to the government under the Reverse Charge Mechanism (RCM). This applies even if the landlord is not registered under GST. The business paying the rent cannot claim this GST as Input Tax Credit (ITC).

What is the GST rule on renting residential property?

Generally, renting a residential dwelling for use as a residence is exempt from GST. This means if you are a salaried individual renting a house, no GST is applicable on your rent payments. However, this exemption is removed when the tenant is a person registered under the Goods and Services Tax (GST) Act. In such cases, the tax liability shifts from the service provider (landlord) to the service recipient (tenant) under what is known as the Reverse Charge Mechanism (RCM).

This rule was clarified via Notification No. 04/2022-Central Tax (Rate) and Notification No. 05/2022-Central Tax (Rate), effective from 18th July 2022. It ensures that when a business takes a residential property on rent for its employees or directors, the transaction comes under the tax net.

When does a GST-registered tenant pay GST on residential rent?

A GST-registered tenant must pay GST on residential rent only when two specific conditions are met: the property is a residential dwelling, and it is rented for residential purposes. If a GST-registered business rents a residential property to use as its office or for any commercial purpose, the landlord (if their turnover exceeds the GST threshold) is liable to charge GST under the normal forward charge mechanism. The RCM provision is triggered specifically when the end-use is residential accommodation for an employee, director, or proprietor.

This applies to all registered persons, including those under the Composition Scheme.

What is the GST rate and who pays it?

The applicable GST rate is 18% (9% CGST + 9% SGST). Under RCM, the responsibility to deposit this tax with the government lies with the tenant (the registered person), not the landlord. The tenant must calculate the GST on the monthly rent, pay it to the government through their GST portal, and file the relevant returns. The landlord, whether registered or not, has no role in this specific transaction's GST compliance. They will receive only the rent amount as agreed.

Can I claim Input Tax Credit (ITC) on this GST?

No, you generally cannot claim Input Tax Credit (ITC) on the GST paid under RCM for residential rent. Section 17(5)(g) of the CGST Act, 2017, specifically blocks ITC on goods or services used for the personal consumption of an employee. Providing residential accommodation is considered a perquisite for the personal benefit of the employee. Therefore, the GST paid becomes a direct cost to the business.

For more details on what credits are restricted, refer to our guide on blocked credits under Section 17(5).

How do I report and pay GST under RCM?

A business liable to pay GST under RCM must follow these steps:

1. Issue a Self-Invoice: The registered person (tenant) must issue a tax invoice on themselves for the rent paid to the unregistered landlord.
2. Report in GSTR-3B: The GST liability must be declared in Table 3.1(d) of Form GSTR-3B for the relevant tax period.
3. Pay the Tax: The tax must be paid in cash (through the electronic cash ledger) along with the regular GST liability for the month. It cannot be offset against any available ITC.
4. Report in GSTR-2A/2B: This transaction will not appear in GSTR-2A or GSTR-2B as the supplier (landlord) is unregistered.

This process must be completed for every month rent is paid. For a detailed guide, see our article on GSTR-3B filing.

Scenario	Landlord's Role	Tenant's Role (if GST Registered)	GST Mechanism
Salaried person rents a flat	Receives rent, no GST compliance	Not applicable	Exempt
Registered business rents a commercial office space from an unregistered person	Receives rent, no GST compliance	Pays rent, no GST liability	Exempt
Registered business rents a commercial office from a registered landlord	Charges 18% GST on invoice, files returns	Pays GST to landlord, claims ITC	Forward Charge
Registered business rents a flat for its Director	Receives rent, no GST compliance	Pays 18% GST to govt., cannot claim ITC	Reverse Charge (RCM)
Registered business rents a flat for use as its own office	Charges 18% GST if registered, files returns	Pays GST to landlord, claims ITC	Forward Charge

Worked example

Let's consider 'InnovateTech Solutions Pvt. Ltd.', a Bengaluru-based startup registered under GST. They rent a 3BHK apartment in Koramangala for their Chief Technology Officer (CTO). The monthly rent is ₹80,000.

1. Parties:

   • Tenant: InnovateTech Solutions Pvt. Ltd. (GST Registered)
   • Landlord: Mr. Anand (Unregistered individual)
   • Property: Residential dwelling used for residence.

2. Applicability of RCM: Since a registered person (the company) is renting a residential dwelling for residential purposes, RCM is applicable.

3. GST Calculation:

   • Rent Amount: ₹80,000
   • GST Rate: 18%
   • GST Liability: ₹80,000 * 18% = ₹14,400 per month.

4. Compliance by InnovateTech:

   • The company must issue a self-invoice for ₹80,000 + ₹14,400 GST.
   • It will pay ₹80,000 to Mr. Anand.
   • It will pay ₹14,400 (₹7,200 CGST + ₹7,200 SGST) to the government via its GST portal while filing its monthly GSTR-3B.
   • The company cannot claim ITC of ₹14,400. This amount is an expense in its profit and loss account.

Common mistakes

1. Assuming the Landlord is Liable: Many businesses wrongly assume that since the landlord is providing the service, they should handle GST. Under RCM, the liability is legally on the registered tenant.
2. Forgetting to Pay: Overlooking this provision is common, especially for businesses new to GST. Non-payment can attract interest at 18% per annum and penalties.
3. Incorrectly Claiming ITC: Claiming ITC on GST paid for an employee's residence is a clear violation of Section 17(5) and can lead to demand notices, interest, and penalties during a GST audit.
4. Composition Dealers Ignoring RCM: Taxpayers under the Composition Scheme often believe they are exempt from all GST complexities. However, they are still liable to pay tax under RCM, and this tax must be paid at the normal rate (18%), not their concessional composition rate.
5. Confusing Commercial and Residential Use: Applying RCM when a residential property is rented for office use is incorrect. In that case, the forward charge mechanism applies, and the landlord is liable if their turnover exceeds the threshold.

How SP & SC helps

Navigating the nuances of the Reverse Charge Mechanism can be complex and prone to errors. SP & SC Legal and Taxation Services provides end-to-end GST compliance support for businesses across India. Our team of CAs ensures you correctly identify RCM liabilities, generate self-invoices, and accurately file your returns, keeping you compliant and avoiding costly penalties. We offer comprehensive GST return filing services that cover all aspects of your monthly and annual compliance, including RCM.

Frequently asked questions

H3: What if I am a salaried person (not GST registered) renting a house?

If you are not registered under GST, the renting of a residential dwelling for your residence is exempt from GST. You do not need to do anything.

H3: What if my landlord is registered under GST?

It does not matter. If a registered person (tenant) rents a residential dwelling for residential use, the liability to pay GST is always on the tenant under RCM, regardless of the landlord's GST registration status.

H3: Does the rent amount matter for this RCM rule?

No, there is no minimum rent threshold for this provision. If the conditions for RCM are met (registered tenant, residential property for residential use), GST at 18% is payable on the entire rent amount from the first rupee.

H3: What form is used to pay this tax?

GST under RCM is reported and paid through Form GSTR-3B. The liability is declared in Table 3.1(d) and paid through the electronic cash ledger.

H3: What if the property is used as a guesthouse for the company?

If a residential property is used as a guesthouse for employees or clients on a temporary basis, it is still considered for the personal comfort of employees. ITC on such rent would be blocked under Section 17(5), and the RCM provisions would apply.

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