Are you not sure whether to collect GST on residential property rent you receive? When renting a home or a business, the GST is handled differently. On the other side, if you own a business, paying rent is one of those essential expenses; therefore, you might be interested in learning whether you are eligible to claim an Input Tax Credit (ITC) for the GST you paid on the rental expense. Let’s examine each one of these in more detail.

GST on Rent

GST stands for Goods and Services Tax is laid on the goods and services provided. This multi-stage, destination-focused tax, which replaces a number of indirect taxes, including VAT, excise duty, service taxes, etc., is levied on every value addition.  

The rent of a commercial property was subject to the GST until July 17, 2022. The GST Council has removed the prior exception to the GST rule that applied to the rents of residential units. From July 18, 2022, the GST will be charged if the residence is rented by the person or company registered under GST. The 47th GST Council meeting recommended that the renter make a reverse charge (RCM) payment of 18% GST. However, they can still pay sales tax and deduct this sum from their GST returns. 

The government has clarified the new GST legislation on rent that came into effect on the 18th of July. PIB stated in a tweet that “renting residential property is taxable only when rented to a business entity.” It is further clarified that “there is no GST when it is rented to an individual for personal use; there is no GST even if the owner or partner of the companies rents a residential property for personal use. 

GST on Rental Income 

The Ministry of Finance excluded income from renting out a residential or commercial property for a business purpose up to INR 20 Lakh from taxation. However, regardless of income level, the GST on residential property rent for personal use will be NIL. As a result, renting out property will be considered a provision of services under the GST Act. The Ministry set the GST on rent at 18%, and the place of supply would serve as the immovable property’s location. 

However, GST is only applicable to certain types of rent, which are listed below:

• When a landlord provides an immovable property for a lease, rent, easement, or permission to occupy.  
• When an immovable property is leased out for commercial, industrial, or residential purposes, either partially or entirely. 

Difference Between Gst on Rent and Gst on Rental Income

The concept of GST on rent and GST on rental income is different. The landlord is concerned about GST on rental income. It occurs when the landlord is required to pay a particular amount of GST on whatever rent income he receives.  

The tenant, on the other hand, is concerned with GST on rent. If the tenant is a GST-registered entity and utilises a residential property for business purposes, they must pay GST, which is frequently included in the rent. This means that GST would apply to their rent.  

In brief, the landlord pays GST on rental income, whereas the renter pays GST on rent. 

Who Needs to Register When the Property is Rented Out for Commercial Use? 

A taxpayer who earns more than the exempted level must register for GST and pay taxes. Therefore, it is taxable if you have given your property to a business. You must register with the GST if you make more than Rs. 20 lakhs in annual income, including rent and any other exempt income. 

The GST threshold limit for people merely providing services is Rs. 20 Lakh, which is higher than the Service Tax of Rs. 10 Lakh. This puts many landlords at ease who were previously subject to the Service Tax rule as they can now earn an additional Rs. 10 Lakh. 

Remember that the threshold limit of Rs. 20 Lakhs remove special category states, where the limit remains at Rs. 10 Lakh. 

Let’s look at an example

Sweta lives in Mumbai and owns an apartment in Hyderabad that she rents out to ABC ltd. for use as a guest house. She earns Rs. 50,000 per month, or Rs. 6,00,000 per year, from the Mumbai property alone. The location of the immovable property shall be the place of supply under GST. 

As a result, even though the person lives in Mumbai, the place of supply will always be Mumbai in this case because that is where the property is located. Sweta doesn’t have to apply for GST on residential property because the total revenue, in this case, is less than 20 lakhs per year. 

It should be highlighted that despite the fact that this property is used for residential purposes, it cannot be argued that the rent revenue comes from the residential property since it is rented out to a business. The fact that how they utilised the abovementioned property is not the deciding factor. 

GST Method if the Property is Rented Out for Business Purposes

• GST will be levied at 18% on the taxable value of all business areas that are rented, and rent will be recognised as a taxable supply of service. 
• A registered charitable or religious trust that owns and manages a public religious place is free from GST. This is only possible if-

1. The rent for these rooms is less than Rs. 1000 per day. 
2. The cost of renting a community hall or any space is less than Rs. 10,000 per day. 
3. The rent of shops and other business areas costs less than Rs 10,000 per month.

Input Tax Credit

The person paying GST on residential property rent can normally use the credit to meet his other tax obligations. In other words, ITC on GST paid on rent can be claimed if all requirements for claiming Input Tax Credit are met.

What is the Condition for an Income Tax Deduction for a Rented Property?

The property owner, who is renting out the space, must collect the GST from the tenant. This GST will be added to the rent amount. If the rent of the property reaches Rs. 2.40 lakh per year starting in the AY 20-21, the rent payer must deduct 10% income tax at source. TDS applies to both residential and commercial premises. TDS will not be applicable to GST

Remember: GST on immovable property rent charged by the government to a registered person shall be subject to the Reverse Charge Mechanism. When the property is rented to a person who is not registered, the government will deduct GST (Forward charge mechanism). 

Conclusion 

GST on rent has been explained in-depth to you above. If you still have any doubts regarding this or need GST registration for your rented residential or commercial property, you can reach out to our experts here at Online Legal India, who will clarify all your queries and provide the legal assistance you need.