GST on Rent: A Comprehensive Guide for Residential Tenants
April 20, 2023
The subject of GST on rent has led to a lot of uncertainty for both tenants and landlords. The introduction of Goods and Services Tax (GST) in India in 2017 has become a critical component of the country’s taxation system. However, comprehending the consequences of GST in the rental industry can be difficult, and it is necessary to have a thorough understanding to prevent any misunderstanding or fines.
That’s why in this comprehensive guide we will be focusing on GST on rent for residential tenants. We’ll cover all the crucial aspects of the GST regime as it relates to renting a home, including when GST is applicable, what type of rental accommodation is applicable for, and who is responsible for paying for it. We’ll also address the impact it has on tenants and landlords.
So, let’s dive in!
GST On Rent: Eligibility & Exemptions Explained for Residential Tenants
Starting from 18th July 2022, if a residential property is rented or leased by an individual or entity that is registered under GST, then the rent will be subject to GST. Under a reverse charge mechanism (RCM), the tenant is liable to pay 18% GST and can claim it as a deduction while filing GST returns for sales tax. This rule is applicable only to tenants who are registered under GST and renting for residential purposes. Prior to this date, GST was only applicable to the rent of commercial properties.
However, there are conditions for eligibility and exemptions to this rule.
Exceptions for GST on Rent
Suppose Mrs. Sharma owns a house that she has rented out to a family for personal residential use. The monthly rent for the house is Rs. 25,000. As per the GST Council’s guidelines, since the property is being used for residential purposes, GST is not applicable on the rent received. Therefore, the tenant does not have to pay any GST on the rent of Rs. 25,000 per month.
As per the GST Council, residential properties that are leased out for residential purposes, such as houses, apartments, and villas, are not subject to GST. This implies that if you are renting a residential property for personal use, regardless of the amount of rent paid, GST is not applicable to the rent. This exemption applies to all types of residential properties, whether they are newly constructed or already built.
In addition, if a property is rented out for charitable or religious purposes, GST will not be applicable to the rental income, subject to certain conditions. For example, if the rent for a room is below Rs. 1,000 per day, or if the rent for a shop is below Rs. 10,000 per month, or if the rent for a community hall or open space is below Rs. 10,000 per day, then the exemption from GST will be applicable.
It’s also important to note that the exemption applies only to rental properties that are used solely for residential purposes. If a landlord rents out both residential and commercial portions of a property, GST will be applicable only on the commercial portion of the rent. Additionally, if a landlord provides any additional services or facilities, such as housekeeping or maintenance, in exchange for rent, GST will be applicable to those services.
Impact of GST on Rent on Tenants and Landlords
The impact of GST on tenants and landlords depends on various factors such as the type of rental property, rental amount, and GST registration status. In general, GST on rental transactions can increase the financial burden on both parties, as the tax is added on top of the rental amount. Tenants may end up paying higher rent, while landlords may see a decrease in demand for their rental properties due to the increased cost. There’s also the additional time and resources on record-keeping, tax compliance, and paperwork related to GST
What Types of Rental Accommodations & Fees are Subject to GST
GST on rent also depends largely on the type of rental accommodation and the expenses incurred as fees to obtain or while obtaining it. The following is a list of accommodation and fees that are subject to GST on rent.
- Residential properties rented out for commercial or business purposes
- Commercial properties, such as shops, offices, warehouses, and godowns
- Renting of a hotel room, including guest houses, service apartments, and lodging houses
- Renting of banquet halls, community halls, and other commercial venues for events and functions
- Any additional services provided by the landlord, such as housekeeping, catering, or laundry services, that are not included in the rental agreement.
- If you are using a broker to rent a property, the brokerage fees charged by the broker are subject to GST.
It needs to be emphasized that the GST rates and rules may vary based on the state and location of the rental property.
Confusion and complexity of understanding the GST regulations and how they apply to rental transactions can be complicated and time-consuming, causing stress and frustration for tenants and landlords alike.
GST also brings certain benefits for both tenants and landlords. For example, tenants can claim input tax credit on the GST paid on rent if they are registered under GST. This can help offset some of the financial burden of paying GST.
Under the new rule, if a tenant who is registered for GST rents a property, they have to pay GST on the rent and then claim back this tax paid as input tax credit (ITC). However, there are some restrictions on what GST can be claimed back. Section 17(5)(g) of the Central Goods and Services Tax Act says that GST cannot be claimed back for services used for personal consumption – it must be for business purposes only.
In a recent decision by the Tamil Nadu Authority for Advance Ruling (AAR), it has been permitted to claim back GST on upfront lease premiums that are non-refundable payments made for long-term leases of industrial plots or plots for the development of financial business infrastructure. This is a significant change because such claims were not allowed previously by tax authorities on the grounds that these payments were similar to real estate transactions where GST was not claimable. Additionally, the AAR ruling also states that GST can be claimed back for upfront lease premiums used for the construction of property categorized as ‘plant and machinery’.
Landlords too can claim the input tax credit on the GST paid on services used for maintaining and managing their rental property.
Conclusion
It is essential for both landlords and residential tenants in India to have a clear understanding of the impact of Goods and Services Tax (GST) on rent. Effective from 18th July 2022, GST is imposed on residential property rent if a GST-registered person/entity rents or leases it. The tenant is required to pay 18% GST on a reverse charge basis (RCM), but they can claim it as a deduction when paying taxes on sales through GST returns. However, exemptions and eligibility conditions apply to this regulation. Landlords must follow all relevant GST rules and regulations, and the GST rate on rent varies based on the property type and rental purpose. The exemptions only apply to residential properties that are solely used for residential purposes. To prevent confusion or penalties, it is important to be well-versed in the details of GST on rent.
Like the vast topic of GST, GST on residential rent is also a huge and complex sub-genre of the same. Every person has their own variables which need professional and customized attending and guidance. Therefore, it’s advisable to consult a professional tax expert with access to specific details regarding the GST on rental accommodations along with local resources.
FAQs
Is GST charged on rent?
GST is levied on the rent of residential property in India if it is rented or leased by a GST-registered entity, and tenants must pay 18% GST on a reverse charge basis (RCM). The GST amount paid can be claimed as a deduction while paying tax on sales in GST returns. The new regulation applies only to residential properties and only to GST-registered tenants. Before 18th July 2022, GST was only applicable to commercial properties. However, there are specific eligibility criteria and exemptions for this rule, depending on factors such as the type of property, purpose of the rental, and annual rental income.
What is the GST Limit for the Rent?
The amount of GST charged on rent is not determined by a specific limit. It is based on the monthly rental amount and the applicable GST rate. If the monthly rent falls below the threshold limit for GST registration, the landlord is not obligated to register for GST and impose GST on the rent. However, if the landlord’s total annual turnover from all taxable supplies, including rent, goes beyond the GST registration threshold of Rs. 20 lakhs, they must register for GST and levy GST on the rent
Who has to pay GST on rent?
The collection GST on rent applies to commercial property owners who lease their property to tenants. Landlords are responsible for collecting the GST from the tenant and charging it on the rent. If the annual rental amount exceeds Rs. 2.40 lakhs from AY 20-21 onwards, the tenant is required to deduct 10% income tax at source. However, landlords who own residential properties rented out solely for residential purposes are exempt from GST and are not required to pay GST on rent. The applicability of GST on rent is determined by the monthly rental amount and the applicable GST rate, and landlords are only required to register for GST if their annual turnover from all taxable supplies, including rent, exceeds Rs. 20 lakhs.
What is the limit for TDS on rent?
The Tax Deducted at Source (TDS) limit on rent is set at Rs. 2,40,000 per annum. If the rent paid during the financial year exceeds this amount, the tenant is required to deduct TDS at a rate of 10% on the excess amount. However, if the landlord declares that their income is below the taxable limit, no TDS deduction is necessary.
What is the GST Rate for Rent RCM?
The GST rate applicable for rent under Reverse Charge Mechanism (RCM) is 18%. This implies that the person receiving the service, i.e., the tenant paying the rent, is responsible for paying the GST directly to the government rather than the landlord. The landlord must mention the GST charged on the invoice or rent agreement. It is crucial to keep in mind that GST on rent is only applicable to commercial properties and not residential properties.
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