GST On Rental Income
- The GST will come into play only if the annual rent is above Rs 20 lakh and that too at 18 per cent rate
- Unlike the earlier regime, the threshold limit for applicability of GST has been increased from Rs 10 lakh to Rs 20 lakh
- Total of taxable services including the rental income from all properties owned by an owner should exceed the basic limit of Rs 10 lakhs per year to come under the GST purview
- The lessee has to deduct income tax at source at 10 per cent, in case the rent for the property exceeds Rs 1.80 lakh in a year
Until now, rental properties were subject to service tax under certain condition, and rental income from a real estate investment was being taxed under the head ‘Income from House property’ under the income tax laws. Properties that are let-out are also subjected to service tax. While the lessee of the property is also required to deduct TDS (tax deducted at source), the proposed GST (Goods and Services Tax) will also impact the tax computation on rental income.
The pre-GST rule
In this phase, the landlord had to obtain a service tax registration, in case his total of taxable services including the rental income from all properties owned by him exceeded the basic limit of Rs 10 lakhs per year. So, anyone with rental income of less than Rs 10 lakh in a year, was exempt from service tax registration as they were outside the purview of the service tax net.
Moreover, the law exempted the rent received, with respect to residential house property let-out for residential purposes, from the levy of service tax. Only commercial properties attract service tax levy, at present. However, any residential property used for commercial purpose attracted service tax. The limit of Rs 10 lakh was applied only for the taxable services. So, even if your rental of residential properties exceeded Rs 10 lakh, you did not have service tax liability, as long as your gross rentals from commercial property did not exceed Rs 10 lakh in a year. The service tax was being collected at 15 per cent of the rent of commercial properties.
Changes under GST
With the clubbing of taxes on goods and services, under the GST regime, the confusion about levy of separate tax on service and goods is done away with. Unlike the earlier regime, the threshold limit for applicability of GST has been increased from Rs 10 lakh to Rs 20 lakh. So, many of the landlords who were covered under the service tax regime, will be out of the indirect tax net with the implementation of GST.
It is interesting to note that for the purpose of computing the aggregate limit of Rs 20 lakh under the GST, all the taxable, as well as exempt goods and services supplied, will be taken into account. So, unlike the service tax regime, where it was only the taxable services, which were taken into account for determining whether you have crossed the basic threshold, under the GST, the value of all the service and goods supplied in India, as well as exported, whether taxable or exempt, will be taken into consideration for the Rs 20-lakh limit.
The Rs 20 lakh limit is lowered to Rs 10 lakh in 11 special category states. Likewise, for computing aggregate supplies, turnover of all supplies made by you would be added. And, the GST will be levied at 18 per cent, on the letting-out of commercial properties. However, rental income received from residential house is exempt.
There is one more major tax implication under the GST, with respect to rent on commercial properties. The parliament has borrowed the concept of ‘reverse charge mechanism’ from the service tax regime, under the GST. However, unlike in the service tax regime, where the reverse charge mechanism is applicable in case of services and is not extended to the sale or manufacturing of goods, the same is made applicable for goods as well as services, under the GST regime.
So, a person who is registered under GST, who gets supplies of goods or services from a person who is not registered under GST, will have to pay the GST under the reverse charge mechanism. Under the service tax regime, there is no provision of reverse mechanism, with respect to the rent paid by the lessee. The proposed GST provisions, due to the increased rate and the levy under the reverse mechanism, will eventually make it costlier to take any commercial premises on rent.
In the case of service tax and GST, it is the landlord or owner of the property who has to collect the service tax or GST from the lessee on the rent charged, in case he is registered under these laws. Likewise, under the income tax laws, the lessee has to deduct income tax at source at 10 per cent, in case the rent for the property exceeds Rs 1.80 lakh in a year. The limit of Rs 1.80 lakh, applies on the landlord and not on the property, which is the subject matter of the lease.
These TDS provisions are applicable for residential, as well as commercial properties. This provision is applicable, only if the lessee of the property is required to get his accounts audited, under Section 44AB of the Income Tax Act. As per GST Law, No GST is payable on services by a person by way of renting of precincts of a religious place meant for general public. So the rate of GST payable on services by a person by way of renting of precincts of a religious place meant for general public is Nil rated.
In Budget 2017 a new provision was introduced for the deduction of tax at source on rent, which is applicable for individuals and Hindu Undivided Families (HUF) who are not required to get their accounts audited as discussed above. Such individuals and HUF will have to deduct tax at source, at the end of the year or at the end of the tenancy period, in case the tenancy gets terminated before the year end, deduction will be at 5 per cent of the rent paid during the year, in case the aggregate value of the rent paid during the whole of the year exceeds Rs 50,000 per month.