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GST on Commercial Property Rent

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Most companies consider paying the rent on their commercial property as one of their operating expenses. But did you know that the GST (Goods and Services Tax) is applicable to rent paid on commercial real estate in India? 

Rent on commercial property must certainly take GST into account. Under the GST system, commercial property rent constitutes a taxable supply of services. As a result, to avoid fines or other problems with the law, both the landlord and the tenant must be aware of the GST implications on commercial property rent. 

Let us investigate the various aspects of GST on commercial property rent in India, such as the applicable rates, threshold limits, input tax credits, and more. 

GST Effects on Commercial Property Rentals 

You can comply with the GST laws and regulations if you know how GST affects commercial property rent. By doing this, you can avoid getting in trouble with the law. 

As a landlord, you can receive an input tax credit (ITC) on the GST you paid for the supplies and labor used to maintain and repair your commercial property. Your overall tax obligation may drop as a result. 

Tenants must account for the GST on commercial property rent when planning their budget for expenses. It is your duty as a landlord to invoice and collect the GST from the tenant. Failing to do so can result in financial losses. 

GST Applicable to Commercial Property Rentals 

Today, renting commercial property has emerged as a new source of income or investment for people. These include establishments that generate cash by conducting business there, such as stores, offices, industrial buildings, showrooms, hotels, etc. The GST calculation for the rent is here. 

Standards for GST on Commercial Property Rent 

The exemption amount is Rs.20 lakh/annum (or Rs. 10 lakhs in some cases), and if a property owner earns more than this amount from renting out commercial property for any other business, they must register for GST. 

GST Rates for Commercial Rentals 

For commercial rental property, the GST rate is 18% of the monthly rent. Whether the landlord registered for GST or not, if the tenant is, they are responsible for paying it when the space is for commercial purposes. 

The rental rates for commercial properties are various. A GST of 12% with ITC and 5% without ITC applies to commercial real estate.  

Rent on Commercial Property Input Tax Credit

An individual may use the GST payment for his other taxable income. In other words, claiming an ITC for GST is simple if the requirements are satisfied. 

The tenant must use the rental property for commercial purposes and be a registered GST taxpayer to be eligible to claim ITC on commercial property rent. 

If the tenant claims ITC on the GST paid on the rent amount when submitting their GST returns, the ITC calculation occurs in this manner. The GST rate applicable to the rented property is the basis for determining the ITC amount. 

To be eligible for ITC, you must fulfill the following requirements: 

  • The tenant must possess current tax invoices or other records from the landlord. 
  • The invoice must make a specific note of the GST due for the rent. 
  • You must use the rent only for business purposes to claim the input tax credit. 
  • ITC limitations: There are a few limitations on claiming ITC for commercial property rent. 
  • You cannot claim ITC if you use the property for non-business purposes.
  • ITC can never be reclaimed if the tenant chooses the composition scheme or the property is GST-exempt. 
  • It is crucial to keep accurate records and documentation of rent invoices and related documents to back up ITC claims. 

GST Complaint Commercial Real Estate Rental 

Landlords in India who receive rent for the commercial property must adhere to GST registration requirements. Let’s see them below. 

Landlords must register for GST if their rental income comes from commercial properties and exceeds a certain threshold. GST registration thresholds cover 20 lakhs (or 10 million for certain category states). 

Regional Supply: Landlords leasing out commercial properties in several states must register for GST, regardless of their annual revenue.  

Even if the landlord’s rental income is below the threshold, they may choose to register for GST. As a result, they can claim an ITC for the costs associated with the property. 

Tax Invoicing and GSTIN: The landlord will receive a Goods and Services Tax Identification Number (GSTIN). They must send tax invoices to tenants that note the GST is payable on top of the rent amount. 

GST Returns 

Regular GST returns, such as GSTR-1, GSTR-3B, and annual returns (GSTR-9), must be filed by registered landlords. These returns include information about rental income, GST gathered, and ITC received. 

Remitting GST: Tenants must pay any applicable GST to landlords, who must send that money to the government within the allotted time frame. The property’s characteristics and the terms of the lease influence the rates of GST. 

Understanding GST on Renting Commercial Properties

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Real estate is one of the country’s most important economic sectors. Many people in the country rely on property rentals as a source of income. The impact of GST on the property rental industry has been significant. Learn more about GST on commercial properties by reading this blog. 

In India, how is commercial rent taxed?

If you rent out your property for commercial purposes and earn more than Rs 200,000 per year, you are subject to GST. GST applies at 18% of the taxable value. 

Who is responsible for GST on commercial property rent?

Owners of rental properties are required to collect GST from renters. This GST is part of the rent. If the rent from AY 20-21 onwards is Rs 2.4 lakh a year, the rent payer must deduct 10% income tax. 

Both residential and commercial properties are subject to TDS. TDS is not taxed. 

Commercial property tax breaks are available. 

Commercial property can be bought and sold. 

The standard deduction

Commercial properties rented at a set price are eligible for a 30% repair deduction. It allows you to save a reasonable amount of tax regardless of how much you spend on your property purchase. 

Interest deduction on loans 

You can deduct the total interest paid on loans involved in buying or building commercial real estate to modify or build real estate. In this category, upfront penalties or processing fees are also tax deductible. It is only valid for the year of ownership following completion. You can also claim the total interest paid in five equal installments before the year of purchase. 

Use of commercial property for work/ business.

You cannot deduct fictitious rental income. You can deduct depreciation and the interest paid on the loan used to purchase the property. The actual cost of maintenance and repairs is tax deductible. 

The new tax regime limits tax deductions for commercial real estate loan interest. Section 24 deductions for rented property do not apply. You can charge up to the annual net sum of gross rent minus municipal tax if you claim interest and standard deductions. 

How much of your rent is tax-free?

You are not required to pay tax on amounts previously paid as property tax. Deduct current-year property taxes from gross rental income or gross annual value (GAV) for the year. 

Section 24A of the Income Tax Act allows for a 30% deduction from net annual value. People pay no tax on this amount and deduct it from their taxable income. Other expenses, such as painting and repairs, are not tax deductible once the 30% limit under this section applies. 

Assume an owner takes out a loan on a rental property. In this case, the loan interest paid during the fiscal year reverts to rental income after standard deductions. This rebate is allowed under Section 24B of the Income Tax Act. 

Interest on borrowed capital for acquisition, construction, repair, or diversion is deductible in the case of rental property. The Income Tax Appeals Court has ruled that owners are not required to pay taxes on unrealized rental income for unpaid rent. 

Because rental income is taxable under sections 22 and 24 of the Income Tax Act, this section only applies to income from habitable land. Renting vacant land is taxable as other sources of income. 

How is rental property tax calculated?

After deducting municipal taxes, standard deductions, and home interest, compute rental income taxes based on the Gross Annual Value (GAV). 

Consider the following example to demonstrate how to calculate taxable income on a rental property:

Assume the owner receives Rs 30,000 in monthly rental income and pays Rs 30,000 in local tax (calculated using the property unit area system). He has also taken out a home loan and is paying Rs 90,000 in interest to secure it. 

Calculate your taxable income as follows: 

Rental Property Income Amount in Rs. 
Gross Annual Value 4,80,000 (40,000 per month) 
Deduct Municipal Taxes 30,000
Net Annual Value 4,50,000
Deduct: 30% standard deduction 1,35,000 (30% of 3,30,000)
Home loan interest90,000
Income from house property2,25,000

Tax Calculation on Rental Property

In this case, the GAV of the property is Rs 4,80,000, which is greater than Rs 2,50,000, so tax is due on the rental property. If you pay Rs 20,000 monthly rent, your GAV is Rs 2,40,000 (20,000 *12). 

How can I avoid paying rental income taxes?

The following suggestions will help you save money on your rental income taxes: 

Upkeep fees: 

Deducting maintenance charges from rent is one of the simplest ways to save tax. The cost of maintenance can include in the rent. In some ways, the tax on rental income is rising. For example, if you calculate a rent of Rs 50,000 and add Rs 10,000 for maintenance, you must pay taxes on the entire amount. However, you can save Rs 10,000 in tax by excluding such costs from maintenance charges. The lease contains only one line saying that tenants can pay maintenance fees directly to the society association.”

Municipal taxes: 

A few individuals realize that municipal taxes, such as property and sewerage fees, can be deducted from rental income. The only requirement is that the property owner pays all municipal taxes. Tenants are frequently liable to municipal taxes. As a result, the tenants’ payments are not deductible. Municipal tax credits reduce your tax liability by lowering your income from real estate. 

Joint Possession 

You can pay taxes on your rental income if you buy a property with a trusted family member (husband/wife/parents). Rental income is shared and taxed with other family members in such cases. 

Fully or partially furnished properties: 

The property owner will provide amenities such as WiFi, a gas connection, DTH/cable TV, and a newspaper. Such charges are typically billed as rent and paid by the owner’s relevant authorities. In such cases, you can request that the lessee pay the bill and deduct the rent amount. Alternatively, you can collect them separately from the tenant. It’s not part of the rent. Therefore, rental income will decrease. 

Standard Deduction: 

When a property is purchased and rented for investment purposes, it follows that there will be some costs for repairs and maintenance. 30% of the annual net value can be claimed as a standard deduction regardless of the repair costs. 

What is the GST rate on commercial property maintenance fees? 

Buyers must pay GST on maintenance costs plus GST on property purchases. The builder levies 18% GST on monthly maintenance fees of around 4000 rupees. Maintenance charges are exempt from GST up to Rs 7700/- per month. 

What are the tax advantages of a commercial property loan? 

Tax break under section 24(B)

This section allows salaried individuals to claim income tax breaks on property loans. If the loan is used to [purchase a new home, you are eligible for a tax credit of up to Rs. 2,00,000. Interest payments are tax-deductible. 

Section 37 (1) Tax Benefit: 

Property loans are not tax deductible, whether they are for business or personal reasons. Because you are investing in real estate, a loan for investment reasons may be tax-free. 

What is the penalty for failing to declare rental income? 

When landlords intentionally omit income from their returns, the IRS imposes fraudulent filing penalties. It could include a fine of 20% of the owed amount plus 75% of the total tax due. These penalties are in addition to any unpaid taxes.