Goods and Services Tax (GST) on rental income depends on the type of property, the purpose of the rental and the GST registration status of the parties involved. These factors determine whether GST applies, who is liable to pay it and whether ITC can be claimed.
Understanding the applicable GST rate, tax liability and ITC eligibility helps businesses remain compliant, avoid disputes and manage rental costs more effectively.
How GST classifies rental transactions for businesses
GST classifies rental transactions based on the type of property being rented and the GST registration status of the tenant. These factors determine whether GST applies, who pays the tax and whether the normal charge or the RCM is applicable.
Under GST, renting, leasing and licensing of immovable property are treated as a supply of services. For businesses, two factors determine the tax treatment:
- Whether the property is commercial or residential
- Whether the tenant is registered under GST
These factors decide whether GST is charged under the forward charge mechanism, the RCM or is exempt.
GST on commercial property
Commercial property rent is generally taxable at 18% GST on the rental amount. A landlord must register under GST when their aggregate annual turnover exceeds ₹20 lakh (₹10 lakh in special category states).
Where GST applies, the landlord issues a tax invoice and collects GST from the tenant.
GST is charged as follows:
- Intra-state rental: 9% CGST + 9% SGST
- Inter-state rental: 18% IGST
A business tenant may claim ITC on the GST paid if the property is used for taxable business purposes and the prescribed GST conditions are satisfied.
Services Accounting Code (SAC): 997212
GST on residential property
Residential property rented to a GST-registered tenant attracts GST at 18% under the RCM, whatever the tenant uses it for. In such cases, the registered tenant pays GST directly to the government instead of the landlord, regardless of whether the landlord is registered under GST. (For example, a registered company that rents a flat to house its employees pays GST under RCM, even though the use is residential.)
However, renting a residential property to an unregistered individual for use as a residence remains exempt from GST, irrespective of the rent amount or the landlord's turnover.
The exemption also applies when a GST-registered proprietor rents a residential property in their individual capacity for personal residential use. As the rental is not treated as a business transaction, the RCM provisions do not apply. If the property is rented for business purposes, the exemption is not available.
SAC: 997211
ITC on rent: What a business can and cannot claim
Input tax credit on rent depends on the nature of the property and the purpose of use.
ITC may generally be available when:
- GST is charged on commercial rent
- The property is used for taxable business activity
- A valid tax invoice is available
- The amount appears correctly in the GST return reconciliation
ITC is generally not available when:
- The property is used for personal accommodation
- The rent is connected to exempt activity
- The credit is otherwise blocked under GST law (see Section 17(5) of the CGST Act)
For reverse charge cases, GST must be paid first before credit is claimed. Businesses should also ensure proper return reporting so that the tax paid and credit claimed match the records.
How does tax deducted at source (TDS) on rent interact with GST?
TDS on rent and GST apply independently and must be calculated and tracked separately. While GST is charged on the rental transaction, TDS is deducted under the Income Tax Act based on the applicable thresholds and rates.
Under Section 194I, businesses and entities liable for tax audit must deduct TDS if the total rent paid to a single landlord during a financial year exceeds ₹6,00,000 (effective from FY 2025-26). The earlier threshold was ₹2,40,000 per year. The applicable TDS rates are:
- 10% for the rent of land, buildings or furniture
- 2% for the rent of plant and machinery
For individuals and Hindu Undivided Families (HUFs) not liable for tax audit, Section 194IB applies. If the monthly rent exceeds ₹50,000 in any month, the tenant must deduct 2% TDS on the rent amount.
An important point to remember is that TDS is deducted only on the rent amount, excluding GST, provided GST is shown separately in the invoice.
For example, if the monthly rent is ₹2,50,000 and GST is ₹45,000:
- Rent: ₹2,50,000
- GST: ₹45,000
- Total invoice value: ₹2,95,000
- TDS is deducted only on ₹2,50,000, not on the total invoice value
Deducting TDS on the GST component is a common compliance error that can result in mismatches and notices from the Income Tax Department.
Conclusion
Correctly classifying rental transactions, applying the appropriate GST provisions and claiming eligible ITC are essential for maintaining compliance and avoiding costly errors. Recording rental transactions accurately from the outset helps prevent issues with reverse charge, tax reporting and reconciliations later.
TallyPrime simplifies GST compliance by automating GST calculations, supporting RCM transactions and helping reconcile data with GSTR-2B, making rental GST management more accurate and efficient for businesses.
