GST on Renting of Residential and Commercial Property – A Complete Comprehensive Thesis

The taxation of renting or leasing of property under the Goods and Services Tax (GST) regime is one of the most discussed and evolving areas of indirect taxation in India. It impacts landlords, tenants, business entities, and commercial operators alike. The law draws a crucial distinction between residential property and commercial property, and imposes GST obligations depending on factors such as purpose of use, type of tenant, nature of the agreement, and reverse charge mechanism (RCM). This thesis provides a complete and structured analysis of GST implications in renting of immovable property, addressing subtleties, exemptions, taxable components, compliance responsibilities, and industry-specific interpretations.

Nature of Renting of Residential Dwelling

GST law grants a significant exemption for renting of a residential dwelling for use as residence. The key condition is actual residential use, not merely the type of property. A residential dwelling typically means a place intended and suitable for habitation, with adequate facilities such as bathrooms, kitchen, and living space.

When a property classified as residential is rented for non-residential purposes—such as a guest house, office, coaching center, or godown—the exemption does not apply. Thus, GST classification depends on functional use rather than municipal categorization.

Renting of Residential Property to Individuals for Personal Use

Renting of a residential dwelling to an individual for personal residential use is fully exempt from GST. No tax is payable by the landlord, irrespective of:

• Landlord’s status (registered or unregistered)
• Rental amount
• Property size
• Number of properties let out

This exemption reflects the principle that residential housing is a social necessity, not a commercial supply.

Renting of Residential Property to Registered Persons (RCM Position)

A major policy shift occurred when renting of residential property to registered persons was brought under Reverse Charge Mechanism (RCM). When a registered business entity takes a residential property on rent—for office use, guest accommodation, or staff quarters—the tenant must pay GST under RCM.

Key features:

• Landlord is not liable to register solely because residential rent is received.
• Tenant (registered person) pays GST @ 18% on RCM.
• Input Tax Credit (ITC) is available only if the rental property is used for business purposes.
• If used for employees as personal residence, ITC may be disputed as it may fall under blocked credits.

Residential Property Given to Unregistered Businesses

When a residential dwelling is rented to an unregistered business entity, GST is not applicable because RCM applies only when the tenant is registered. In such cases, the pre-existing exemption for residential use continues.

Residential Property Used for Mixed or Non-Residential Purposes

When a residential property is used for commercial purposes—such as a clinic, boutique, warehouse, office, or coaching center—the exemption does not apply. The landlord must charge GST @18% forward charge if registered.

If the landlord is unregistered, GST does not apply unless the turnover exceeds registration threshold.

Nature of Renting of Commercial Property

Renting of commercial property—offices, shops, factories, warehouses, industrial estates, co-working spaces—is a taxable supply of service under GST. Tax is charged at 18% on the taxable value of rent.

The activity is considered business even if carried out occasionally, positioning the landlord squarely within the GST regime once the exemption threshold is crossed.

Need for Registration of Commercial Landlords

A landlord renting out commercial property must obtain GST registration if:

• Annual aggregate turnover from all taxable supplies exceeds ₹20 lakh (or ₹10 lakh in special category states), OR
• Even if turnover is below threshold but the landlord is required to pay tax under RCM (rare in commercial renting).

Registration is not optional because rental service is a continuous taxable supply.

GST Rate, Valuation, and Components

GST rate on commercial renting is 18% (CGST 9% + SGST 9%).

Tax is charged on:

• Monthly rent amount
• Any non-refundable deposits
• Maintenance charges collected by landlord
• Ancillary charges directly connected to renting

Refundable security deposits do not attract GST unless adjusted towards rent or damages.

Commercial Rent with ITC Implications

For commercial tenants, GST paid on rent is generally eligible for Input Tax Credit, provided the premises is used for business purposes. This makes commercial renting economically neutral for most business tenants.

However, ITC is not available if the premises is used for:

• Personal consumption
• Activities exempt from GST
• CSR activities
• Any business listed under blocked credits

Co-working Spaces and Shared Offices

Co-working providers typically offer a composite supply that includes:

• Office space
• Furniture
• Internet
• Housekeeping
• Common area services

GST applies on the entire package value at 18%, subject to ITC availability. If electricity is separately metered and recovered on actuals, it may be outside GST, depending on contractual terms.

Sub-leasing of Property

If a tenant sub-lets a property:

• Sub-leasing is treated as an independent supply.
• GST @18% applies if sub-lessor is registered.
• ITC can be claimed on GST paid on main rent if used for business.

Sub-leasing frequently occurs in business districts and co-working arrangements.

Renting for Hostel, PG, and Dormitory Services

Hostels, Paying Guest accommodations (PGs), and student housing have nuanced tax positions:

• If arrangements resemble hotel or boarding services, GST @12% or 18% may apply.
• If premises are rented as long-term residential lodging, the residential exemption may apply depending on facts such as duration, nature of contract, and service components offered.

The decisive test is whether the service is essentially “renting of residential dwelling for residence” or “accommodation service”.

Lease Premiums and Long-Term Leases

Long-term leases of commercial property with upfront premiums are taxable as renting of immovable property. Even non-refundable premiums or advance lease amounts attract GST at 18%.

In contrast, long-term leases of residential dwelling for residence retain the exemption.

Renting to Charitable or Religious Bodies

Exemption applies only if:

• Property is used for charitable activities defined under GST; or
• The property is used by a registered religious body for public or religious purposes without income generation.

Renting for commercial activities by NGOs or trusts is taxable unless covered by a narrow exemption.

Reverse Charge Mechanism (RCM) on Commercial Renting

Commercial renting is generally under forward charge, not RCM. However, specific cases—such as government renting to registered persons—may attract RCM.

Key point:

• If government or local authority rents commercial property to a registered person, RCM applies.
• If rented to unregistered persons, GST is charged by the government agency.

Invoicing and Reporting

A registered landlord of commercial property must:

• Issue GST tax invoice monthly
• Report supplies in GSTR-1
• Pay tax through GSTR-3B
• Maintain agreements and rent receipts
• Reconcile rent, deposit adjustments, and maintenance income

Even residential renting under RCM requires reporting by the tenant in GSTR-3B under reverse charge liability.

Continuous Supply and Time of Supply

Renting is treated as continuous supply of services. Time of supply arises:

• On the due date of rent as per contract
• If no due date specified, on the invoice date
• If advance received, at the time of receipt

This ensures GST liability aligns with rental cycles.

Late Fees, Penalties, and Interest

If a tenant pays late fees, penalty, or interest for delayed rent, GST applies on these charges as they are naturally connected to the main supply.

GST on renting of residential and commercial property is governed by a principle-based framework distinguishing purpose of use, nature of property, status of tenant, and type of supply. Residential renting for dwelling purposes continues to enjoy a broad exemption, reinforcing its social importance. Conversely, commercial renting remains fully taxable at 18%, forming a key revenue stream for the indirect tax system. Through nuanced provisions like RCM for residential rent to registered persons, ITC mechanisms for businesses, and detailed rules concerning deposits, maintenance, and sub-leasing, the GST regime attempts to strike a balance between fiscal stability and taxpayer convenience.

Understanding these provisions is essential for landlords, tenants, real estate operators, and businesses to ensure compliance, optimize tax positions, and avoid litigation.