GST on Commercial Property (2023 Guide)

Real estate is one of the most important economic sectors in any country. Property rentals are a popular source of income for many people in the country. GST has had a significant impact on the property rental business. Read this article to learn more about how GST on commercial property. Read this article to learn more about  GST on commercial properties.

How is commercial rent taxed in India?

GST applies if you rent out your property for commercial purposes and earn more than INR 200,000 per annum. GST is charged at 18% of the taxable value.

Who pays GST on the rent of commercial property?

Owners of rental properties must collect GST from rent payers. This GST is added to the rent. If the rent from AY 20-21 onwards is Rs 2.4 lakh per annum, the rent payer must deduct income tax at the rate of 10%.

TDS applies to both residential and commercial properties. TDS is not subject to GST.

Which tax deductions are available for commercial property?

Deductions available for commercial property 

Standard deduction 

Applied at a flat rate of 30% as a flat rate deduction for repairs and other diversions of rented commercial properties. It helps you save a reasonable amount of tax and applies regardless of how much you spend on your property purchase.

Deduction on loan interest

You can claim a deduction from the total interest amortized on loans used to purchase or construct commercial real estate and to modify or construct real estate. Upfront penalties or processing fees in this category are also tax deductible. This is limited to use from the year of ownership after completion. You can also claim the total amount of interest paid prior to the year the commercial property was acquired in five equal installments.

Use of commercial property for your work/business

You cannot claim a deduction for notional rental income. You can claim depreciation along with the interest you paid on the loan to purchase the property. The actual cost of maintenance and repairs is claimable for tax purposes.

The new tax regime limits tax deductions for interest paid on commercial real estate loans. Section 24 deductions for let out property are not in consideration. You can claim interest and standard deductions, but you can only charge up to the annual net amount of gross rent minus municipal tax.

How much rent paid is tax-free?

You do not have to pay tax on amounts already paid as property tax. Deduct property taxes paid in the current year from the gross rental income or gross annual value (GAV) for the year.

Section 24A of the Income Tax Act allows a deduction of 30% from the net annual value. People pay no tax on this amount and deduct the same amount from the taxable amount. Beyond the 30% limit under this section, other costs such as painting and repairs are not claimable for tax purposes.

Suppose an owner takes out a loan on a rental property. In this case, the full amount of interest paid on the loan during the fiscal year is deducted from the rental income after taking into account standard deductions. Section 24B of the Income Tax Act allows for this rebate. 

In the case of rental property, interest on borrowed capital for acquisition, construction, repair or diversion is deductible. For unpaid rent, the Income Tax Appeals Court has a rule that owners are not required to pay taxes on unrealized rental income. 

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

What is the tax slab in India in 2022?

The income tax plate for the financial year 2022-23 applies to tax regimes for residents under age 60, Hindu undivided families (HUFs), and non-resident Indians (NRIs) with income in India.

What are the tax benefits of owning rental property?

The tax benefits of owning a rental property are:

Travel expenses are deductible:

Property owners who travel regularly to check on their tenants should not be concerned if they have to travel far to reach their property. Finally, you can deduct travel expenses. This includes taxi, parking, and petrol costs if you use your car for traveling. A landlord can use his standard mileage rate set at 58 cents per mile for the 2019 tax year instead of deducting individual vehicle travel costs.

You can write off the cost of your hotel stays, airfare, and rental cars if you’re a landlord who lives in a different state than your rental property. Meals enjoyed while traveling is also deductible. However, please be careful when deducting transportation expenses associated with accommodation. 

Legal costs are deductible:

Unfortunately, some issues can only be resolved in court. Those who have been forced to evict tenants or take legal action for other reasons have at least the financial advantage. Unlike tenants, you can claim court and attorney fees.

Deductible mortgage interest:

Tax deductions for mortgage interest paid on a loan used to buy a rental property are unlimited. Investors, who use credit cards to purchase important items such as appliances and furniture must purchase a business credit card to keep their business expenses separate from their personal expenses.

How is tax calculated on rental property?

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

Let’s use an example to understand how to calculate taxable income on rental property:

Assume that the owner receives a monthly rental income of Rs 30,000 and pays a local tax of Rs 30,000 (calculated using the property unit area system). He has also taken out a home loan by paying his Rs 90,000 interest on the loan interest.

Calculate taxable income as:

In this case, the GAV of the property is Rs 4,80,000 which is higher than Rs 2,50,000, hence the tax is payable on the rental property. If the rent of the property is Rs 20,000 per month i.e. GAV is Rs 2,40,000 (20,000*12), then you do not have to pay rental income tax.

How do I avoid paying taxes on rental income?

The following tips will help you save tax on your rental income:

Maintenance fees:

One of the simplest ways to save tax is to deduct maintenance charges from rent. Some rents include maintenance fees. In a way, the tax on rental income is increasing. For example, if you calculate a rent of Rs 50,000 and include Rs 10,000 for maintenance, you will pay taxes on the entire Rs 50,000. However, by excluding such costs from maintenance charges, you can save Rs 10,000 in tax. You only need to include one line in the lease that states, Tenants can pay maintenance fees directly to the society association.

Municipal Taxes:

Few people are aware that you can deduct municipal taxes from your rental income, including property taxes and sewerage taxes. The only catch is that the owner must pay all municipal taxes. Tenants are often required to pay municipal taxes. Because of this, the owners cannot deduct the tenant’s payment. Municipal tax credits reduce your tax liability by reducing your income from your house property.

Joint property: 

If you buy a property with a trusted family member (husband/wife/parents), you can pay taxes on your rental income. In such cases, rental income is shared and can be taxed with other family members.

Partially Furnished/Fully Furnished Properties:

In such properties, the owner will provide certain amenities such as a WiFi connection, gas connection, DTH/cable TV, and newspaper. Such charges are normally billed as rent and paid by the relevant authorities of the owner. In such cases, you can ask the lessee to pay the bill and deduct the amount equivalent to the rent. Alternatively, these can be collected 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 is assumed 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 actual repair costs.

How much is GST on maintenance charges for commercial property?

Buyers must pay Goods and Services Tax (GST) on maintenance costs and GST on property purchases. The builder charges 18% GST on monthly maintenance fees which are around 4000 rupees per month.  GST exemptions up to Rs 7500/-pm for maintenance charges.

What are tax benefit for commercial property loan?

Tax benefit under 24(B)

This section allows salaried individuals to claim income tax benefits on loans for property. If the loan amount is used to finance a new home, you are entitled to a tax credit of up to Rs. 2 Lakh. Interest payments are tax deductible.

Tax Benefit under Section 37 (1):

Property loans are not tax deductible regardless of whether the loan is for business or personal purposes. If you take out a loan for investment, the loan may be tax-free because you are investing in property.

How much is the fine for not declaring rental income?

The IRS imposes fraudulent filing penalties when landlords intentionally omit income from their returns. This may include a fine of 20% of the amount owed and 75% of the total tax due. These penalties are in addition to any unpaid taxes.

Frequently Asked Questions (FAQs)

Can you claim rent as a tax deduction?

Individuals paying rent for furnished/unfurnished housing may submit Form 10B, provided that the HRA is not paid as part of their salary, under Section 80 (GG) of the IT Act. The rent paid is deductible from your income.

Can you avail GST exemption on commercial property?

No, there is no exemption available to commercial rent under GST.

Is interest on commercial property loans tax deductible?

If you are buying or constructing a building for commercial purposes, you can take out a commercial store loan and the interest you pay on the loan is fully deductible.

Is RCM applicable on rent for commercial property? 

 No, reverse charge mechanism is not applicabile on rent for commercial property.

Does rental income count as income?

Yes, rental income counts as income. Income received as rent from a building or house is taxable under the heading income from home ownership.

Do landlords get tax relief?

The landlord can reduce their taxable income with the help of a standard deduction at the rate of 30%.

Do landlords pay GST on rent?

Residential property is exempt from GST if it is rented out for residential use.

Wrapping Up

Rent is classified as a taxable service supply in India, so the GST rate for commercial real estate is 18% of the taxable value. However, there is no GST on the commercial property if the landlord is not registered for GST. A religious or charitable trust is exempt from GST.

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