GST on Rent: Who Pays and How It Works

Update : As of October 10, 2024, the Goods and Services Tax (GST) regulations have been updated to include the renting of commercial properties under the Reverse Charge Mechanism (RCM). 

This change specifically affects transactions where an unregistered person rents out commercial property to a registered person. 

That is, if you are a GST registered business renting commercial property from an unregistered landlord, you are now responsible for paying the GST on the rental amount directly to the government. You can, however, claim Input Tax Credit (ITC) for the GST paid, subject to the usual conditions.

However, If you are not registered under GST, you are not liable to pay GST on the rent, even if the landlord is unregistered.

The below are the potential scenarios.

Scenario 1 - Owner and Tenant has No Gst registration

When neither the tenant nor the landlord is registered for GST, no GST applies to the rent.

In this case, neither party has to pay or collect GST. 

Scenario 2 - Owner has Gst registration and Tenant has No Gst registration

If the landlord is registered but the tenant isn’t, the landlord includes GST in the rent amount and collects it from the tenant.

The landlord is responsible for filing the GST collected, and no special mechanisms or tax credits apply since the tenant is unregistered.

Scenario 3 - Tenant has Gst registration and Owner doesn't have Gst registration

When the tenant is registered, but the landlord isn’t, the tenant is required to pay GST directly to the government.

This is handled under the Reverse Charge Mechanism (RCM), where the tenant files the GST themselves.

The tenant can then claim an input tax credit (ITC) on the GST they’ve paid, which reduces their tax liability.

Scenario 4 - Both Owner and Tenant has Gst registration

Finally, if both the landlord and tenant are registered, the landlord charges GST on the rent and collects it from the tenant.

The landlord files the GST as usual.

Since the tenant is also registered, they can claim an input tax credit on the GST paid, reducing their overall tax burden.

Note : Please talk to a Chartered Accountant for validation.

Capital Gains

When you sell an asset (in this case, real estate), a portion of the profit must be given to the government as capital gains tax. 

This is classified as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), depending on the duration of ownership.

Following the Union Budget 2024-25, there have been significant changes in the capital gains tax rates applicable to real estate investments in India:

Long-Term Capital Gains (LTCG):

The tax rate for LTCG on real estate has been reduced from 20% to 12.5%. 

However, a crucial change is that the indexation benefit—which adjusted the purchase price of the property for inflation—has been removed for properties purchased after April 2001.

This means that while the tax rate has been lowered, investors may face higher tax liabilities due to the inability to factor in inflation. 

Properties bought before 2001 still retain the indexation benefit, and sellers can use the fair market value as of 2001 for LTCG calculations.

Let’s say you bought a house for 10 lakhs a few years ago and are now selling it for 30 lakhs. Without indexation, your profit (or capital gain) is simply 20 lakhs (30 lakhs - 10 lakhs). 

You would have to pay tax on this 20 lakhs.

With indexation, the government allows you to account for inflation (how prices increase over time). What 10 lakhs could buy 10 years ago can’t buy as much today because things have gotten more expensive. Indexation adjusts your original purchase price to reflect this change in the value of money.

So, instead of just using 10 lakhs, you adjust it to what 10 lakhs would be worth today because money loses value over time due to inflation. For example, 10 lakhs back then might be worth 20 lakhs in today's money.

After this adjustment, your buying price might be considered as 20 lakhs. Now, your profit (capital gain) is only 10 lakhs { 30 lakhs [ selling price ] - 20 lakhs [ purchase price adjusted with indexation] }, so you pay less tax.

Indexation helped in reducing your tax because it recognizes that the value of 10 lakhs years ago isn’t the same today. Now it is not more the case.

Short-Term Capital Gains (STCG):

The tax rate for STCG on real estate transactions (for properties held for less than 24 months) has been increased to 20% from the earlier rate of 15%.

End Note:

Investors with shorter holding periods (under 24 months) may see higher tax liabilities due to the increased STCG rate. Meanwhile, those with longer-term holdings may benefit from the reduced LTCG rate. However, the removal of the indexation benefit for properties purchased after 2001 could offset some of this advantage, potentially resulting in higher tax liabilities despite the lower LTCG rate.