The 54th GST Council Meeting, held on 9th September 2024, brought new updates on the GST treatment for rental income, reigniting discussions on its applicability. The topic is especially relevant as the government continues to focus on real estate, a sector heavily taxed both directly and indirectly. In this article, we will explore how GST on rental income is currently structured and what key changes were introduced in the latest meeting.
In India, property is taxed through both direct and indirect taxes:
- Direct Taxes: Capital gains tax on the sale of property, with recent changes such as the removal of indexation benefits.
- Indirect Taxes: Including GST, which applies to the purchase, sale, and rental income from properties under certain conditions.
For properties that are rented out, rental income is taxed under Income from House Property or Business Income, depending on the type of business activity. In addition to income tax, GST is also applicable on rental income in specific scenarios.
Mechanisms for GST Collection on Rental Income
GST on rent can be collected through two main mechanisms:
- Forward Charge Mechanism (FCM): In FCM, the supplier (landlord/property owner) is responsible for collecting and remitting GST to the government.
- Reverse Charge Mechanism (RCM): Under RCM, the tenant (recipient of the rental service) pays the GST directly to the government, bypassing the landlord. This mechanism is typically used when the government encounters difficulties in collecting tax via the supplier.
During the 54th GST Council Meeting, the government announced a significant update regarding GST on rental income. To overcome challenges related to tax collection under FCM, a shift towards Reverse Charge Mechanism (RCM) was introduced for certain cases. This adjustment ensures smoother tax collection, especially in situations where compliance on the landlord’s side was proving difficult.
The table below provides a detailed breakdown of how GST on rent is structured after the recent changes, including the type of supplier, the type of recipient, and the applicable tax mechanism.
| Property-Service Supplier | Recipient Type | Tax Mechanism |
| Commercial-Registered Person | Commercial-Registered Person | FCM |
| Commercial-Registered Person | Commercial-Unregistered Person | FCM |
| Commercial-Unregistered Person | Commercial-Registered Person | RCM –Proposed in 54th GST council meeting (Notification will be issued soon) |
| Commercial-Unregistered Person | Commercial-Unregistered Person | Exempted |
| Residential-Registered Person | Residential-Registered Person | Exempted |
| Residential-Registered Person | Residential-Unregistered Person | Exempted |
| Residential-Unregistered Person | Residential-Registered Person (Proprietor) | Exempted (Exempt if renting for own residence, as per Notification No. 15/2022 w.e.f. 1-1-2023.) |
| Residential-Unregistered Person | Residential-Registered Person (Director/Employee) | RCM |
Explanation (as per Notification No. 15/2022-Central Tax (Rate), w.e.f. 1-1-2023):
Renting of residential dwelling to a registered person is exempt if:
1. The registered person is a proprietor renting in his personal capacity for use as his own residence.
2. Renting is on his own account and not for the proprietorship concern
Why These Changes Matter?
The recent change in the 54th GST Council Meeting to introduce RCM for certain rental scenarios reflects the government’s focus on securing efficient tax collection. By shifting the tax liability to the tenant, the government ensures compliance in cases where landlords or property owners may struggle to meet their tax obligations. This update underscores the importance of understanding GST regulations for both landlords and tenants. Each party must carefully assess the nature of the property and the applicable tax mechanism to ensure compliance. Non-compliance with GST regulations can lead to penalties and interest charges, making it vital for all involved parties to stay informed and up-to-date.
The changes announced in the 54th GST Council Meeting simplify tax collection for rental income, particularly in cases where suppliers find it challenging to comply with GST under the Forward Charge Mechanism. The introduction of the Reverse Charge Mechanism (RCM) ensures smoother compliance for tenants and landlords alike, ultimately contributing to better tax transparency and reduced tax leakage. To avoid any penalties or non-compliance, landlords and tenants should consult their tax advisors to understand how these changes apply to their specific rental agreements and business setups –JSPCO
