The rental income from a real estate investment, is taxed under the head ‘Income from House property’ under the income tax laws, which is a direct tax law of the country. Properties that are let-out, are also subject to indirect taxation in the form of service tax, presently. The lessee of the property is also required to deduct TDS (tax deducted at source), while the proposed GST (Goods and Services Tax) will also impact the tax computation on rental income.
Existing service tax laws
Presently, the landlord has to obtain a service tax registration, in case his total of taxable service including the rental income from all the properties, exceeds the basic limit of Rs 10 lakhs per year. So, as long as your rental income from all the properties owned by you in India, does not exceed Rs 10 lakhs, you are outside the purview of the service tax net.
The current law exempts the rent received, with respect to residential house property let-out for residential purposes, from the levy of service tax. Only commercial properties attract service tax levy, at present. Any residential property used for commercial purposes, will also attract levy of service tax. The limit of Rs 10 lakhs, applies only for the taxable services. So, even if your rental of residential properties exceeds Rs 10 lakhs, you will not have service tax liability, as long as your gross rentals from commercial property does not exceed Rs 10 lakhs in a year. The limit of Rs 10 lakhs gets reset, at the beginning of the year. Presently, the service tax is collected at 15 per cent of the rent of commercial properties.
Proposed provisions under the GST
With the clubbing of taxes on goods and services, under the GST regime, the confusion about levy of separate tax on service and goods is done away with.
Unlike under the present service tax regime, the threshold limit for applicability of GST has been increased from Rs 10 lakhs to Rs 20 lakhs. So, many of the landlords who were covered under the service tax regime, will go out of the indirect tax net, once the GST is implemented from the proposed date of July 1, 2017.
It may be interesting to note that for the purpose of computing the aggregate limit of Rs 20 lakhs under the GST, all the taxable, as well as exempt goods and services supplied, shall be taken into account. So, unlike the service tax regime, where it is only the taxable services, which are taken into account for determining whether you have crossed the basic threshold, under the GST, the value of all the service and goods supplied in India, as well as exported, whether taxable or exempt, are taken into consideration for the Rs 20-lakh limit. The GST is proposed to be levied at 18 per cent, on the letting-out of commercial properties.
There is one more major tax implication under the GST, with respect to rent on commercial properties. The parliament has borrowed the concept of ‘reverse charge mechanism’ from the service tax regime, under the GST. However, unlike in the service tax regime, where the reverse charge mechanism is applicable in case of services and is not extended to the sale or manufacturing of goods, the same is made applicable for goods as well as services, under the GST regime. A person who is registered under GST, who gets supplies of goods or services from a person who is not registered under GST, will have to pay the GST under the reverse charge mechanism. Under the service tax regime, there is no provision of reverse mechanism, with respect to the rent paid by the lessee. The proposed GST provisions, due to the increased rate and the levy under the reverse mechanism, will eventually make it costlier to take any commercial premises on rent.
Provisions for tax deduction on income tax, for rented property
In the case of service tax and GST, it is the landlord/owner of the property who has to collect the service tax/GST from the lessee on the rent charged, in case he is registered under these laws. Likewise, under the income tax laws, the lessee has to deduct income tax at source at 10 per cent, in case the rent for the property exceeds Rs 1.80 lakhs in a year. The limit of Rs 1.80 lakhs, applies on the landlord and not on the property, which is the subject matter of the lease. These TDS provisions are applicable for residential, as well as commercial properties. This provision is applicable, only if the lessee of the property is required to get his accounts audited, under Section 44AB of the Income Tax Act.
The Budget 2017 has introduced one more provision, for the deduction of tax at source on rent, which is applicable for individuals and Hindu Undivided Families who are not required to get their accounts audited as discussed above. Such individuals and HUF will have to deduct tax at source, at the end of the year or at the end of the tenancy period, in case the tenancy gets terminated before the year end, at 5 per cent of the rent paid during the year, in case the aggregate value of the rent paid during the whole of the year exceeds Rs 50,000 per month.