More than two months have passed since the revolutionary Goods and Services Tax aka GST was enforced in India. We’ve been giving you constant updates on the impact of GST on the buying and selling process in the Indian real estate. In continuation, now we’re going to throw light on the impact of not just GST but even TDS on rental income. Property rent is one of the biggest sources of income in India for a number of people and has become a dynamic market with time. The income gained through property rent is taxed as the ‘Income from House Property’ under the income tax law. Now that GST has transformed the way different things are being taxed in India, people can be seen sharing confused glances about the tax they have to pay on their rental property.
GST has been enforced in the Indian tax system to make the taxation in India more uniform and transparent. In case of “Income from house property’ or rental income, the former tax law stated that landlords earning an annual rental income of more than INR 10 lakhs have to pay service tax on their rental income. Only commercial properties were bound by tax law to pay this service tax whereas residential properties rented out for residential purposes or commercial purpose were totally exempted from paying any type of service tax. However, GST has increased this basic rental income limit and now a majority of landlords do not fall under the purview of service tax unless their rental income increases INR 20 lakhs.
The New GST Provision On Rental Income
It has become clear that the landlords earning more than INR 20 lakhs as rental income annually would fall under the purview of GST from 1st July 2017. Under the GST regime, only the residential properties to let for residential purposes are exempted from any type of tax whereas both commercial and residential properties to let for any type of commercial use would fall under the purview of GST. Income from rental property in India has been kept under the 18% tax slab and anyone earning more than INR 20 lakhs from rent would be liable to pay this tax. The landlord would also have to issue a tax invoice to the lessee or tenant at regular intervals regarding the same.
The aggregate limit of rental income would be computed by taking all the taxable as well as supplied goods and services exempted from taxes into account. This means that now the tax would be levied on the non-taxable services and goods that are supplied in India or exported to see the INR 20 lakh limit. Moreover, a new ‘Reverse Charge Mechanism’ has also been implemented under GST on rental income on commercial property for rent in India. Under this mechanism borrowed by the service tax regime, a person who is registered under GST and is procuring goods and services from any person not registered under GST would also have to pay the required GST of 18% under the reverse charge mechanism.
The New TDS Provision On Rental Income
Another factor that is affecting the rental sector of real estate is the TDS or Tax Deduction at Source. Under the Budget 2017, new TDS provisions have been announced that have also impacted the tax deducted on rental income. Unlike GST, where the landowner deducts a tax from the tenant, under TDS, the lessee or the tenants are liable to deduct 10% income tax at the source. If and when the lessee needs to get his/her account audited under Section 44AB of the Income Tax Act, he/she is allowed to take this TDS provision. This is applicable only if the rent of the property exceeds INR 1.80 lakhs annually which is solely applied on the landlord and not the property to let for rent.
For the individuals and Hindu Undivided Families, who do not have to get their accounts audited for any reason, the tax deducted at source would be 5% of the rent paid for the entire year. This would also be applicable where tenancy tenure ends before the completion of a year provided the monthly rent paid exceeds INR 50,000 per year.
This means that while GST might increase the rent paid by the lessee on any type of property for rent in India used for commercial purposes, TDS might just be a sigh of relief for the tenants or the lessee. The true effect of these two provisions of GST and TDS would soon be seen in the rental sector of the Indian real estate.