Real estate stands as a crucial pillar of the nation's economy, serving as a significant source of income for many individuals reliant on property rentals. The introduction of GST has considerably influenced the property rental sector. To delve deeper into how GST affects commercial properties, continue reading this blog.
Taxation of Commercial Rent in India
If you're leasing out your property for commercial use and your annual earnings exceed Rs 200,000, GST applies to you. Specifically, GST is levied at a rate of 18% on the taxable amount.
Responsibility for GST on Commercial Rent
The owners of rental properties are tasked with collecting GST from tenants, which becomes a portion of the rent charged. Starting from AY 20-21, for rents amounting to Rs 2.4 lakh annually, the renter must subtract 10% income tax from the payment.
Both residential and commercial properties fall under TDS regulations, but TDS itself is not subjected to taxation.
Commercial Property Tax Incentives
It's noteworthy that commercial real estate can be both acquired and sold without significant taxation barriers.
Understanding Standard Deductions
Properties leased at a fixed rate qualify for a standard deduction of 30% for repair costs, providing a tax relief irrespective of the actual expenditures on property acquisition.
Interest Deductions on Loans
You may deduct the complete interest paid on loans taken for acquiring, constructing, or renovating commercial properties. This includes any initial fees or processing charges, applicable solely during the ownership year following its completion. Additionally, you’re eligible to claim the total interest paid in five equal installments before the purchase year.
Utilizing Commercial Property for Business
It’s crucial to note that you cannot declare fictional rental income. However, depreciation on the property and interest on the associated loans can be deducted. Actual maintenance and repair costs are also considered tax-deductible.
Changes in the tax regime have limited the deductions available for the interest on commercial property loans. Under Section 24, the standard deduction for rented properties is not applicable. When claiming interest and standard deductions, you may only charge an amount up to the annual net profit of the gross rent deducted by municipal taxes.
Tax-Free Rental Income
You won't incur taxes on any amounts already paid as property taxes. You can deduct the current year's property taxes from either the gross rental income or the gross annual value (GAV) for that specific year.
According to Section 24A of the Income Tax Act, you can claim a 30% deduction from the net annual value, allowing you to evade taxes on this portion, reducing your taxable income. However, expenses like painting and repairs are not tax-deductible when the 30% limit under this section is applied.
If an owner takes a loan on a rental property, the interest paid throughout the fiscal year returns to the rental income after standard deductions are applied, as permitted under Section 24B of the Income Tax Act.
Interest payments on borrowed funds for the purpose of acquisition, construction, or repairs are deductible for rental properties. Additionally, the Income Tax Appeals Court has opined that property owners are not liable to pay taxes on unrealized rental income stemming from unpaid rent.
Since rental income is taxable under sections 22 and 24 of the Income Tax Act, this regulation applies solely to income derived from habitable land. Leasing vacant land, however, is regarded as income from other sources.
Calculating Rental Property Tax
After deducting municipal taxes, standard deductions, and home loan interest, you determine the rental income tax based on the Gross Annual Value (GAV).
Let’s work through an illustrative example:
Assuming an owner receives Rs 30,000 in monthly rental income and pays Rs 30,000 in local tax (using the property unit area system for calculation). The owner is also servicing a home loan with Rs 90,000 interest.
Rental Property Income Amount in Rs.
Gross Annual Value 4,80,000 (40,000 per month)
Deduct Municipal Taxes 30,000
Net Annual Value 4,50,000
Deduct: 30% standard deduction 1,35,000 (30% of 3,30,000)
Home loan interest 90,000
Income from house property 2,25,000
Tax Calculation on Rental Property
The calculated GAV of the property stands at Rs 4,80,000, exceeding Rs 2,50,000, hence tax is applicable. For a monthly rental of Rs 20,000, the GAV will amount to Rs 2,40,000 (20,000 * 12).
Ways to Minimize Rental Income Taxes
To help manage your rental income taxes efficiently, consider these strategies:
Upkeep Fees:
One easy method to save on taxes is by deducting maintenance charges from your rental income. Maintenance costs can be encompassed within the rent. Consequently, if you charge a rent of Rs 50,000 and include Rs 10,000 for maintenance, the entire sum becomes taxable. You can, however, bypass Rs 10,000 in tax by ensuring such costs are excluded from maintenance fees, simply stating in the lease that tenants pay these fees directly to the society association.
Municipal Taxes:
Many individuals overlook the fact that municipal taxes, such as property and sewerage charges, are deductible from rental income. The only stipulation is that the property owner must cover all municipal taxes, as tenants are oftentimes responsible for these payments, rendering them non-deductible. Tax credits on municipal levies can effectively reduce your tax burden by curtailing your real estate income.
Joint Ownership
If you co-own a property with a trustworthy family member (such as a spouse, parent, etc.), you can distribute rental income, consequently permitting tax payment to be shared amongst family members.
Furnished Properties:
Offering amenities like WiFi, gas connections, DTH/cable television, and newspapers, which the owner provides, may incur bills categorized as rent. In these situations, you can request that tenants settle the bills independently and adjust the rental amount accordingly or collect them separately, thus decreasing the rent and rental income.
Standard Deduction:
Properties that are acquired for investment and rented out must involve certain associated repair and maintenance expenses. A 30% deduction of the annual net value can be claimed as a standard deduction, irrespective of the actual costs of repairs.
GST on Commercial Property Maintenance Fees
Buyers are liable to pay GST on maintenance charges in addition to the GST on property purchases. Builders typically impose an 18% GST on monthly maintenance fees approximately amounting to 4,000 rupees, while maintenance fees are exempt from GST for amounts up to Rs 7,700 per month.
Tax Advantages of a Commercial Property Loan
Tax Deduction Under Section 24(B)
This provision permits salaried individuals to receive income tax relief on property loans. For a loan taken out for acquiring a new property, you can claim tax breaks of up to Rs. 2,00,000. Interest payments made are tax-deductible.
Section 37 (1) Tax Benefit:
Property loans, irrespective of being for business or personal objectives, are generally not deductible. However, loans taken for investment purposes might qualify for tax exemptions.
Consequences of Not Declaring Rental Income
When landlords willfully neglect to report their income, they face penalties from the IRS for fraudulent filing. This may entail fines of 20% of the owed amount plus 75% of the overall taxes due. Such penalties are in addition to any dues unpaid.