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Service Tax on Renting Immovable Property

As the name suggests, an immovable property is any property which cannot be moved. Any object or an item of the property that cannot be moved without altering or damaging it in the process is also considered as immovable property. Immovable properties are usually fixed to the ground, such as house, land, apartment buildings etc.

An immovable property can be rented for either commercial or residential purpose. Services of such property include renting, leasing, letting, licensing etc. for commercial or business purposes.

Vacant land pertaining to agriculture or land used for residential dwelling, property rented by Reserve Bank of India or property rented to the non-business entity by Government or local authority is not taxable under Service Tax. Service Tax is also applicable only if the yearly turnover of the services rendered is more than Rupees 10 Lakhs.

Service Tax Imposed for Renting of Immovable Property for Residency

Renting is defined as letting, hiring, allowing access or usage of goods, services, and property without the transfer of possession from one owner to another. It is an agreement where payment is made for temporary acquisition of the property.

The residential dwelling is referred to any structure or part of the structure that is used as a residence by a single individual, a single family or a multi-family. Residential dwelling does not include accommodations like motel, hotel, guest house, lodge, camp-site or any other places that are acquired for temporary residency.

No Service Tax is levied on the refundable amount collected from the tenants as a security deposit or rental deposit. Any non-refundable account that is collected by the landlord is subjected to Service Tax. Service Tax is imposed on the maintenance charge paid towards the maintenance of the building which is paid by the tenant. The land owner is responsible for collecting the tax value and submitting it to the Income Tax Department.

Service Tax Applicable on Rent

Service tax on the rent of the immovable property is levied at 15%. The services on which this tax is imposed are as follows:

  • Security or Rental Deposit – No Service Tax is applicable to any refundable amount that is paid by the tenant as security or rental deposit. However, Service Tax is imposed on all the non-refundable amount paid for the services.
  • Reimbursement of actual Electricity Charges – If the electricity bill payable is collected by an agent from the electrical department, no service tax is charged on it. In case a lump sum amount towards the electricity bill is collected or any additional charges are included in the bill, it is subjected to Service Tax.
  • Maintenance Charges – As mentioned, any charges incurred towards the maintenance of the building are subjected to service tax.
  • Renting of Residential House – Any property used for residential purposes is exempted from Service Tax. However, if it is used for commercial or business purposes, Service tax is levied on it.
  • Renting of Vacant Land – Any empty land that is utilized as a parking space or for setting up a temporary shed for marriage is subjected to Service Tax. Agriculture or any agriculture-related activities such as animal husbandry, horticulture or floriculture are exempted from the tax.
  • Renting of Hotel, Inn, Guest House, Club or Campsite – Service Tax is exempted on any room charging Rupees 1000 or equivalent at any commercial place which is used for residential or lodging purposes.
  • Renting a Convention Center- If you rent a convention center for entertainment, educational or recreational purpose, Service Tax is levied on it.
  • Rent from space provided to Mobile Towers – If you have rented your land to mobile companies for setting up a mobile tower then the rent amount collected from it is taxable.
  • Rent from space provided for Vending Machines in a shop or complex – Service tax is applicable on the vending machines for providing goods and services.

Facts about Service Tax on Rent

  • Deduction from Rental Income – No expenses, except property taxes (municipal taxes), can be deducted from the gross rent that is collected by the landlord.
  • Payment of Tax – The tax collected by the land owner must be remitted to the department within the due date (5th of the following month/quarter) depending upon the nature of the taxpayer or the tenant. Any payment made electronically through internet banking must be done by 6th of the subsequent month/quarter. Any delay or non-payment of taxes earns a hefty interest and penalty on the amount due.

Service Tax on Renting of Immovable Property by Co-Owners

Every property is rented differently for different purposes. A single piece of property can be either owned by an individual or it can be co-owned by two or more parties.

When an entire property is owned by a single owner, he or she alone owns the full 100 percent share of the property and he/she is solely responsible for collecting the rent from the tenants or paying taxes on the property. When the property is owned by joint owners then each owner enjoys an equal share in the property and all of them will receive an equal share of rent on the property. Property co-owners only have to pay Service Tax on the rent received as per the individual’s capacity.

If a common property is owned by several individuals then the property can be owned in any proportion between them, if it is agreed upon. The amount of rent due to a single owner in a co-ownership is determined by the percentage of shares owned upon the property.

Maximum Limit for Service Tax on Renting of Immovable Property

Service tax is not imposed on any service provider if their total income earned in a year is below Rupees 10 Lakhs. But if the total amount earned on the services provided by a service provider exceed the threshold value of Rupees 10 Lakhs, (limit exempted from taxation) then Service Tax is made mandatory to be paid upon the earnings.

TDS (Tax Deduction at Source) on Immovable Property

Tax Deduction at Source or TDS on rent is likely to be deducted by the person who is making the payment if the total amount to be paid during the financial year is more than Rupees 1.8 Lakhs per annum. This limit is liable upon the taxpayer. For example; if the property is co-owned by two people then the limit is applicable to both. Likewise, the tax deduction at source on rent will be deducted if the payment received by each owner exceeds the value of Rupees 1.8 Lakhs per annum.

The land owner is imposed to pay a Service tax percent of 15% if the total amount collected by him/her from one or more sources within that year exceeds Rupees 10 Lakhs.

Availing TDS on Rent

To avail tax deduction at source (TDS) upon the rent amount one should meet the following criteria:

  • The person who collects the rent must provide his/her PAN card details to the person who pays the rent. If the PAN card credential is not given to the tenant, the TDS that is liable to be deducted from the rent will be 20 percent of the total rent amount.
  • Any extra charge is not applicable on the TDS on rent, except where the amount of more than 1 crore is paid to a foreign company.
  • No additional education tariff or secondary or higher education tariff can be charged on the TDS charged on rent.
  • If any non-refundable deposit is made by the tenant, TDS is likely to be charged on it. However, no TDS can be deducted from any refundable deposits made to the land owner.
  • No tax will be deducted from the amount paid by a tenant towards municipality taxes, ground rent etc.
  • For any payment made towards hotel accommodations which are taken on a regular basis, TDS will be charged on the rent.

GST to be Applied from July 1

From July 1st, leasing of land, renting buildings and the EMI (Equated Monthly Installment) paid on the purchase of houses or apartments under construction will be subjected to GST-Goods and Services Tax. However, the sale of land and building will stay out of the ambit of GST, whilst continuing to attract stamp duty. The rate at which GST will be imposed can be between 6 to 18 percent.