Service Tax on Renting Immovable Property

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

Service Tax Applicable on Rent

Service tax on the rent of immovable property was levied at 15% (the final rate, until 30 June 2017). The services on which this tax was imposed were as follows:

• Security or Rental Deposit – No Service Tax was applicable to any refundable amount that was paid by the tenant as security or rental deposit. However, Service Tax was imposed on all the non-refundable amounts paid for the services.
• Reimbursement of actual Electricity Charges – If the electricity bill payable was collected by an agent from the electrical department, no service tax was charged on it. In case a lump sum amount towards the electricity bill was collected or any additional charges were included in the bill, it was subjected to Service Tax.
• Maintenance Charges – As mentioned, any charges incurred towards the maintenance of the building were subjected to service tax.
• Renting of Residential House – Any property used for residential purposes was exempted from Service Tax. However, if it was used for commercial or business purposes, Service tax was levied on it.
• Renting of Vacant Land – Any empty land that was utilized as a parking space or for setting up a temporary shed for marriage was subjected to Service Tax. Agriculture or any agriculture-related activities such as animal husbandry, horticulture or floriculture were exempted from the tax.
• Renting of Hotel, Inn, Guest House, Club or Campsite – Service Tax was exempted on any room charging Rupees 1000 or equivalent at any commercial place which was used for residential or lodging purposes.
• Renting a Convention Center- If a convention center was rented for entertainment, educational or recreational purposes, Service Tax was levied on it.
• Rent from space provided to Mobile Towers – If land was rented to mobile companies for setting up a mobile tower then the rent amount collected from it was taxable.
• Rent from space provided for Vending Machines in a shop or complex – Service tax was 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), could be deducted from the gross rent that was collected by the landlord.
• Payment of Tax – The tax collected by the land owner had to 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 had to be done by the 6th of the subsequent month/quarter. Any delay or non-payment of taxes earned 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 had 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 was not imposed on any service provider if their total income earned in a year was below Rupees 10 Lakhs. But if the total amount earned on the services provided by a service provider exceeded the threshold value of Rupees 10 Lakhs (the limit exempted from taxation), then Service Tax was mandatory to be paid upon the earnings.

TDS (Tax Deduction at Source) on Immovable Property

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

The land owner had to pay Service tax at 15% if the total amount collected by him/her from one or more sources within that year exceeded Rupees 10 Lakhs.

Availing TDS on Rent

To avail tax deduction at source (TDS) upon the rent amount one had to meet the following criteria (as they stood in the service tax era):

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

GST Applied from July 1, 2017

From 1 July 2017, leasing of land, renting buildings and the EMI (Equated Monthly Installment) paid on the purchase of houses or apartments under construction became subject to GST-Goods and Services Tax, which replaced service tax. However, the sale of land and building stayed out of the ambit of GST, whilst continuing to attract stamp duty. For details of how renting is taxed today, see our GST guide.