Lease income from ‘residential’ property is exempt from GST

MUMBAI: Rent or leave and license fees received by an owner of a residential flat, even if such flat has been let out to corporate entities for use by the latter’s employees, will not be subject to goods and services tax (GST). This was recently held by the Authority for Advance Rulings (AAR), Maharashtra.

In cities like Mumbai, residential flats are often let out, on a lease and license basis to business entities. In turn, the concerned company allots these flats to its key executives for their residential purposes. Letting out of residential flats is exempt from GST, but does the mere fact that it is let out to a corporate entity transform its character? This often becomes a contentious issue. Kasturi and Sons, which had proposed to let out some of its residential flats, located in a posh South Mumbai area, to Life Insurance Corporation of India (LIC) approached the AAR. It contended that the flats that are going to be let out are residential apartments and they are going to be used for residential purposes only. Merely because these flats will be taken by LIC does not change the end usage to ‘commercial’

The bench was composed of members Rajiv Magoo and R. R. Ramnani, who ruled that flats which are used for residential purposes, irrespective of whether they are let out to individuals or to commercial entities will be covered by the exemption notification dated June 28, 2017. In this case, as the nature of the end use was residential; Kasturi and Sons would not have to pay GST on the monthly leave and license fee received by it (This was proposed to be Rs. 145/sqft).

Indirect tax specialist and founder of a CA firm, Sunil Gabhawalla explains, “The exemption is available if the property being let out is a residential dwelling and is used for residential purposes. If the property is used for commercial purposes, the exemption is not available and the landlord or licensor would be required to register and pay GST at 18% if the annual rent crosses 20 lakhs.”

“The ruling correctly holds that the commercial nature of licensee (which is LIC) would not be relevant to decide the eligibility for the exemption but the actual use of the property - residential stay by employees of LIC is the determining factor,” adds Gabhawalla.The AAR bench in its order pointed out that the submissions made by the jurisdictional GST official defined all logic. He had submitted that: LIC is a commercial organization and hence the staff to whom the flat is let out can sit late in office and work more. LIC is a profit-making company. So, in order to increase profit, the facility of residential quarters is given to employees, which is a commercial use.

The jurisdictional officer had also submitted that the exemption notification would not apply, but he had failed to provide any reasoning for his opinion, observed the AAR bench.In its order, the AAR bench also referred to a similar advance ruling given by the West Bengal bench. “The GST applicability is not decided by the nature of the property, but by the purpose for which it is used,” emphasized the AAR bench and held that the exemption notification would apply.


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