"Rent is exempt from GST": what the law actually says in 2026

The claim goes around every year: "Rent is exempt from GST — it's just a house, not a business." Landlords repeat it. Tenants repeat it. Then a GST officer issues a notice to a registered business that paid rent to an unregistered landlord for three years without depositing a rupee of tax, and suddenly the exemption everybody was certain about turns out to have been narrowed twice — once in July 2022 and again in October 2024.

The exemption is real. It is also much smaller than most people think, and the person who pays the penalty for getting it wrong is usually the tenant, not the landlord.

What the law actually says

Renting of immovable property is a supply of service under Schedule II, Paragraph 5(a) of the CGST Act, 2017. The default position, therefore, is that rent attracts GST at 18%. Exemption is the exception, and it is narrow.

The exemption lives in Entry 12 of Notification No. 12/2017-Central Tax (Rate): services by way of renting of a residential dwelling for use as residence are exempt. Note the two conditions stacked into that phrase — the property must be a residential dwelling, and it must be used as a residence. Renting a flat to a company that houses staff in it satisfies both. Renting the same flat to a company that runs a back office out of it satisfies neither.

Two amendments then cut into this exemption:

Amendment 1 — 18 July 2022. Notification No. 04/2022-Central Tax (Rate) restricted Entry 12 so the exemption no longer applies when a residential dwelling is rented to a registered person. From that date, a registered tenant renting a residential dwelling pays 18% GST under reverse charge — the tenant self-assesses and deposits the tax, regardless of whether the landlord is registered. A subsequent clarification (effective 1 January 2023) carved out the case where a proprietor rents a residence in a personal capacity for personal use — that stays exempt even if the proprietor's firm is GST-registered.

Amendment 2 — 10 October 2024. Notification No. 09/2024-Central Tax (Rate) extended reverse charge to commercial property rented by an unregistered landlord to a registered tenant. Before this, if your landlord was below the registration threshold, no GST arose at all on the commercial rent. After 10 October 2024, the registered tenant must deposit 18% under RCM. This is the change most businesses have still not absorbed, and it is the single biggest source of rent-related GST exposure sitting on books right now.

So the correct 2026 position, stated properly, is four cases — not one exemption.

There is one more trap worth naming. Renting a residential dwelling that the tenant then uses for commercial purposes — a clinic in a flat, a consultancy in a villa, serviced apartments let out nightly — is not covered by Entry 12 at all. The exemption turns on use as residence, not on the municipal classification of the building. Calling a property "residential" in the rent agreement does not exempt it if the occupant runs a business from it.

Practical implications

The tenant carries the risk, not the landlord. Under reverse charge, the statutory liability under Section 9(3) of the CGST Act sits on the recipient. If your business rents an office from an individual landlord who is not GST-registered, the landlord has done nothing wrong by not charging GST. You have done something wrong by not depositing it. Interest under Section 50 runs at 18% per annum from the due date, and penalty exposure under Section 73 is 10% of tax (or Rs.10,000, whichever is higher) — rising to 100% under Section 74 if suppression is alleged.

Work the arithmetic on a common case. A firm rents an office at Rs.1,50,000 per month from an unregistered individual. RCM applies from October 2024. Over 21 months to June 2026 that is Rs.31,50,000 of rent, Rs.5,67,000 of GST that should have been deposited, plus interest at 18% running month by month — roughly Rs.85,000 to Rs.90,000 by mid-2026 — plus penalty. That is close to Rs.7 lakh on a liability the business could have discharged at zero net cost, because the same tax was fully creditable.

RCM on rent is usually cash-neutral, but only if you actually pay it. Tax deposited under reverse charge on premises used for taxable business supply is available as input tax credit under Section 16. You pay Rs.27,000 and you claim Rs.27,000. The catch is procedural: RCM liability must be discharged in cash through the electronic cash ledger — it cannot be set off against existing ITC. Credit becomes available only in the month the tax is actually paid. So the cost is working capital and discipline, not tax.

Credit is not available in every case. If the premises are used for exempt supplies, credit is proportionately reversed under Rule 42. Where an employer takes residential premises for employee accommodation, the credit position depends on whether it is a business input or a personal-consumption perquisite blocked under Section 17(5)(g) — a live dispute, and the safer route is to document the business nexus in the lease or the HR policy.

Rent counts toward your registration threshold if you are the landlord. A landlord earning Rs.22 lakh a year from commercial rent has crossed the Rs.20 lakh services threshold under Section 22 and must register — even if that rent is their only "business". Once registered, they charge GST on the invoice and forward charge applies; RCM ceases. Residential rent that is exempt does count toward "aggregate turnover" for threshold purposes under Section 2(6), which surprises landlords with mixed portfolios.

GST and income-tax TDS are separate obligations. TDS on rent — Section 194-I of the erstwhile Income-tax Act, 1961, carried forward in the corresponding provision of the Income Tax Act, 2025 — applies at 10% on rent above the annual threshold and is reported in the TDS statements that populate the annual tax statement (Form 26AS, now Form 168 under ITA 2025). Depositing income-tax TDS on rent does nothing for your GST position, and vice versa. Under ITA 2025 terminology this is reckoned by Tax Year, not "previous year" or "assessment year". Also note: GST is computed on rent excluding the income-tax TDS — you deduct TDS on the base rent, and you compute 18% GST on that same base rent.

What to do

• List every premises you rent — offices, warehouses, godowns, staff accommodation, co-working seats, shop-in-shop counters. Include informal arrangements without a written lease; the liability follows the supply, not the paperwork.
• Get the landlord's GSTIN in writing for each one. If they have one, they must issue a tax invoice with GST and you claim credit normally. If they do not have one, get a signed declaration that they are unregistered — that declaration is what triggers your RCM obligation and it is also your audit evidence.
• Classify each premises by actual use, not by the building's label. A flat used as an office is commercial for GST purposes. A commercial unit used as a hostel is still commercial.
• Fix the period from 10 October 2024 onward first. Compute RCM on commercial rent from unregistered landlords for every month since. Deposit tax with interest under Section 50 voluntarily using Form DRC-03 before a notice is issued — voluntary payment under Section 73(5) avoids penalty entirely.
• Report it correctly going forward. RCM liability goes in Table 3.1(d) of GSTR-3B; the corresponding credit goes in Table 4(A)(3). Issue a self-invoice under Section 31(3)(f) and a payment voucher under Section 31(3)(g) for every RCM supply from an unregistered supplier — this is mandatory and is routinely missed.
• Rewrite your lease clauses. Every new lease should state the landlord's registration status, who bears GST, and an obligation on the landlord to notify you within 30 days if their status changes. A landlord crossing the threshold mid-lease flips you from RCM to forward charge, and nobody will tell you unless the contract requires it.
• Reconcile annually. Compare rent debited in the books against RCM discharged in GSTR-3B before filing GSTR-9. A mismatch here is one of the easiest things for a system-driven scrutiny notice under Section 61 to spot.

FAQ

I rent a flat to live in and my proprietorship is GST-registered. Do I pay RCM?
No. Where a proprietor rents a residential dwelling in their personal capacity for their own residence, and it is not used in the course or furtherance of business, the exemption continues — clarified with effect from 1 January 2023. Keep the lease in your personal name, pay from a personal account, and do not claim the rent as a business expense.

My commercial landlord is unregistered. Can I just ask him to register so I avoid RCM?
You can ask, but he is only obliged to register if his aggregate turnover crosses the Section 22 threshold. He may register voluntarily under Section 25(3), which shifts the tax to forward charge and gives him credit on property expenses. Many small landlords will refuse because it creates a permanent filing obligation. If he stays unregistered, the RCM liability is yours and it is not optional.

Is RCM on rent claimable as input tax credit?
Yes, provided the premises are used for making taxable supplies and you satisfy Section 16 conditions. The tax must first be paid in cash through the electronic cash ledger; credit is available in the same tax period the payment is made. If you make both taxable and exempt supplies, reverse the proportionate credit under Rule 42.

Does GST apply to the security deposit?
No — a refundable security deposit is not consideration for a supply, per the proviso to Section 2(31). But the moment any part of it is adjusted against rent or forfeited, that portion becomes consideration and attracts 18% GST in the month of adjustment. Non-refundable deposits are taxable from day one.

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See Also

• "Reverse charge means my supplier handles the GST": what Section 9(3) actually says
• GSTR-3B vs GSTR-1 Mismatch Notices: Why They're Issued, How to Reconcile, and the Penalty Exposure
• Input Tax Credit Blocked Under Section 17(5): The Complete List With the Cases That Catch Businesses Off Guard

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