Income from Commercial Property Rental: Overview
Income from renting out commercial property (shops, offices, warehouses) in India is taxed as either:
- Income from House Property (Sections 22 to 27): the normal head for rent from a building you own
- Profits and Gains of Business (Section 28): only when letting is itself your organised business activity
The head affects deductions, depreciation, and ITR reporting. This guide covers FY 2025-26 (AY 2026-27) under the Income-tax Act, 1961.
Head of Income: House Property vs Business
Income from House Property (the default)
Rent from letting a building or land appurtenant to it that you own is taxed under house property, whether the building is residential or commercial.
Characteristics:
- Owner receives rent for the use of the building
- Letting is not the owner's main organised business activity
- Typical: landlord lets a shop, office floor or warehouse to a tenant
Deductions Available:
- 30% standard deduction on net annual value (Section 24(a))
- Interest on loan (Section 24(b)), no cap for a let-out property
- No depreciation
- No separate deduction for actual repairs or maintenance
Income from Business (letting as a business)
Rent can be business income when letting out property is the main object of the owner's business, for example a company formed to own and let out commercial complexes, or a business centre that provides services along with space. When a building is let out along with plant, machinery or furniture and the two lettings are inseparable, the composite rent is taxed as business income or, if the owner does not carry on a business, as income from other sources (Section 56(2)(iii)). Simply running your own business from part of the same building does not turn rent from the other part into business income.
Deductions Available:
- Actual business expenses (instead of the 30% flat deduction)
- Repairs and maintenance (actual costs)
- Depreciation under Section 32 on the building (10% for buildings other than residential, on written down value)
- Interest on loan
- Employee costs, utilities
Which Applies?
- Rent from owning a building = House Property
- Letting is the organised business itself, or inseparable from letting of business assets = Business Income
- Gray area: decided on facts, so keep records of services provided and how the property is used
Income from House Property: Deductions
Net Annual Value
- Gross annual value = rent receivable for the year (or the expected rent, if higher)
- Less municipal taxes actually paid by the owner during the year
- = Net annual value (NAV)
Standard Deduction (30%)
- Available under Section 24(a), at 30% of NAV
- No receipts needed
- Covers repairs and maintenance, which cannot be claimed separately
Example: Commercial property rent Rs 15 lakh per annum, no municipal tax paid
- Net annual value: Rs 15,00,000
- Less 30% standard deduction: Rs 4,50,000
- Income before interest: Rs 10,50,000
Interest on Loan (No Cap for Let-Out Property)
- Full interest on a loan taken to buy, build, repair or reconstruct the property is deductible under Section 24(b)
- The Rs 2 lakh cap applies only to self-occupied property (Rs 30,000 for older loans and repair loans). A let-out property, residential or commercial, has no cap on the interest deduction
- Keep the loan interest certificate and loan agreement
Example: Loan interest Rs 8 lakh
- Net annual value: Rs 15,00,000
- Less 30% standard deduction: Rs 4,50,000
- Less interest on loan: Rs 8,00,000
- Income from house property: Rs 2,50,000
No Depreciation
- Depreciation is NOT available under House Property
- Available only if the income is taxed as business income
TDS on Commercial Rent (Sections 194-I and 194-IB)
Section 194-I (tenants other than small individuals/HUFs)
- Applies from 1 April 2025 when rent exceeds Rs 50,000 for a month or part of a month (earlier it was Rs 2.4 lakh a year)
- 10% on rent for land, building or furniture; 2% for plant, machinery or equipment
- For FY 2025-26, the tenant reports it in quarterly Form 26Q and issues Form 16A. For rent paid from 1 April 2026, the same TDS falls under Section 393 of the Income-tax Act, 2025 and is reported in Form 140 with a Form 131 certificate
Section 194-IB (individual or HUF tenants not liable to tax audit)
- Applies when rent exceeds Rs 50,000 for a month or part of a month
- 2% from 1 October 2024 (earlier 5%), deducted once a year or at the end of the tenancy
- Paid through challan-cum-statement Form 26QC; no TAN needed
Calculation
- TDS is on rent excluding GST, where GST is shown separately in the invoice (CBDT Circular 23/2017)
- Example: Rent Rs 25 lakh, GST Rs 4.5 lakh
- TDS = Rs 25 lakh × 10% = Rs 2.5 lakh (not on the GST portion)
Landlord's Responsibility
- Check that the tenant's TDS appears in Form 26AS and AIS
- Claim the credit in your ITR
- If TDS is missing, follow up with the tenant to file or correct the TDS return
Consequences for the Tenant
- Section 201(1A): interest at 1% per month if TDS is not deducted, and 1.5% per month if deducted but not paid to the government
- Section 271C: penalty equal to the TDS not deducted
- Section 40(a)(ia): 30% of the rent can be disallowed in the tenant's business accounts if TDS is not deducted and paid
GST on Commercial Property Rental
Rate
- 18% GST on renting of commercial property
- Charged on the rent amount, shown separately on the invoice
Threshold for Registration
- A landlord who supplies only services must register once aggregate turnover exceeds Rs 20 lakh in a financial year (Rs 10 lakh in the special category states of Manipur, Mizoram, Nagaland and Tripura). Telangana follows the Rs 20 lakh limit
- Aggregate turnover counts all taxable and exempt supplies under the same PAN, including residential rent
Who Pays
- Registered landlord: charges 18% to the tenant and deposits it with the government
- Unregistered landlord letting commercial property to a GST-registered tenant: the tenant pays 18% under reverse charge
Example
- Rent: Rs 1,00,000 per month
- GST @18%: Rs 18,000 per month
- Tenant pays total: Rs 1,18,000 per month
ITC Eligibility
- A GST-registered tenant can claim the 18% as input tax credit if the premises are used for business
- ITC is not available to the extent the premises are used for personal purposes or exempt supplies (Section 17(1) and 17(2))
Verification Checklist
- Check the landlord's GSTIN on the GST portal
- Verify the registration is active
- Check that the invoice shows GST separately
ITR Form Selection
ITR 1 (Sahaj)
- Resident individual with salary or pension, up to two house properties (from AY 2026-27), and other sources, total income up to Rs 50 lakh
- Not available with business income, a brought-forward house property loss, or capital gains other than Section 112A long-term gains up to Rs 1.25 lakh
- Schedule: HP (House Property)
ITR 2
- Individuals and HUFs with rental income plus capital gains, more than two house properties, or income above Rs 50 lakh
- Schedule: HP, CG (Capital Gains)
ITR 3 (Business income)
- Rental income taxed as business income, or any other business or professional income
- Schedule: P&L, BP (Business and Profession)
Which Form
- Rent under house property = ITR 1 or ITR 2
- Letting as a business, or other business income = ITR 3
Worked Example: Commercial Property Rental
Scenario: Owner lets an office building (4,000 sq ft). Tenant pays Rs 20 lakh annual rent. Owner has a construction loan of Rs 50 lakh at 9% per annum. No municipal tax paid during the year.
Given
- Gross annual value: Rs 20,00,000
- Loan outstanding: Rs 50,00,000
- Interest at 9% per annum: Rs 4,50,000
- GST status: Landlord's aggregate turnover is Rs 20 lakh, which does not exceed the Rs 20 lakh threshold, so registration is not mandatory. If rent rises above Rs 20 lakh, the landlord must register
Calculation (House Property Head)
- Net annual value: Rs 20,00,000
- Less 30% standard deduction: Rs 6,00,000
- Less interest on loan: Rs 4,50,000
- Income from House Property: Rs 9,50,000
Tax Liability
- Assuming the owner's other income already puts them in the 30% slab (old or new regime) and no surcharge applies
- Tax on Rs 9,50,000 at 30% = Rs 2,85,000
- Plus health and education cess (4% of tax) = Rs 11,400
- Additional tax: Rs 2,96,400
TDS Credit
- Section 194-I: tenant deducts Rs 2,00,000 (10% of Rs 20 lakh), and the landlord claims credit
- Balance payable: Rs 2,96,400 - Rs 2,00,000 (TDS) = Rs 96,400, to be paid as advance tax during the year to avoid interest under Sections 234B and 234C
Renting to Relatives or Your Own Business
Transfer pricing (Section 92) applies to international transactions and specified domestic transactions, not to an individual letting property to a family member. Rent from a relative is taxed like any other rent, but the arrangement must be genuine: keep a rent agreement, receive rent through the bank, and report it in Schedule HP. If your own business pays rent to a relative, Section 40A(2) allows the Assessing Officer to disallow the part that is excessive compared to market rent.
Depreciation (Business Head Only)
If commercial rental is taxed as business income, depreciation is claimed on written down value under Section 32 at the rates in Appendix I of the Income-tax Rules:
Rates
- Building (other than residential): 10%
- Furniture and fittings: 10%
- Plant and machinery (general): 15%
Example
- Building cost (excluding land): Rs 50,00,000
- Depreciation at 10%: Rs 5,00,000 (half, Rs 2,50,000, if the building is put to use for less than 180 days in the year of purchase)
Land is not depreciable, and depreciation cannot be claimed under the house property head.
Rental Loss: Set Off and Carry Forward
If deductions exceed rental income (loss under house property):
- Old regime: the loss can be set off against other heads such as salary in the same year only up to Rs 2 lakh (Section 71(3A))
- The balance is carried forward for 8 assessment years and set off only against future house property income (Section 71B)
- New regime: the house property loss cannot be set off against other heads
- Losses cannot be carried back
Example
- Net annual value: Rs 15,00,000
- Standard deduction: Rs 4,50,000
- Interest on loan: Rs 12,00,000
- Loss: Rs 1,50,000
- Old regime: set off fully against salary or other income (within the Rs 2 lakh limit)
Compliance Checklist
- Verify TDS deducted by the tenant in Form 26AS and AIS
- Obtain the loan interest certificate for the Section 24(b) deduction
- Maintain a copy of the rental agreement
- Keep proof of municipal taxes paid
- Check GST registration need once aggregate turnover crosses Rs 20 lakh
- Select ITR form (ITR 1, ITR 2, or ITR 3)
- File Schedule HP or Schedule BP (as applicable)
Source: Income-tax Act 1961 (Sections 22 to 24, 28, 32, 40(a)(ia), 40A(2), 71, 71B, 194-I, 194-IB, 201, 271C); CBDT Circular 23/2017 (TDS on rent excluding GST); Finance Act 2025 (194-I threshold); Finance (No. 2) Act 2024 (194-IB rate); CGST Act 2017 Section 22 (registration threshold)
