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 (Section 22) - if passive rental
- Income from Business (Section 28) - if owner also operates own business in building
Choice of head affects deductions, depreciation, and ITR reporting.
Head of Income: House Property vs Business
Income from House Property (Passive Rental)
Applies if property is let out purely for rental income, with no connection to owner's business.
Characteristics:
- Owner receives rent passively
- No business operation by owner in building
- Tenant is unrelated party
- Typical: Landlord lets entire commercial building to tenant
Deductions Available:
- 30% standard deduction (Section 24(a))
- Interest on loan (Section 24(b)) - no cap limit for commercial
- No depreciation
- No actual repair/maintenance expenses
Income from Business (Active Use)
Applies if owner also operates own business in same building/complex and rents adjacent space.
Characteristics:
- Owner has business in building
- Rents out portion to tenant
- Ownership and operation intertwined
- Typical: Shop owner rents adjacent shop; office tenant lets office floor to other tenant
Deductions Available:
- All actual business expenses (not just 30%)
- Repair and maintenance (actual costs)
- Depreciation (Section 32) on building (15% per annum)
- Interest on loan (full amount)
- Employee costs, utilities
- Section 44ADA presumptive income (8% of gross rent, if turnover is below Rs 2 crore)
Which Applies?
- Purely passive rental (no business connection) = House Property
- Owner has business in same building = Business Income
- Gray area: Seek tax advice based on facts
Income from House Property: Deductions
Standard Deduction (30%)
- Available under Section 24(a)
- No receipts needed
- No actual maintenance spent
- Simple calculation
Example: Commercial property rental Rs 15 lakh per annum
- Gross rental income: Rs 15,00,000
- Less 30% standard deduction: Rs 4,50,000
- Net income: Rs 10,50,000
Interest on Loan (No Cap)
- Full interest deductible under Section 24(b)
- Unlike residential property (Rs 2 lakh cap for self-occupied, Rs 30k for let-out), commercial property let-out has NO cap
- Must produce bank statement/loan agreement
Example: Loan interest Rs 8 lakh
- Gross rental: Rs 15,00,000
- Less 30% standard deduction: Rs 4,50,000
- Less interest on loan: Rs 8,00,000
- Net taxable income: (-) Rs 2,50,000 (loss, can carry forward 8 years)
No Depreciation
- Depreciation NOT available under House Property
- Available only if income treated as Business
- Structure depreciation @ 15%, furniture/fittings @30%
No Actual Repair Deduction
- 30% standard deduction covers maintenance/repairs
- Actual repair costs cannot be separately claimed
- Exception: Major renovation (treated as capital expenditure, depreciation available under Business head)
Section 194I: TDS on Commercial Rent
Rate
- 10% TDS on annual rent above Rs 2.4 lakh
- Tenant deducts TDS, files Form 26QB
- Landlord claims credit in ITR
Threshold
- Annual rent >Rs 2.4 lakh triggers TDS
- Rs 20,000 per month = Rs 2.4 lakh annual
- Below Rs 2.4 lakh: No TDS
Calculation
- Deducted on rent ONLY, not GST
- Example: Rent Rs 25 lakh, GST Rs 4.5 lakh
- TDS = Rs 25 lakh × 10% = Rs 2.5 lakh (not on GST portion)
Landlord's Responsibility
- Verify Form 26QB filed by tenant
- Check Form 26AS for TDS credit
- Claim in ITR-1/ITR-2
- If TDS not filed by tenant, follow up (Form 26QB is tenant's obligation)
Penalty for Non-Deduction
- Section 201(1A): 1.5% per month interest on TDS not deducted
- Section 271C: Penalty equal to TDS amount
- Tenant liable if fails to deduct
GST on Commercial Property Rental
Rate
- 18% GST if landlord is registered
- Charged on rent amount
- Separate from rent
Threshold for Registration
- Turnover >Rs 20 lakh (goods) or Rs 10 lakh (services) triggers registration
- If landlord's total income including rent >Rs 20 lakh, likely registered
Who Pays
- Tenant pays to landlord (18% on rent amount)
- Landlord deposits to government
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
- Tenant can claim 18% GST as ITC (if tenant is GST registered)
- Limitation: Section 17(5) - ITC blocked on rent if property used for personal use or outside business scope
Verification Checklist
- Check landlord's GST certificate
- Verify landlord is active on GST portal
- Confirm registration scope includes commercial rental services
Deduction Differences: House Property vs Business
| Aspect | House Property (Section 22) | Business Income (Section 28) |
|---|---|---|
| Standard deduction | 30% (fixed) | None (actual expenses) |
| Interest on loan | Full (no cap) | Full |
| Repair expenses | Covered in 30% | Actual expenses deductible |
| Depreciation | Not available | Available (15% structure, 30% items) |
| Utilities (electricity, water) | Covered in 30% | Separately deductible |
| Employee costs | Not available | Deductible |
| Section 44ADA | Not applicable | Available (presumptive 8% if turnover is less than Rs 2 crore) |
ITR Form Selection
ITR-1 (Individuals, 1 income source)
- File if: Only salary income + one commercial rental property
- Schedule: HP (House Property)
- Use if rental under House Property head
ITR-2 (Multiple sources, capital gains)
- File if: Salary + rental + capital gains from property sale
- Schedule: HP, CG (Capital Gains)
- Use if sold commercial property same year and claiming LTCG/STCG
ITR-3 (Business income)
- File if: Commercial rental treated as Business Income
- Schedule: P&L, BP (Business Profit)
- Use if owner has business in building and rental income intertwined
Which Form
- Passive rental (House Property) = ITR-1 or ITR-2
- Active business + rental = ITR-3
Worked Example: Commercial Property Rental
Scenario: Owner lets office building (4,000 sq ft). Tenant pays Rs 20 lakh annual rent. Owner took loan of Rs 50 lakh @9% per annum for construction.
Given
- Gross rental: Rs 20,00,000
- Loan outstanding: Rs 50,00,000
- Interest rate: 9% per annum = Rs 4,50,000 annual
- GST status: Landlord not registered
Calculation (House Property Head)
- Gross rental income: Rs 20,00,000
- Less 30% standard deduction: Rs 6,00,000
- Less interest on loan: Rs 4,50,000
- Net income from House Property: Rs 9,50,000
Tax Liability
- Assuming owner is in 30% tax bracket (old regime)
- Tax on Rs 9,50,000 @ 30% = Rs 2,85,000
- Plus education cess (4% of tax) = Rs 11,400
- Total tax: Rs 2,96,400
TDS Credit
- Section 194I: If tenant deducts Rs 2,00,000 (10% of Rs 20L), landlord claims credit
- Tax payable: Rs 2,96,400 - Rs 2,00,000 (TDS) = Rs 96,400
Related-Party Rental: Arm's Length Price
If commercial property is rented to related party (family, business associate), rent must be at arm's length price under Section 92.
Related Parties
- Family members
- Subsidiary company
- Associate company
- Other connected entity
Arm's Length Obligation
- Rent must match market rent for similar properties
- Section 92(2) documentation required if related party
- Transfer pricing study recommended
- Non-compliance: AO can adjust rent upward
Documentation
- Comparable rent analysis (market survey)
- Transfer pricing report (if TP threshold exceeded)
- File with ITR
Depreciation (Business Head Only)
If commercial rental treated as Business Income:
Rates
- Building structure: 15% per annum (Section 32)
- Furniture/fittings: 30% per annum
- Plant/machinery: 40% per annum (if movable)
Example
- Building cost: Rs 50,00,000
- Depreciation @ 15%: Rs 7,50,000
Limitation
- Depreciation available only on building constructed after acquisition
- Lease depreciation: Lower of construction value or lease term
- Cannot be claimed under House Property head
Rental Loss: Carry Forward
If deductions exceed rental income (negative income):
- Loss can be carried forward for 8 consecutive years
- Set off against other income (salary, business, capital gains)
- Cannot be carried back
Example
- Gross rental: Rs 15,00,000
- Standard deduction: Rs 4,50,000
- Interest on loan: Rs 12,00,000
- Loss: Rs 1,50,000
- Carry forward for 8 years
Compliance Checklist
- Verify TDS deducted by tenant (Form 26QB)
- Check Form 26AS for TDS credit
- Obtain bank statement for interest deduction
- Maintain copy of rental agreement
- If related-party rent: Maintain TP documentation
- Verify landlord's GST status (if applicable)
- Select ITR form (ITR-1, ITR-2, or ITR-3)
- File Schedule HP or Business Profit (as applicable)
FAQ
Q: Can owner claim depreciation on commercial property rented out under House Property head?
A: No. Depreciation is available only if rental income is treated as Business Income. Under House Property, 30% standard deduction is the only automatic relief.
Q: If commercial property generates loss, can it be carried back?
A: No. Loss from House Property can be carried forward 8 years, not carried back. Exception: Business loss can be carried back 1 year (house property loss cannot).
Q: Is rent received in foreign currency subject to TDS?
A: Yes. Section 194I applies to rent paid in any currency. TDS is calculated on INR equivalent at TT buying rate at date of rent payment.
Q: Can owner claim loan interest if property was inherited (no purchase loan)?
A: No. Section 24(b) interest deduction applies only to loans taken for construction/purchase. Inherited property: No interest deduction possible.
Source: Income Tax Act 1961 (Sections 22, 24, 28, 32, 92, 194I, 201, 271C); CBDT Circular 119/2017 (Transfer Pricing); Section 44ADA
