Renting out a shop, office space, or warehouse comes with a layer of complexity residential landlords don't face: GST registration thresholds, a choice between 'House Property' and 'Business Income' classification, and TDS obligations that kick in at much lower amounts than for residential rent. Here's how commercial rental income is actually taxed.
Income Tax Classification: House Property vs Business Income
The first question for any commercial property owner is: under which head is the rental income taxed? This depends primarily on the nature of the activity:
| Scenario | Head of Income |
|---|
| You simply let out a shop/office/warehouse you own, receiving rent without providing significant additional services | Income from House Property |
| You operate a business of letting out properties with substantial additional services (e.g., a managed co-working space, serviced offices with staffing, security, maintenance bundled in as a core service offering) | Profits and Gains of Business or Profession |
This distinction matters because the computation, deductions, and set-off rules differ significantly between the two heads.
Computation Under "Income from House Property"
If classified as house property income, the computation follows the standard formula:
- Gross Annual Value = Actual rent received/receivable (or higher of municipal value/fair rent/standard rent if the property is vacant for part of the year, subject to specific rules for let-out properties)
- Less: Municipal taxes paid by the owner
- = Net Annual Value
- Less: Standard deduction @ 30% of Net Annual Value
- Less: Interest on loan taken to acquire/construct/repair the commercial property (no cap, since it's not self-occupied)
- = Income from House Property (commercial)
No deduction for actual expenses beyond the 30% standard deduction. Unlike business income, where you can deduct actual expenses (repairs, insurance, depreciation, etc.) individually, house property income allows only the flat 30% standard deduction (plus municipal taxes and home loan interest) - actual maintenance costs, society charges, etc., generally cannot be separately deducted.
Computation Under "Business Income"
If the letting activity is classified as a business (substantial services provided), the income is computed as per normal business income rules - actual rental receipts less actual expenses incurred (maintenance, staff costs, depreciation on the property and furnishings, etc.), which can sometimes result in a more favorable computation if expenses are high, but also brings the income within the ambit of tax audit requirements (Section 44AB) if turnover/receipts exceed prescribed thresholds.
GST on Commercial Rent
This is where commercial property differs sharply from residential property:
| Property Type | GST Treatment |
|---|
| Residential property let out for residential use | Generally exempt from GST |
| Commercial property (shops, offices, warehouses) let out for business/commercial use | Taxable under GST (typically at 18%) if the landlord's aggregate turnover (including rental income and any other taxable supplies) exceeds the GST registration threshold (₹20 lakh for most states, ₹10 lakh for certain special category states) |
GST is separate from income taxIf your aggregate turnover (across all sources, not just this one property) crosses the GST registration threshold, you must register for GST and charge GST on the commercial rent, in addition to your income tax obligations on the rental income itself. The GST collected is not your income - it's collected on behalf of the government and deposited via GST returns - but registering also means the rental income (along with any other business income) needs to be reported in GST returns, separate from your income tax return.
TDS on Commercial Rent Paid by Tenants
| Tenant Type | TDS Section | Threshold | Rate |
|---|
| Individual/HUF not subject to tax audit, paying rent for any property (residential or commercial) | Section 194-IB | Rent exceeding ₹50,000 per month | 2% |
| Other persons (companies, firms, individuals/HUFs subject to tax audit) paying rent for land/building/furniture | Section 194-I | Aggregate rent exceeding ₹2,40,000 in the financial year (threshold subject to periodic revision) | 2% for plant & machinery, 10% for land/building/furniture (rates subject to revision) |
For commercial tenants who are businesses (companies, firms, or individuals/HUFs subject to tax audit), TDS under Section 194-I applies at a much lower aggregate threshold (₹2,40,000/year, i.e., ₹20,000/month on average) compared to the ₹50,000/month threshold under 194-IB that applies to non-audit individual/HUF tenants. Commercial landlords should track TDS credit reflected in Form 26AS/AIS from multiple tenant types.
Frequently Asked Questions
I own a single shop that I rent out to a retailer, and I don't provide any services beyond the bare premises. Do I need to register for GST? ▼
GST registration is required if your aggregate turnover (which includes this rental income plus any other taxable supplies you make, across all your business activities) exceeds the applicable threshold (₹20 lakh for most states, ₹10 lakh for certain special category states) in a financial year. If your total rental income from this shop (and any other taxable income) is below this threshold, you would not be required to register for GST, and the rent would not attract GST. If you cross the threshold, GST registration and charging GST on the commercial rent (typically at 18%) would become mandatory.
My tenant (a private company) pays me ₹25,000 per month rent for my office space. Will TDS be deducted, and at what rate? ▼
Yes. Since the tenant is a company (not an individual/HUF outside tax audit), TDS under Section 194-I applies if the aggregate annual rent exceeds the prescribed threshold (₹2,40,000/year, i.e., an average of ₹20,000/month - and ₹25,000/month × 12 = ₹3,00,000/year clearly exceeds this). TDS would be deducted at the rate applicable to rent for land/building (commonly 10%, subject to the rates in force), and you would see this reflected as TDS credit in your Form 26AS/AIS, which you can claim against your tax liability when filing your ITR.
Can I claim depreciation on my commercial property if the rental income is taxed as 'Income from House Property'? ▼
No. Under the 'Income from House Property' head, depreciation on the building itself is not a separately allowable deduction - the flat 30% standard deduction on Net Annual Value is meant to broadly cover repairs, maintenance, and similar costs (including an implicit allowance for wear and tear), and no additional depreciation claim is permitted. Depreciation on the property as a specific deduction is relevant only if the rental activity is classified as a business (Profits and Gains of Business or Profession), where the asset is part of the business's block of assets eligible for depreciation under Section 32.