RCM on Rent under GST: Complete Guide on Renting of Immovable Property

Renting of immovable property is one of the common transactions in business. A shop may be taken on rent, an office may be used on lease, a warehouse may be hired for storage, or a residential flat may be taken by a company for its employee or director.

Under GST, renting of immovable property is treated as a supply of service. In normal cases, the supplier of service is liable to collect and pay GST. However, in certain notified cases, GST is payable by the recipient under Reverse Charge Mechanism, popularly known as RCM.

In case of rent, the RCM provisions mainly need to be understood through three entries:

Entry 5A  :  Renting of immovable property by Government or local authority to a registered person.
Entry 5AA: Renting of residential dwelling to a registered person.
Entry 5AB: Renting of immovable property other than residential dwelling by an unregistered person to a registered person.

Each entry has its own scope, conditions, and practical implications.

Meaning of Renting of Immovable Property

Renting of immovable property means allowing, permitting, or granting access, occupation, use, or enjoyment of an immovable property. It may be with or without transfer of possession or control.

In simple words, if a person is allowed to use a property against rent, lease charges, license fees, or similar consideration, it may be covered as renting of immovable property.

This can include renting of shop, office, commercial premises, warehouse, godown, land, residential flat, house, bungalow, or any other immovable property.

Entry 5A: Renting by Government or Local Authority

• Entry 5A applies where services are supplied by the Central Government, State Government, Union Territory, or local authority by way of renting of immovable property to a person registered under GST.

• This entry was inserted vide Notification No. 3/2018-Central Tax (Rate), dated 25 January 2018, with effect from 25 January 2018.

• In simple language, if Government or local authority gives any immovable property on rent to a GST registered person, then the registered person has to pay GST under RCM.

• For example, if a municipal corporation gives a shop on rent to a registered trader, the trader will be liable to pay GST under RCM. The municipal corporation will not collect GST from the trader in the normal way. The liability will shift to the recipient.

• The important point in Entry 5A is that the supplier must be Government, State Government, Union Territory, or local authority. The recipient must be a person registered under GST. The nature of property can be any immovable property.

• Therefore, where a registered business takes premises, shop, land, stall, office, or similar immovable property on rent from Government or local authority, RCM applicability should be checked.

Entry 5AA: Renting of Residential Dwelling to Registered Person

• Entry 5AA covers service by way of renting of residential dwelling to a registered person. This entry was inserted vide Notification No. 5/2022-Central Tax (Rate), dated 13 July 2022, with effect from 18 July 2022.

• Earlier, renting of residential dwelling for use as residence was exempt under GST. However, the exemption was later restricted. From 18 July 2022, where residential dwelling is rented to a registered person, GST is payable under RCM.

• The phrase “residential dwelling” is not specifically defined under GST law. However, in common understanding, it refers to a property meant for residential living. It may include a flat, house, bungalow, apartment, or similar residential accommodation. It generally does not include hotel, motel, inn, guest house, lodge, campsite, houseboat, or similar places meant for temporary stay.

• In simple language, if a residential house or flat is given on rent to a GST registered person, GST may be payable by the recipient under RCM.

• For example, if a company takes a residential flat on rent for providing accommodation to its director or employee, the company being a registered person will be liable to pay GST under RCM.

• Similarly, if a registered partnership firm or LLP takes a residential bungalow on rent for business-related residential accommodation, Entry 5AA may apply.

Why Entry 5AA Was Introduced

• The original exemption was intended to provide relief where residential property was used as residence by individuals and non-commercial persons. The idea was that ordinary residential rent should not carry GST burden.

• However, where residential dwelling is rented to a registered business entity, the Government brought such transaction under tax net through RCM. Therefore, the exemption continues in genuine personal residential cases, but it does not simply apply merely because the property is residential.

• From 18 July 2022, the amended exemption entry excludes cases where residential dwelling is rented to a registered person. At the same time, Entry 5AA was inserted in the RCM notification.

• Therefore, if the tenant is registered under GST, the transaction must be carefully examined.

Important Clarification for Proprietor

A practical issue arose in case of proprietors.

A proprietor may be registered under GST for his business. At the same time, he may take a residential house on rent for his personal residence. The question was whether GST under RCM would apply merely because he has GST registration. To address this issue, an explanation was inserted with effect from 1 January 2023. The clarification provides relief where the proprietor rents a residential dwelling in his personal capacity for use as his own residence, and the rent is not on account of business and is not recorded in the books of account of the firm.

For example, Mr. A is a proprietor having GST registration for his trading business. He takes a residential flat on rent in his personal capacity for living with his family. The rent is paid personally and not booked in business books. In such a case, exemption may be available, and RCM may not apply.

However, if the same residential property is taken in the name of the business, or rent is recorded in business books, or it is used for business purposes, the position may change.

Conditions for Entry 5AA

• For Entry 5AA to apply, the property should be residential dwelling, the supplier may be any person, and the recipient must be a registered person.

• It is not necessary that the landlord should be registered. Even if the landlord is unregistered, Entry 5AA can apply. Even if the landlord is registered, the liability is still shifted to the registered recipient under RCM where the entry applies.

• This is an important point because many people wrongly believe that RCM applies only when landlord is unregistered. That is not correct for Entry 5AA.

Entry 5AB: Renting of Immovable Property Other Than Residential Dwelling

• Entry 5AB is a recent and very important amendment. It covers service by way of renting of any immovable property other than residential dwelling, where the supplier is an unregistered person and the recipient is a registered person.

• This entry was inserted vide Notification No. 09/2024-Central Tax (Rate), dated 8 October 2024, with effect from 10 October 2024.

• Initially, the entry used the words “any property”. Later, by corrigendum dated 22 October 2024, it was corrected as “any immovable property”. Therefore, Entry 5AB applies to renting of immovable property other than residential dwelling

• In simple language, if an unregistered landlord gives commercial property, office, shop, warehouse, godown, land, or other non-residential immovable property on rent to a registered person, then GST is payable by the registered recipient under RCM.

• For example, Mr. B is an unregistered individual. He gives a commercial shop on rent to a registered trader. From 10 October 2024, the registered trader is required to pay GST under RCM, subject to other applicable conditions.

Purpose Behind Entry 5AB

• Before this amendment, where the landlord was unregistered, GST was generally not collected by the landlord. Many commercial properties were rented by unregistered landlords to registered businesses. In such cases, the recipient was using the premises for business, but tax was not being paid if the landlord was outside GST registration.

• Entry 5AB shifts the tax liability to the registered recipient. Therefore, the registered tenant must now check the GST registration status of the landlord.

• If the landlord is unregistered and the property is other than residential dwelling, RCM may apply.

• This amendment has made documentation very important. Businesses should obtain confirmation from the landlord about whether he is registered under GST or not. The rent agreement, payment records, and GST working should also be maintained properly.

Amendment from 16 January 2025 for Composition Taxpayers

• Notification No. 07/2025-Central Tax (Rate), dated 16 January 2025, amended Entry 5AB.

• After this amendment, a registered person who has opted to pay tax under composition levy is excluded from the recipient category under Entry 5AB.

• In simple language, from 16 January 2025, if the tenant is a composition taxpayer, he is not liable to pay GST under RCM under Entry 5AB for renting of immovable property other than residential dwelling from an unregistered landlord.

• his amendment is important because composition taxpayers generally have simplified compliance. Therefore, while checking Entry 5AB, one must verify whether the recipient is a regular registered taxpayer or a composition taxpayer.

Difference Between Entry 5AA and Entry 5AB

• Entry 5AA applies to residential dwelling. Entry 5AB applies to immovable property other than residential dwelling.

• Under Entry 5AA, the supplier may be any person. It does not matter whether the landlord is registered or unregistered. The recipient must be a registered person.

• Under Entry 5AB, the supplier must be an unregistered person. The property must be other than residential dwelling. The recipient must be a registered person, but from 16 January 2025, composition taxpayers are excluded.

• Therefore, the first step is always to identify the nature of property. If it is residential dwelling, Entry 5AA should be checked. If it is commercial or other non-residential immovable property, Entry 5AB should be checked.

Practical Examples

If a registered company takes a commercial office on rent from a registered landlord, RCM will not apply under Entry 5AB because the landlord is registered. The landlord will charge GST under forward charge.

• If a registered company takes a commercial office on rent from an unregistered landlord, Entry 5AB will apply from 10 October 2024. The company will pay GST under RCM.

• If a registered company takes a residential flat on rent for employee accommodation, Entry 5AA may apply. The company will pay GST under RCM.

• If an unregistered individual takes a residential flat on rent for personal residence, RCM will not apply because the recipient is not registered under GST.

• If Government gives an office on rent to a registered person, Entry 5A will apply. The registered person will pay GST under RCM.

• If an unregistered individual gives a warehouse on rent to a composition taxpayer, Entry 5AB will not apply from 16 January 2025 due to specific exclusion of composition taxpayers.

Compliance Under RCM on Rent

• Where RCM applies, the recipient has to discharge GST liability. The GST payable under RCM has to be paid in cash. Input Tax Credit cannot be used for payment of RCM liability.

• If the supplier is unregistered, the recipient should issue a self-invoice. The recipient should also prepare payment voucher wherever applicable.

• The RCM liability should be reported in GSTR-3B in the relevant table for inward supplies liable to reverse charge.

• After payment of GST under RCM, the recipient may claim Input Tax Credit, subject to normal conditions of Section 16 and restrictions under Section 17. If the property is used for taxable business purposes, ITC may generally be available. However, if the property is used for exempt supply, personal use, or non-business purpose, ITC eligibility should be separately examined.

• For example, if a registered business pays RCM on office rent and uses the office for taxable business, ITC may be available. But if the rent relates to a property used for personal purposes, ITC may not be available.

Points to Check Before Deciding RCM on Rent

• Before deciding GST liability on rent, the following points should be checked carefully.

• First, identify whether the property is residential dwelling or other immovable property. This is the most important step because residential dwelling and commercial property are covered under different entries.

• Second, check who is the landlord. If the landlord is Government or local authority, Entry 5A may apply. If the landlord is unregistered and property is non-residential, Entry 5AB may apply.

• Third, check whether the tenant is registered under GST. Most RCM entries on rent apply only when the recipient is a registered person.

• Fourth, check whether the tenant is a regular taxpayer or a composition taxpayer. This is important for Entry 5AB after 16 January 2025.

• Fifth, check the purpose of use. In case of residential dwelling, whether the property is taken for personal residence or business-related purpose can make a difference, especially in proprietorship cases.

• Sixth, check whether the rent is recorded in business books. In case of proprietors, this can be an important factor for deciding whether the transaction is personal or business-related.

Common Mistakes in RCM on Rent

• One common mistake is to assume that all rent payments are liable under RCM. This is not correct. RCM applies only when the transaction falls within a notified entry.

• Another mistake is to ignore the GST registration status of the landlord. For Entry 5AB, landlord must be unregistered. If landlord is registered, GST will generally be charged by landlord under forward charge.

• Another common error is treating residential and commercial property in the same manner. Residential dwelling is covered under Entry 5AA, whereas commercial and other non-residential immovable property is covered under Entry 5AB.

• Many taxpayers also forget the composition taxpayer exclusion introduced from 16 January 2025. Therefore, composition cases should be separately checked before applying Entry 5AB.

• Another practical mistake is payment of RCM but failure to claim eligible ITC. If the rent is used for taxable business and other ITC conditions are satisfied, ITC should be considered after payment of RCM.

Conclusion

RCM on rent under GST requires entry-wise analysis. It cannot be decided only by seeing the rent agreement or only by checking whether the landlord has charged GST.

RCM on Rent under GST: Quick Applicability Summary:

Rent Situation	When RCM will be applicable?
Property taken on rent from Government / Local Authority	RCM applies when Government / Local Authority gives immovable property on rent to a GST registered person.
Residential dwelling taken on rent	RCM applies when residential house / flat / bungalow is rented to a GST registered person.
Commercial property taken on rent from unregistered landlord	RCM applies when shop / office / godown / warehouse / commercial property is rented by an unregistered landlord to a GST registered person.
Residential dwelling taken personally by proprietor	RCM generally does not apply if the proprietor takes house on rent in personal capacity for own residence and rent is not recorded in business books.
Commercial property taken from registered landlord	RCM does not apply. Landlord will charge GST under forward charge.
Commercial property taken by composition taxpayer from unregistered landlord	From 16-01-2025, RCM does not apply under Entry 5AB.
Residential house rented to unregistered individual for personal residence	RCM does not apply. It remains exempt if used as residence.

 

Entry 5A applies where Government or local authority gives immovable property on rent to a registered person. Entry 5AA applies where residential dwelling is rented to a registered person. Entry 5AB applies where immovable property other than residential dwelling is rented by an unregistered person to a registered person, subject to the later exclusion for composition taxpayers from 16 January 2025.

The simplest way to decide RCM on rent is to ask four questions: What is the nature of the property? Who is the landlord? Who is the tenant? Is the tenant a regular registered person or composition taxpayer?

Once these points are clear, GST treatment becomes easier. For businesses, it is now important to review all rent agreements, identify unregistered landlords, check residential dwelling cases, pay RCM wherever applicable, and maintain proper documentation for ITC and GST return reporting.

Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.