Rental Income Tax: Property Taxes Not Deductible, Notional Interest Considered. General Exemption Applies

The ruling in this case determined that the applicant cannot deduct property taxes and statutory levies from rental income. Notional interest on the security deposit should be considered in calculating total income from rental only if it affects the value of the rental supply service. The applicant is eligible for tax exemption under the general exemption of Rs. 20 lakhs, provided their total turnover, including monthly rent and notional interest influencing the value of supply, does not surpass the threshold limit.

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Issues Involved:
1. Deduction of property taxes and statutory levies from rental income.
2. Consideration of notional interest on security deposit for rental income.
3. Entitlement to tax exemption under the general exemption of Rs. 20 lakhs.

Detailed Analysis:

Issue 1: Deduction of Property Taxes and Statutory Levies from Rental Income
The applicant sought clarification on whether property taxes and other statutory levies paid by them could be deducted from the rental income to arrive at the value of rental income. According to Section 15(2) of the CGST Act 2017, "the value of supply shall include any taxes, duties, cesses, fees, and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier." The property tax levied by BBMP under the Karnataka Municipalities Act 1964 is not excluded from the value of the taxable supply. Therefore, the property tax cannot be deducted from the value of taxable supply of "Renting of Immovable Property" service.

Issue 2: Consideration of Notional Interest on Security Deposit for Rental Income
The applicant questioned whether notional interest on the security deposit should be considered for arriving at total income from rental. The draft rental agreement specified that the lessee would pay a monthly rent of Rs. 1,50,000/- and an interest-free refundable security deposit of Rs. 5 Crore. The security deposit, taken as a guarantee against damage to property, is not considered as payment for the supply of the Renting of Immovable Property Service (RIS) unless it is applied as consideration for the supply. Notional interest on the security deposit is considered part of the value of supply if it influences the value of the supply, i.e., the monthly rent. The security deposit is invariably collected in all leasing cases, and higher deposits generally result in lower monthly rents. Therefore, there is a nexus between the security deposit and the rent charged. The notional interest earned from the security deposit must be considered part of the value of supply if it influences the value of the supply and is subject to GST along with the monthly rent.

Issue 3: Entitlement to Tax Exemption under the General Exemption of Rs. 20 Lakhs
The applicant inquired about their entitlement to tax exemption under the general exemption of Rs. 20 lakhs. Section 2(112) of the CGST Act, 2017 defines total turnover in a State or Union Territory. The interest-free security deposit does not fall under the purview of supply as it is not considered a consideration. However, notional interest on the security deposit becomes part of consideration if it influences the value of supply. The applicant is entitled to the general exemption for registration purposes, provided their annual total turnover, including monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit.

Ruling:
1. The applicant cannot deduct property taxes and other statutory levies for the purpose of arriving at the value of rental income.
2. Notional interest on the security deposit shall be taken into consideration for arriving at total income from rental only if it influences the value of the supply of RIS service, i.e., monthly rent.
3. The applicant is entitled to exemption of tax under the general exemption of Rs. 20 lakhs, subject to the condition that their annual turnover, including monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit.

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