Leasing commercial property or business equipment is taxed at 18% (SAC 9972/9973). A residential dwelling leased to a GST-registered business attracts 18% under Reverse Charge (RCM) — the tenant pays, effective 18 July 2022 — while a residential lease to an individual for personal use is fully exempt. Long-term (30-year-plus) leases of industrial land by a government body are exempt, and land leased inside an SEZ is zero-rated.
GST on Lease — Decision Table
Every common lease scenario, the applicable rate, who pays the GST and whether Input Tax Credit is available to the lessee.
| Type of Lease | GST Rate | Who Pays | ITC |
|---|---|---|---|
| Commercial property (office, shop, warehouse) | 18% | Lessor (forward charge) | Yes |
| Residential → company / LLP / firm | 18% RCM | Lessee (reverse charge) | No* |
| Residential → individual (personal use) | Nil | — | — |
| Industrial / factory building lease | 18% | Lessor | Yes |
| Operating lease of plant, machinery, vehicles | 18% | Lessor (periodic) | Yes |
| Finance lease (ownership passes at end) | Rate of the asset | Lessor (upfront) | Yes |
| Long-term (30yr+) industrial land — govt body | Nil | — | — |
| Land / unit leased inside an SEZ | Zero-rated | Refund route | Yes |
| Assignment of industrial leasehold rights | Not taxable | — | — |
* Blocked under Section 17(5) for employee/guest-house use. SAC 997212 (non-residential), 997213 (land/building lease). Lease rates were not changed by the GST 2.0 rationalisation of 22 September 2025.
Residential Lease & the RCM Trap
Before 18 July 2022, a residential dwelling let to a business was exempt. Since then, when a GST-registered business takes a residential property on lease — for an office, guest house or employee accommodation — the lessee must self-pay 18% GST under RCM, even if the landlord is unregistered and issues a bill without GST.
The RCM GST on a residential flat used for employee accommodation or a guest house is blocked as ITC under Section 17(5) — you pay it but cannot recover it. This is a compliance risk often missed by startups and firms leasing flats for staff or a registered office.
Leasing a flat or office for your business? Get your RCM & ITC position checked.
Talk to a GST Expert →Finance Lease vs Operating Lease
For leases of movable assets — machinery, vehicles, equipment — GST treatment turns on the lease type. It decides when tax is charged and on what value.
Operating lease — supply of service
- Ownership stays with the lessor
- 18% GST on each periodic rental (SAC 9973)
- Tax spread over the lease tenure
- Lessee claims ITC on each instalment
- Machinery, cars, equipment on hire
Finance lease — supply of goods
- Ownership intended to pass to the lessee
- GST charged upfront on full asset value
- At the rate applicable to that asset
- Economically a hire-purchase
- Instalments not separately taxed again
A finance lease is treated as a supply of goods because it is economically equivalent to a hire-purchase: the lessor finances the acquisition and title transfers at the end. An operating lease keeps ownership with the lessor, so each rental is a taxable service at 18%.
18% Operating lease — ₹1,00,000 rent
18% Commercial property — ₹2,00,000 rent
Structuring an equipment or property lease? Get the GST timing and ITC right first.
Get Lease GST Advice →GST on Land & Long-Term Leases
Land leases are the most nuanced area. The rate depends on who the lessor is, the tenure and whether the transaction is an original grant or a transfer of existing rights.
| Land Lease Scenario | GST | Basis |
|---|---|---|
| Long-term (30yr+) industrial-plot lease by govt/PSU body | Exempt | Entry 41 — upfront premium, public-owned lessor |
| Assignment / transfer of industrial leasehold rights | Not taxable | Immovable property, Schedule III (SC, Jul 2026) |
| Commercial land lease by a private lessor | 18% | Taxable renting of immovable property |
| Land / unit leased inside an SEZ | Zero-rated | Deemed export — refund/LUT route |
| Lease to educational institution (specified) | Exempt* | Only if conditions of the exemption notification met |
* Exemption is conditional; confirm eligibility before relying on it.
A one-time premium for a long-term industrial land lease from a government body (NOIDA, GIDC, MIDC, DDA) can be exempt under Entry 41, and the Supreme Court in July 2026 affirmed that assigning such leasehold rights to a third party is not taxable at all as it is a transfer of immovable property. Do not assume every 99-year lease attracts 18% — the lessor and structure decide it.
ITC on Lease Payments — When Can You Claim It?
| Scenario | ITC? | Reason |
|---|---|---|
| GST on commercial office / shop / warehouse lease | Yes | Business use — normal B2B ITC rules |
| GST on operating lease of machinery / vehicles | Yes | Used for taxable business (subject to 17(5) on some cars) |
| RCM GST on residential flat for employees | No | Blocked under Section 17(5) — personal / staff benefit |
| Lease used partly for exempt supplies | Part | Apportion ITC under Rule 42/43 |
A registered lessee needs a valid tax invoice (or RCM self-invoice) and the credit reflected in GSTR-2B.
Frequently Asked Questions
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