Comprehensive Guide to Renting Out Immovable Property in India

Renting out immovable property—whether residential, commercial, or industrial—is a well-established practice in the Indian real estate sector. However, this process involves several legal, financial, and tax considerations that both landlords and tenants must clearly understand to ensure seamless and compliant transactions.

This comprehensive guide explores the process, obligations, and challenges involved in renting out property in India while highlighting the key legal and tax aspects every property owner and tenant should be aware of.

What Does Renting Out Immovable Property Mean?

Renting refers to the act of leasing out a property to a tenant in exchange for periodic rent payments. The arrangement can involve various categories of properties depending on the intended use and type of occupants.

The primary types of properties that can be rented include:

• Residential Properties: Flats, independent houses, or villas leased to individuals or families for dwelling purposes.
• Commercial Properties: Shops, office spaces, or co-working spaces used for business and professional activities.
• Industrial Properties: Warehouses, factories, or industrial units used for manufacturing or storage purposes.

Understanding these distinctions is crucial, as each category involves different legal frameworks, taxation rules, and compliance requirements.

Having proper knowledge of rental agreements, tenant rights, tax liabilities, and applicable state laws helps both landlords and tenants maintain transparency and avoid potential disputes. It ensures compliance with statutory obligations, protects financial interests, and contributes to smoother rental transactions.

Types of Rental Agreements

1) Residential Lease Agreement

• Features: Typically short-term in nature, usually lasting for 11 months, which helps landlords avoid the complex provisions of long-term tenancy laws.
• Terms: The agreement includes details such as rent amount, security deposit, maintenance charges, renewal conditions, and notice period.

2) Commercial Lease Agreement

• Differences from Residential Leases: Usually has a longer tenure and includes specific clauses tailored for business operations. It may require higher security deposits and contains detailed conditions related to usage and maintenance.
• Clauses: Provisions for subletting, signage rights, alterations, and commercial usage terms are commonly included to ensure business continuity.

3) Leave and License Agreement

• Definition: A contractual arrangement granting a tenant permission to use the property without transferring tenancy rights.
• Popularity: This structure is especially preferred in metropolitan cities like Mumbai, Delhi, and Bengaluru for short-term stays or temporary arrangements, as it provides flexibility and easier termination options.

Steps to Rent Out Immovable Property

• Step 1: Prepare the Property – Ensure that the property is clean, habitable, and compliant with safety regulations before listing it for rent. Conduct necessary repairs and consider adding value through furniture, fixtures, or air conditioning to attract better tenants.
• Step 2: Find Suitable Tenants – Advertise the property through reputed online real estate portals, local brokers, or word-of-mouth referrals. It is important to perform background verification and police checks to assess the reliability of potential tenants.
• Step 3: Draft a Rental Agreement – A well-drafted rental agreement should include key clauses such as rent amount, payment frequency, security deposit, maintenance obligations, renewal conditions, and termination terms.
• Step 4: Register the Rental Agreement – To make the agreement legally valid and enforceable, register it under the respective state’s Registration Act. Pay applicable stamp duty and registration fees as prescribed by state laws.
• Step 5: Handover and Documentation – During possession handover, provide property keys and an inventory list (especially for furnished properties). Maintain copies of all signed documents and payment records to ensure complete transparency and legal safety.

Rental Income and Taxes

Rental income refers to any income earned by leasing out a property. It is taxable under the head “Income from House Property” as per the Income Tax Act, 1961.

a) Taxation of Rental Income

• Standard Deduction: A flat 30% deduction of the annual rental income is allowed towards maintenance and repair expenses, irrespective of actual costs incurred.
• Property Tax Deduction: Property tax paid by the landlord during the financial year can be deducted, provided it has been actually paid and not merely accrued.
• Net Taxable Rental Income: Net Rental Income = Gross Rent − (30% Standard Deduction + Property Tax Paid)

b) Tax Deducted at Source (TDS) on Rentals

• If the tenant or lessee is not an individual or HUF, they must deduct TDS at 10% when monthly rent exceeds ₹50,000.
• If the tenant is an individual or HUF, TDS must still be deducted if their gross receipts in the preceding financial year exceed ₹1 crore from business or ₹50 lakhs from profession.

GST on Commercial Rentals

Under GST law, a landlord or lessor must obtain GST registration if their aggregate turnover exceeds ₹20 lakhs in a financial year. Once registered, GST is applicable on rental income, and the landlord must issue a tax invoice (e-invoice) to the tenant.

Example: If a commercial property is rented for ₹25 lakhs annually, GST at 18% will apply to the total rent amount.

• It is important to note that GST does not apply on refundable security deposits collected by the landlord.
• If the landlord is not registered under GST but the tenant is registered, and the property is not residential, GST is payable by the tenant under the Reverse Charge Mechanism (RCM) as per Entry 5AB of Notification 13/2017, dated 28th June 2017.

Legal Obligations and Compliance

Tenant Verification

Landlords must conduct police verification to ensure tenant safety and prevent misuse of the property. This process also helps avoid potential legal issues in case of disputes.

Registration of Rental Agreements

Rental agreements exceeding 11 months must be legally registered. Non-registration can result in the agreement being unenforceable and may expose the parties to legal risks and penalties.

Eviction Laws

Evictions must follow due legal process, typically involving notice periods and valid grounds such as non-payment of rent, misuse of property, or breach of agreement terms.

Responsibilities of the Landlord

• Provide a safe, livable, and well-maintained property.
• Address repair and maintenance issues promptly.
• Manage security deposits responsibly, ensuring timely refunds after adjusting legitimate dues.

Responsibilities of the Tenant

• Pay rent on time and adhere to all terms of the rental agreement.
• Keep the property clean and well-maintained.
• Notify the landlord immediately in case of damages or repair requirements.

Common Clauses in a Rental Agreement

• Rent and Security Deposit: Define the rent amount, payment schedule, and conditions for refund or adjustment of the security deposit.
• Maintenance Responsibilities: Specify whether the landlord or tenant will bear maintenance and repair costs.
• Lock-in Period: Mention a minimum duration within which neither party can terminate the agreement.
• Termination Clause: Outline the notice period and conditions for vacating the property.

State-Specific Rental Laws

• Maharashtra Rent Control Act: Safeguards tenant rights and regulates rent revisions.
• Delhi Rent Control Act: Governs security deposit norms and eviction processes.
• Tamil Nadu Regulation of Landlords and Tenants Act: Defines balanced responsibilities between landlords and tenants.

Factors That Affect Rental Value

• Location: Proximity to schools, markets, workplaces, and transport hubs.
• Type of Property: Furnished or semi-furnished properties often fetch higher rents.
• Market Trends: Rental demand in urban centers can fluctuate with job growth and migration.
• Amenities: Parking, power backup, and security features significantly influence rent value.

Challenges in Renting Out Property

• Tenants defaulting on rent payments.
• Disputes over security deposit refunds.
• Property damage or misuse by tenants.
• Delays in rent collection or eviction proceedings.

Tips for Landlords

• Conduct thorough tenant screening before finalizing agreements.
• Draft detailed and legally sound rental contracts.
• Keep records of rent receipts, maintenance expenses, and communication.
• Schedule periodic inspections to ensure property upkeep.

Rental Trends in India

• Increasing rental demand in metropolitan cities due to urban migration and job opportunities.
• Growth of co-living and shared accommodation spaces driven by young professionals and students.
• The work-from-home trend has influenced rental preferences, with many tenants seeking larger spaces or properties in suburban areas.

Renting out immovable property can be a profitable and stable income source when managed responsibly. A sound understanding of rental agreements, compliance requirements, and tax implications ensures smooth operations and minimizes disputes. Landlords and tenants are advised to consult legal and tax professionals for complex transactions to safeguard their interests.

For more information, contact us today.

Disclaimer: This blog provides general information for educational purposes only and does not constitute legal or financial advice. Readers should seek professional guidance for specific situations.

FAQs

1. Is rental income taxable in India?
   Yes, rental income is taxable under the head “Income from House Property.”
2. What is the maximum deposit a landlord can collect?
   It varies by state but typically ranges from two to three months’ rent.
3. How should disputes between landlords and tenants be resolved?
   Disputes can be resolved through mutual discussion or, if unresolved, by taking legal action under the Rent Control Act.
4. What happens if the rental agreement is not registered?
   An unregistered rental agreement is not legally enforceable and can lead to disputes or financial losses.
5. Are there any tax benefits for landlords?
   Yes, landlords can claim deductions for maintenance expenses and property taxes when calculating taxable income.