What tax treatment applies to ground lease income for the landowner?

The tax treatment of ground lease income for the landowner is governed by India’s Income Tax Act, and the income is generally classified and taxed as “Income from Other Sources” or “Income from House Property”, depending on the lease structure and the landowner’s profile. This treatment affects how the landowner reports income, claims deductions, and meets tax compliance obligations.

1. Classification as “Income from Other Sources”

• In most cases, ground lease income is treated as income from other sources under Section 56 of the Income Tax Act.
  
• This applies when:
  
  • The landowner is not in the business of leasing property.
    
  • Only bare land is leased without any constructed structure.e
    
• The entire lease rent is taxed at the applicable slab rate of the individual or entity (up to 30% for individuals or as per corporate tax rates).
  

2. Treatment as “Income from House Property” (If Applicable)

• If the land leased includes a building or constructed property, and not just vacant land, the income may fall under Income from House Property (Section 22).
  
• This classification allows the landowner to:
  
  • Claim a standard deduction of 30% for repairs and maintenance.e
    
  • Deduct interest on borrowed capital (if applicable)
    
• However, pure ground leases without structures do not qualify under this head.
  

3. Goods and Services Tax (GST) Applicability

• GST is applicable on lease rent from commercial land, even if no structure exists.
  
• The landowner must:
  
  • Register for GST if annual rental income exceeds ₹20 lakh (₹10 lakh in special category states)
    
  • Charge GST at 18% under the “leasing of land” category.
    
• GST collected must be remitted monthly or quarterly, and returns must be filed under GSTR-1 and GSTR-3B.
  

4. Capital Gains Implications (If Lease Premium or Lump Sum is Received)

• If the landowner receives a one-time upfront lease premium (salami) or a non-refundable security deposit, this may be taxed as capital gains or income, depending on the lease term and nature.
  
• For leases exceeding 12 years, the premium may be treated as a transfer of rights, triggering long-term capital gains if the land was held for more than 24 months.
  
• Regular annual rent, however, is not subject to capital gains but is taxed as recurring income.
  

5. TDS (Tax Deducted at Source) Compliance

• The tenant must deduct TDS under Section 194-I on lease rent payments:
  
  • At 10% for individuals and companies (if annual rent exceeds ₹2.4 lakh)
    
• Landowners must reflect TDS in their income tax return and reconcile with Form 26AS.
  

To ensure full compliance and tax efficiency:

• Landowners should maintain proper documentation, including the registered lease deed and GST invoices
  
• Consult with a chartered accountant for optimal classification, deductions, and accurate reporting.
  

In summary, ground lease income is taxable as regular income, subject to GST, TDS, and applicable slab or corporate tax rates, with no standard deductions unless the lease includes a built-up property. Proper structuring and reporting are essential to avoid penalties and optimize post-tax returns.