Maintenance Charges from Tenant Taxed as Business Income if Separate Agreement Exists

Taxability of rent-related receipts like maintenance has always been a debatable issue under the Income-tax Act, 1961, particularly in distinguishing between ‘Income from House Property’ and ‘Profits and Gains of Business or Profession’. Recent judicial rulings have reaffirmed and added an important dimension by holding that maintenance charges recovered from tenants to be taxed as business income where a separate agreement exists. (judicial principle developed over time and consistently followed up to ICAI Judicial Updates 2024–2025 (A.Y. 2025–26).)

“This position is not based on a statutory amendment but has evolved through judicial interpretation and has been consistently upheld in recent rulings up to A.Y. 2025–26.”

The Core Legal Issue — Understanding the Two Heads of Income

The Key Principle — Substance Over Form

When the property owner provides active services such as security, lift maintenance, CCTV, housekeeping, power backup, or firefighting systems through a separate agreement, such receipts are considered payment for services rather than rent. This shifts taxation to business income.

Key Case Laws — Evolution of Judicial Interpretation

1.Karnani Properties Ltd. v. Commissioner of Income Tax, West Bengal

What services did Karnani provide — and how?

Every tenant, in addition to paying monthly rent, had to make separate payments covering the following services: Charges for electric current — supplied to each flat and shop, Charges for use of lifts — maintained within the complex, Charges for supply of hot and cold water — to each flat etc

What made this particularly significant was how these services were delivered. The Tribunal found as a fact that:

• The company purchased high voltage AC current in bulk from the Calcutta Electric Supply Corporation, converted it into low voltage AC current in its own power house within the premises, and then supplied it to tenants — functioning like a mini utility company
• It maintained a separate water pump-house and a boiler for supplying hot and cold water to all tenants
• These were not pass-through charges — the company had dedicated infrastructure and employees running these services

GST IMPLICATIONS

• Commercial rent exceeding ₹20 lakh per year attracts 18% GST — this is the threshold for normal category states. Lower thresholds apply in special category states .
• If maintenance charges are classified as a service (business income), they may be independently liable to GST as "facility management services" under SAC 998519
• Residential property let for commercial use by a GST-registered landlord also attracts GST
• Society maintenance up to ₹7,500 per member per month is exempt from GST — but this applies only to RWA collections, not landlord-to-tenant maintenance billing
• Residential property let out for RESIDENTIAL USE = Exempt from GST — always, regardless of rent amount.Residential property let out to a GST REGISTERED entity = 18% GST applies — regardless of how the tenant uses it.

TDS IMPLICATIONS​

Any sum paid or credited on or after 1st April 2026 is governed by the corresponding provisions of the Income Tax Act, 2025.( New Sections)

New Section Reference:Section 393(1) [Table: Sl. No. 2(ii) .D(b)].

Who deducts: Any person other than individual/HUF — companies, firms, LLPs, AOP, trusts. Also individuals/HUFs if liable to tax audit under Sec 44AB (turnover >₹1 cr for business or >₹50L for profession) Threshold (updated): Budget 2025 raised the limit from ₹2.4L per year to ₹50,000 per month(600000 PA). If monthly rent exceeds ₹50,000 — TDS applies on the full amount

New Section Reference :Section 393(1) [Table: Sl. No. 2(i)].

Who deducts: Individual or HUF whose business turnover is below ₹1 cr / profession below ₹50L — i.e. not liable to tax audit

Threshold: Monthly rent exceeds ₹50,000

Rate: 2% (reduced from 5% effective October 2024)

New Section Reference: Section 393(1) [Table: Sl. No. 6(i).D(b)].

Who deducts: Any specified person paying for a works contract or service contract — companies, firms, trusts, tax-audit individuals/HUFs

Threshold: Single payment ≥ ₹30,000 OR aggregate payments to same party ≥ ₹1,00,000 in a FY — either condition triggers TDS

Rate — individual/HUF landlord: 1% of maintenance amount (excluding GST if shown separately)

Rate — company/firm landlord: 2% of maintenance amount (excluding GST if shown separately

KEY TAKEAWAYS:

The head of income depends on substance, not form — the nature of services matters more than what you call the payment

A separate, well-documented maintenance agreement can help in this classification

Classification as business income can reduce tax liability when actual costs exceed 30% of maintenance receipts TDS treatment (194C vs 194-I) and GST filings must align with the chosen income head

Review existing lease agreements — if bundled, consider restructuring prospectively with proper documentation Consult a CA before reclassifying — litigation risk exists, but the current judicial trend favours business income treatment when services are genuine