Everybody understands that renting a residential property provides a regular passive income. But did you know that renting your residential unit for commercial purposes will usually provide you with better rental returns? But, can you legally rent your residential property for commercial purposes? Is it legal?
In this article, let RES Management walk you through how you can use your residential property for commercial purposes and increase your rental returns.
Turning your residential home into a revenue-generating commercial operation could greatly enrich your finances, but launching a commercial operation involves using a home (some of which enjoy benefits such as low tax on rental income).
When you convert your residential property to a commercial space, those benefits may no longer apply. It is also important to recognise that some states have varying conversion regulations, and some have levied severe penalties for not conforming to State mandates for conversion.
That being said, going commercial may be worth it, especially given the increased guaranteed rental returns; not only does commercial typically result in lower maintenance costs, but the tenure is long and stable. With that being said, here's what you need to know.
Using residential properties for commercial use: Legal or Illegal?
Yes, it is legal in certain situations. Indian law provides for certain commercial activities in residential areas, but they are subject to strict limitations. The Municipal Corporation or development authority manages these regulations, and they vary between cities.
Generally, commercial activities that are small in scale, do not create a nuisance, and do not change the neighbourhood should be allowable. Here are examples of commercial activities that would presumably not cause a nuisance to a residential area.
Consultancies, tutoring centres, and coaching classes
Clinics, CA offices, or lawyer chambers
Freelancing or online businesses that do not include walk-in customers
Large-scale operations, shops with large foot traffic, factories, and anything with hazardous elements are not allowed in residential areas If you are going to change how, or change the actual physical characteristics of the residential property significantly, then you will need to change it to commercial use.
For example, if you are looking at starting a business in an expanding market like Ahmedabad, it is prudent to look into new commercial projects in Ahmedabad and have them exclusively designed for commercial use.
What commercial properties are allowed in India?
The Delhi Master Plan 2021 and comparable governing rules in other urban cities provide a list of acceptable professional activities in a residential neighbourhood (generally consisting of the following):
Due to the inconsistency of development across India, we will not be exhaustive, but in residential areas, permissible particulars often include:
Professional activities are restricted to 25% of the residential premises.
Small-scale neighbour-based tuition classes (few students)
A tailor's or beauty parlour with limited customer footfall.
However, permitted activities must, at minimum, meet the following criteria:
Required approval from the local municipal authority.
Demonstrate a no-objection certificate (NOC) from the housing society (where relevant)
No disturbance of the residential character of the surroundings.
This ambiguity is potentially why so many developers and businesses are choosing proper commercial properties in GIFT City and other new up-and-coming commercial areas.
Commercial Vs. Residential renting in India
If you're a homeowner who has decided to rent your residential property to commercial operators, you need to be clear on the tax implications of such an arrangement.
Income Tax Treatment - If the property is rented out (to another person) as residential property but used for business purposes, the rent is taxable as 'Income from House Property'. However, if you rented it out to a business that is using it for its purposes, the income (or even savings) may be taxable under 'Profits and Gains of Business or Profession'.
GST Treatment - If the property is rented to someone as a residential property, then it is exempt from GST. However, if the property rented is for commercial use, the rent is subject to GST at 18%.
Property Tax - A local authority may charge a higher property tax if the property is converted from residential to commercial use.
Before leasing it out, you should consult your CA or tax advisor, and also consider the type of lease. The terms of a commercial lease are legally and financially distinct from a residential lease, and will invariably involve a larger bond and stricter terms.
If you are thinking of using your home for a purpose beyond being a residence, here are some points to consider:
Zoning - The municipal bylaws, or zoning laws, will tell you whether what you want to do is possible legally with commercial activity being carried out in a residential area, and you will have to check with your local development authority for that information.
NOC from the Housing Society - If you are situated in a gated community or an apartment complex, you'll need to check the society rules to see if you can operate a business in your home. Obtaining a No Objection Certificate is advisable.
Licences and Approvals - Depending on the type of business you plan, you may need a trade licence, will have to register for GST, and may need health and safety clearance, and have to establish what your responsibility will be for each of those approvals and waivers.
Impact on your neighbours - Avoid businesses that will cause noise, pollution, and/ or traffic. The last thing you want is an angry neighbour complaining or seeking legal recourse.
Insurance and Security - Commercial activities may not be covered in a home insurance policy. Look into obtaining commercial property insurance.
Maintenance and Infrastructure - Most residences are not structurally designed for activity commensurate with foot traffic or the operation of heavy machinery. It is warranted to assess whether the infrastructure can sustain the commercial activity.
Frequently Asked Questions 1. Can residential property be put to commercial use?
Yes, but it depends on local zoning laws and permissions from the municipal authority or housing society. Some small-scale commercial activities like clinics, tuition centers, or home offices may be allowed, but larger businesses typically require conversion or special approval. 2. How to use residential property for commercial use?
To use a residential property commercially, apply for zoning conversion or mixed-use permission from the local municipal authority. Approval depends on property location, type of business, and local regulations. Also, ensure compliance with housing society rules and building bylaws. 3. What is the fine for using residential property for commercial use?
Fines vary by city and municipality. Unauthorised commercial use can attract penalties ranging from ₹10,000 to several lakhs, along with possible eviction or property sealing. Always check with local authorities before using residential space for business purposes. 4. Can residential property be used for GST registration?
Yes, you can use your residential address for GST registration if you operate a business from there. You’ll need to provide address proof and consent or ownership documents. However, ensure local zoning laws permit business activity at that location. 5. Can we live in a commercial property?
Yes, living in a commercial property is possible in some cases, especially in mixed-use buildings. However, this depends on local zoning laws, building regulations, and the nature of the commercial space. Comfort, safety, and legal compliance should be considered.
Conclusion
Utilising a home for business purposes can be complicated because of zoning laws, permits, and local regulations. While many home-based businesses are legally usable, changing a property intended for personal use to a property meant for business purposes requires some strategic planning and knowledge of local laws and regulations to avoid complications.
For those who are looking to transition into a commercial use property, it's best to consider options that are not a typical residential property.
RES Management provides valuable expertise and a comprehensive portfolio of commercial properties. Whether you are looking for a new commercial space or an investment opportunity, put your trust in RES Management to find the ideal commercial space that meets your legal obligations, in the right location suitable for your clientele or customers, and ready for investment or to operate.
