GST exemption applies to Residential Hostels/PGs despite Sub-Leasing: SC

The Supreme Court has given an important decision about GST on house rent in State of Karnataka & Anr. v. Taghar Vasudeva Ambrish & Anr., by Judgment dated 04 December 2025. The Court clarified when GST exemption is available on renting of residential properties, especially in cases where a house is rented to a company and then used as a hostel or PG for students and working professionals.

For a long time, there was confusion on one main question— Is 18% GST payable if the person who takes the house on rent does not live there himself, but gives it further on rent for living purposes?

This case mainly involved Entry 13 of Notification No. 9/2017 (IGST Rate), which gives GST exemption for renting of a residential dwelling used as a residence. The Supreme Court examined what exactly the term “residential dwelling for use as residence” means and how it should be applied in such situations.

The Supreme Court had to decide one main question: Is 18% GST payable on rent when a residential house is given on rent to a company, and that company further gives the house as a hostel or PG to students and working professionals?

The Court’s decision depended on two basic points:

1. Is the property actually a residential house?

2. Does the law require that the person who takes the house on rent must live there himself, or is it enough that the house is finally used for living purposes?

Meaning of “Residential Dwelling” under GST

The Court pointed out that GST law does not clearly define what “residential dwelling” means. Because of this, the Court looked at other helpful sources, such as:

• The CBIC Education Guide dated 20.06.2012 (issued during the old Service Tax period), and
• Earlier court decisions and dictionary meanings.

What the CBIC Education Guide Says

Under the erstwhile Finance Act, 1994, an Education Guide dated 20.06.2012 issued by the CBIC explained it as follows:-

“4.13.1 What is a ‘residential dwelling’?

 The phrase ‘residential dwelling’ has not been defined in the Act. It has therefore to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp-site, lodge, house boat, or like places meant for temporary stay.”

As per the CBIC Education Guide:

• A residential dwelling means any house or place meant for living, and
• It does not include places like hotels, motels, inns, guest houses, or lodges, because these are meant for short and temporary stays.

How Courts have explained “Residential Dwelling”

The Supreme Court looked that before the introduction of GST, service tax was applicable only on the renting of commercial properties. Even if a residential property was used for commercial purposes, it was not liable to service tax. Service tax was levied at 15% of the rental value of commercial properties.

Accordingly, landlords renting out commercial properties were required to obtain service tax registration and pay tax on the rental income. In contrast, rental income from residential properties was exempt, and therefore, landlords letting out residential properties were neither required to register nor to pay service tax on such income.

After the introduction of GST, the tax treatment of rental income changed significantly. Under GST, renting of both commercial and residential properties is considered a supply of service. As a result, GST is applicable on rental income, meaning landlords are required to charge and pay GST on rent received, and tenants are required to pay GST on the rent they pay, subject to applicable exemptions and conditions.

However, the Central Government, considering it necessary in the public interest and based on the recommendation of the GST Council, issued Notification No. 9/2017–Integrated Tax (Rate) dated 28.06.2017. This notification grants GST exemption to certain services, listed entry-wise.

For the present issue, Entry No. 13 is relevant. Under this entry, an unconditional exemption is granted for renting of a residential dwelling to any person, provided it is used for residential purposes. This means that GST is not payable when a residential dwelling is rented for residence.

Conversely, if a residential dwelling is rented for commercial or business purposes, the exemption does not apply, and GST becomes payable on such rental income.

The Supreme Court looked at earlier court decisions from India and abroad to understand what “residential dwelling” really means.

Some important cases were:

• V. L. Kashyap v. R.P. Puri reported in 12 (1976) DLT 369 (Delhi High Court)

The Court said that a residential house is different from shops, offices, or other business places. In para 25, it has been held as under:-

“25. The rule of law deducible from the aforesaid decisions is that the work ‘dwelling house’ is synonymous with residential accommodation as distinct from a house of business, warehouse, office, shop, commercial or business premises. The word ‘house’ means a building. It would include the outhouses, courtyard, orchard, garden etc. which are part of the same house, but it cannot include a distinct separate house.”

(Emphasis supplied)

• Uratemp Ventures Limited v. Collins reported in (2001) 3 WLR 806 (UK House of Lords)

The Court held that even one single room can be treated as a residential dwelling if people live there.

• Bandu Ravji Nikam v. Acharyaratna Deshbushan Shikshan Prasark Mandal, Kolhapur, reported in 2003 (3) Mah L.J. 472 (Bombay High Court)

The Court clearly said that a students’ hostel is residential in nature, because students live there, sleep, eat, and carry out their daily activities. The Bombay High Court also made it clear that: Just because rent is charged, a hostel does not become a commercial or non-residential property. In para 10:-

“10. … Undoubtedly, “hostel” is nothing but a house of residence or lodging for students. Just because the respondent may charge some amount from the students for providing that facility, may not necessarily mean that it is a commercial or non residential user. Further, there is perceptible difference between “hotel or lodging house” and ‘student hostel’, though in both cases accommodation may be provided on monetary consideration. In the latter, the occupant cannot claim to be a “tenant” or a “licensee” nor can he claim protection of the provisions of the Bombay Rent Act. Whereas, in the case of the former, part III of the Act would apply. Besides, it will be useful to notice the observations of this Court in para 20 of the decision in the case of Kishinchand (supra). This court has held that the word “residence” may receive a liberal meaning, for a man’s residence is very often the place where he sleeps at night. This court in the said case adverted to the decision of the Privy Council (AIR 1937 PC 46), wherein it is observed that “there is no reason for assuming that it contemplates only permanent residence and excludes temporary residence”. Reference is also made to Sri Sri Sri Kishore Chandra Singh Deo vs Babu Ganesh Prasad Bhagat and others, AIR 1954 Sc 316, wherein it is observed that

“Residence only connotes that a person eats, drinks and sleeps at that place and that it is not necessary that he should own it”.

 This Court then proceeded to hold that the legislature is using words “non-residential purpose” in Section 25 did not intend to prohibit use of a building containing a residential flat for the purposes of construction of Marriage Halls, Charitable Hospitals and “quarters” and garages for Doctors and Nurses. As in the present case, “Students hostel” was also to be used for sleeping, eating, studies etc. temporarily if not permanently day to day, it cannot be described as “non-residential” use within the meaning of Section 25 of the Act. Accordingly, if the suit premises were to be used as students hostel, then surely it would be for the residential purpose of the students of the College run by the respondent trust. In that case also, the respondent trust would be entitled to claim possession of the suit premises for the requirement of the trust. If this be so, there is no force in the argument pressed into service that no decree could be passed as the nature of requirement would be prohibited by Section 25 of the Act.”

(Emphasis supplied)

Dictionary Meaning and Common Understanding

The Court also looked at the meanings of the words “residence” and “dwelling” from well-known dictionaries like:

• Concise Oxford Dictionary, and
• Black’s Law Dictionary.

From these meanings, the Court explained that:

• Residence means a place where a person lives, eats, drinks, and sleeps.
• Dwelling means any building or structure where people live.

What the Court Finally Held

The Court clearly said that any house or accommodation meant for long-term living is a “residential dwelling.” In this case, official municipal records also showed that the property was approved and recorded as a residential property, so there was no doubt at all that it was a residential dwelling.

“Used as Residence”: Does the renter have to live there?

The Court held that the only issue that now remains to be decided is whether the third condition for claiming GST exemption—namely, that the residential dwelling must be let out for use as a residence—is satisfied in the present case or not.

This was the most important issue in the case. The tax department (Revenue) argued that:

• GST exemption should be given only if the person who takes the house on rent lives there himself.
• If the house is rented to a company and then given further on rent (sub-leased) as a hostel or PG, the exemption should not apply.

What the Supreme Court Said

In the present case, the third condition can also be considered to be fulfilled because the property was taken on rent only for residential use. There is no requirement in the exemption that the tenant or lessee must personally use the property as a residence.

In fact, M/s DTwelve Spaces Private Limited, the lessee, acts as an aggregator that provides residential accommodation in the nature of hostels. The property continues to be used solely for residential purposes. Therefore, the third condition stands satisfied because M/s DTwelve Spaces Private Limited is the main lessee, while the students and working women occupying the premises are merely sub-lessees.

It is a settled legal principle that a lease between the owner and a tenant becomes a sub-lease when the tenant further lets out the property to another person, which does not alter the original residential character or use of the property.

In view of the above discussion, it is clear that for the period 2019–2022, all three conditions prescribed under Entry No. 13 were duly satisfied.

The Court did not accept the argument made by the tax department that the exemption under Entry 13 would not apply merely because the lessee did not personally use the property as a residence and instead sub-let it to students or working women. The Court reiterated that Entry 13 does not require the lessee to occupy the residential dwelling as its own residence.

Any interpretation suggesting otherwise would amount to reading an extra condition into Entry 13, which is not supported by the language of the exemption notification.

The Court agreed with Mr. Datar’s submission that interpreting Entry 13 in a narrow manner—by limiting the exemption only to cases where the service recipient personally uses the property as a residence—would defeat the legislative intent. The exemption is meant to apply whenever a residential dwelling is rented out and is ultimately used for residential purposes, regardless of who actually occupies it.

In simple terms, the intention of the law is that a property used as a residence should not be burdened with 18% GST or IGST, and denying the exemption merely because the property is used by occupants through an intermediary would go against this purpose.

In the present case, the end use of the property continues to be residential. However, if 18% GST is imposed on the transaction between Respondent No. 1 and the lessee, M/s DTwelve Spaces Private Limited, this tax burden would ultimately be passed on to the students and working professionals occupying the premises. This would result in defeating the very legislative intent behind granting GST exemption for properties used for residential purposes.

Why the Court used “Purposive Interpretation”

The Supreme Court said that GST exemptions should be understood based on their purpose, especially when the exemption is meant to benefit people.

The Court relied on earlier important judgments such as:

• Mother Superior Adoration Convent (2021), and
• Union of India v. Wood Papers Ltd. (1990),

which clearly state that beneficial exemptions must be interpreted in a meaningful and fair manner.

The principle of purposive interpretation (or purposive construction) means that the Court should interpret a legal provision in a way that advances the purpose for which it was enacted. The focus is not merely on the literal wording, but on what the provision is intended to achieve.

In other words, while interpreting the law, the Court seeks to understand the objective behind the provision and give it a meaning that helps achieve that objective, thereby ensuring that the legal text fulfills the goal it was designed to accomplish.

As Aharan Barak in Purposive Interpretation in Law puts it:-

 “Purposive interpretation is based on three components: language, purpose, and discretion. Language shapes the range of semantic possibilities within which the interpreter acts as a linguist. Once the interpreter defines the range, he or she chooses the legal meaning of the text from among the (express or implied) semantic possibilities. The semantic component thus sets the limits of interpretation by restricting the interpreter to a legal meaning that the text can bear in its (public or private) language.”

Among the three components—language, purpose, and the Court’s discretion—the purposive component represents the ratio juris, that is, the core purpose of the legal provision. This purpose reflects the values, goals, interests, policies, and aims that the provision seeks to achieve. In essence, it is the function the legal text is intended to serve and the objective it is designed to fulfill.

The Court also emphasized that statutory interpretation is not static but dynamic in nature. While the literal rule of interpretation was once regarded as the “golden rule,” the doctrine of purposive interpretation now predominates—especially in cases where a literal reading fails to advance the object of the statute or leads to absurd results. If an interpretation produces an outcome contrary to the purpose of the law, it cannot be accepted.

Legal scholars such as Hart and Sacks rejected strict intentionalism as the primary method of statutory interpretation and instead advocated purposivism. This approach has since been widely adopted by courts, not only in India but also across other legal systems. The Supreme Court has reaffirmed this principle in Shailesh Dhairyavan v. Mohan Balkrishna Lulla, (2016) 3 SCC 619.

What the Court found to be the Real Intention of the Law

Giving Entry 13 a narrow interpretation—by limiting the exemption only to cases where the service recipient personally uses the rented property as a residence—would defeat the legislative intent. The exemption is meant to apply whenever a residential dwelling is rented out and is ultimately used for residential purposes, regardless of who actually occupies it.

The clear intent behind this exemption is that a property used as a residence should not be burdened with 18% GST or IGST. If Entry 13 were interpreted narrowly, the exemption would be denied in situations where the lessee sub-leases the property for residential use, which would run contrary to the purpose of the exemption.

In the present case, the end use of the property remained the same, that is, use as a residence by students and working women. However, if 18% GST is imposed on the transaction between Respondent No. 1 and the lessee, this tax burden would be passed on to the students and working professionals. Such a result would ultimately defeat the legislative intent behind granting GST exemption for properties used for residential purposes.

Activity-Based vs Person-Based Exemption

In addition, it is important to note that the exemption under Entry 13 is activity-specific and not person-specific. Under the GST law, there are certain exemptions that are person-specific, meaning they apply only when the service provider or the service recipient belongs to a notified category of persons.

However, Entry 13 falls in the category of activity-based exemptions, where the nature of the activity itself—i.e., renting of a residential dwelling for residential use—is exempt. Such exemptions do not depend on who is using the service, but on how the service is used.

For example, Entry 1 provides exemption for services provided by an entity registered under Section 12AA of the Income Tax Act, 1961, specifically for charitable activities. Here, the exemption is person-specific, as it applies only if the service is provided by an entity registered under Section 12AA.

Another example is Entry 26, which grants exemption for transmission or distribution of electricity, but only when carried out by an electricity transmission or distribution utility. This again is a person-specific exemption, in contrast to activity-based exemptions like Entry 13.

Effect of Amendments in 2022 and 2023

Entry 13 was amended w.e.f. 18.07.2022 and it now reads as follows:-

“Services by way of renting of residential dwellings for use as residence except where the residential dwelling is rented to a registered person.”

Thus, from 18.07.2022 onwards, no exemption is available to Respondent No. 1, as the property has been rented to a registered person. By pursuing these appeals, the revenue is, in effect, attempting to apply the 2022 amendment retrospectively, which is not permissible under the law.

Apart from the above amendment in 18.07.2022, further Explanation was added to Entry 13 w.e.f. 01.01.2023 which reads as follows:-

“Explanation- for the purpose of exemption under this entry, this entry shall cover services by way of renting of residential dwelling to a registered person where, –

(i) The registered person is proprietor of a proprietorship concern and rents the residential dwelling in his personal capacity for use as his own residence; and

(ii) Such renting is on his own account and not that of the proprietorship concern.”

The Explanation makes it clear that even if the rent is paid by a registered person, the exemption will still apply provided the property is used as a residence and is rented in a personal capacity. This shows that the intention from the beginning was to ensure that rental agreements for residential use are exempt from GST, regardless of who pays the rent.

Final Conclusion of the Supreme Court:

• The property in question is a residential dwelling.
• It was used as a residence throughout.
• All conditions of Entry 13 were satisfied for the period 2019–2022.
• GST at 18% was not payable.
• Appeals filed by the Revenue were dismissed.

Key Takeaways for Taxpayers and Professionals:

• Hostel and PG accommodations used for long-term stays qualify as residential dwellings.
• Sub-leasing does not negate residential use.
• Entry 13 exemption is based on use of the property, not the identity of the lessee.
• 2022 amendments cannot be applied retrospectively.
• The judgment strongly protects landlords, aggregators, and occupants for the pre-amendment period.

Case Reference: State of Karnataka & Anr. v. Taghar Vasudeva Ambrish & Anr. | Supreme Court of India | Judgment dated 04 December 2025

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