Commercial vs Residential Property Investment: Yields, GST, Loans and Tax Compared
Commercial property pays roughly twice the rent of residential for the same money: gross yields of about 6% to 9% on offices and shops against roughly 3% to 4.6% on flats in India's big cities. You pay for that extra income with bigger tickets, longer vacancies, costlier loans, GST on under-construction purchases and a narrower pool of buyers when you sell.
Key takeaways
- ANAROCK's 2026 study puts residential yields at 3.2% (Delhi) to 4.6% (Bengaluru). Commercial yields are usually quoted at 6% to 9%, with pre-leased assets at 7% to 9%.
- Commercial leases run 3 to 9 years with lock-ins, but when a tenant leaves, the unit can sit empty for months. A flat re-lets in weeks.
- Commercial purchase loans cost about 9% to 10.25% at big private banks, over up to 15 years. Home loans start around 7% to 7.25% and usually run longer.
- An under-construction commercial unit carries GST at an effective rate of about 12%, which most individual buyers cannot claim back. Ready units with a completion certificate carry none.
- Rent from both is taxed the same way. Capital gains relief on reinvesting in a house is easier to get when you sell a flat.
Yield: the headline gap and what eats into it
ANAROCK's August 2026 study of 11 housing markets found yields have risen since 2019 but remain low. Bengaluru moved from 3.6% to 4.6%, Mumbai from 3.5% to 4.3%, Hyderabad from 2.6% to 3.6% and Delhi from 2.2% to 3.2%. Those are gross, before costs and tax. For city-by-city detail, see our sibling guide on rental yield in India by city.
Commercial yields are harder to pin down because they depend on the tenant, not only the location. Sources we checked quote 6% to 8% for offices, 7% to 10% for warehouses and 6% to 9% for commercial property broadly. Treat the top of any range with suspicion: 10% usually means a weak tenant or a short lease.
| Factor | Residential flat | Commercial (office or shop) |
|---|---|---|
| Gross yield | About 3.2% to 4.6% in big cities | About 6% to 9% |
| Typical lease | 11-month leave and licence, renewed | 3 to 9 years, 1 to 3 year lock-in |
| Security deposit | 2 months where Model Tenancy Act rules apply | 6 to 12 months by market practice; 6 months where MTA caps apply |
| Rent escalation | Negotiated at renewal | 5% a year or 15% every 3 years is common |
| Loan rate (2026) | From about 7% to 7.25% | About 9% to 10.25% |
| Loan tenure | Usually longer than 15 years | Usually up to 15 years |
| GST on rent | None when let for living | 18%, once the landlord crosses the Rs 20 lakh registration threshold |
Ticket size and who can actually buy
On a flat, a bank will lend up to 75% to 90% of the value under RBI's loan-to-value rules (90% up to Rs 30 lakh, 80% up to Rs 75 lakh, 75% above that). A leased office with a creditworthy tenant usually starts around Rs 1 crore, and banks lend a smaller share against it, often 70% to 75%.
If Rs 1 crore is out of reach, the regulated route in is a listed REIT (large ones have distributed roughly 6% to 8%) or an SM REIT, with a Rs 10 lakh minimum. Our explainers on REITs and SM REITs and fractional ownership go through the trade-offs.
Leases, tenants and vacancy risk
A commercial lease looks safer on paper: a long term, a lock-in and a big deposit, against a residential tenant who can leave on a month's notice. The risk sits at the end of the lease. When a company leaves an office, the next tenant may want a different floor plate, a new fit-out and two or three rent-free months to build it out. Several months of zero income is common. National office vacancy fell to about 13.2% to 13.85% in the first half of 2026, a post-pandemic low, but that average hides wide swings. In March 2025 Hyderabad and Delhi-NCR each had around 17% to 17.5% of Grade A stock empty, against about 7% to 7.5% in Bengaluru and Chennai. A fairly priced flat re-lets in weeks.
Tenant quality matters more than location
On a commercial asset the tenant is the investment: a bank branch on a nine-year lease is worth far more than a start-up on three years. Our pre-leased listings show lease details up front for that reason.
GST: at purchase and on rent
On purchase, GST applies only to under-construction property. A ready unit with a completion or occupancy certificate carries none. For under-construction residential outside the affordable category the rate is 5% without input credit. For under-construction commercial, the 18% rate applies after a one-third deduction for land, which works out to roughly 12% of the agreement value. On a Rs 50 lakh shop that is about Rs 6 lakh, and since the Finance Act, 2025 reversed the Supreme Court's Safari Retreats ruling, most individual buyers can't claim it back. Our GST on property purchase guide covers the detail.
On rent, a flat let to a family for living attracts no GST. Commercial rent attracts 18%, but only once the landlord's taxable turnover crosses Rs 20 lakh a year (Rs 10 lakh in special-category states). The tenant pays it on top of rent, so it is a compliance job rather than a cost.
Loans and income tax
In September 2026, commercial purchase loans were priced around 9.25% to 10.25% at HDFC Bank and 9% to 10% at ICICI Bank, against 7.25% to about 8.5% for SBI home loans.
Rent from either asset is taxed under income from house property, now in sections 20 to 24 of the Income-tax Act, 2025. Section 22 (the old section 24) gives a flat 30% deduction for repairs and allows interest on a loan for a let-out property. The Rs 2 lakh interest cap applies to a self-occupied home. On sale, both are long-term assets after 24 months and pay 12.5% capital gains tax. The difference is reinvestment relief. Selling a flat and buying another uses section 82 (the old 54) on the gain. Selling a shop or office and buying a house uses section 86 (the old 54F), which requires you to reinvest the whole net sale price for full relief and to own no more than one other house on the date of sale. Our capital gains guide and tax on rental income post cover both in detail.
Worked example: Rs 1 crore in each
Take two ready properties at Rs 1 crore each, so no GST. The flat lets at Rs 30,000 a month (3.6% gross). The office lets at Rs 65,000 a month (7.8% gross). The vacancy assumptions below are illustrations, not market data.
- Flat: one empty month a year leaves Rs 3,30,000. Taxable at 70% is Rs 2,31,000; at a 30% slab, tax is Rs 69,300. Net: Rs 2,60,700, or 2.6%.
- Office: one six-month void every three years averages two empty months a year, leaving Rs 6,50,000. Taxable at 70% is Rs 4,55,000; tax is Rs 1,36,500. Net: Rs 5,13,500, or 5.1%.
The office still wins by about Rs 2.5 lakh a year. Add a loan. Rs 65 lakh on the office at 9.5% over 15 years is an EMI of about Rs 67,875, slightly more than the rent. Rs 80 lakh on the flat at 7.75% over 20 years is about Rs 65,676, more than twice its rent. The office nearly pays for itself; the flat needs you to top it up every month. That is the real case for commercial, while the tenant stays.
When commercial is the wrong choice
- You can't carry a vacancy. If a year without rent would force a sale, the higher yield is not worth the risk.
- You need an easy exit. Offices and shops sell mainly to investors, who price off the yield and the lease left.
- You might want to live in it. A flat can become your home or your child's. An office unit cannot.
- The deal relies on an "assured return". Promised rent from a developer is not a lease from a tenant.
- It is a small unit in a strata-sold mall or complex. Fragmented ownership often means poor upkeep and weak tenants. Our sibling post on high-street versus mall shops covers that trap.
Comparing Indian income property with a Gulf allocation? Our Dubai versus India comparison sets out the differences.
Frequently asked questions
Is commercial property a better investment than residential in India?
For income, usually yes: 6% to 9% gross against about 3% to 4.6% for flats in big cities. For safety and liquidity, residential usually wins, because flats re-let faster and sell to a far wider pool of buyers. Commercial suits investors with Rs 1 crore or more, a long horizon, and cash to carry six to twelve months of vacancy.
What loan can I get for buying a shop or office?
Banks offer commercial property purchase loans at roughly 9% to 10.25% a year, usually for up to 15 years, and typically fund around 70% to 75% of the value. That compares with home loans from about 7% and funding of 75% to 90%. Expect processing fees of 0.5% to 2% and a closer look at your income.
Do I have to pay GST on rent from my commercial property?
Only once your total taxable turnover crosses Rs 20 lakh a year, or Rs 10 lakh in special-category states. Above that you must register and charge 18% GST on rent, which the tenant pays on top. A flat let to someone for living attracts no GST at all, whatever the rent.
Can I save capital gains tax when I sell a commercial property?
Yes, through section 86 of the Income-tax Act, 2025 (formerly 54F). Buy one residential house within a year before or two years after the sale, or build one within three years. Full relief needs the whole net sale price reinvested, and you must not own more than one other house on the sale date.
What happens if my commercial tenant leaves before the lease ends?
Inside the lock-in, the tenant usually owes rent for the rest of the lock-in period, and you can adjust dues against the deposit. After the lock-in, the tenant can usually leave by serving the notice period the lease sets. Either way, budget for a void of six months or more while you find and fit out for the next tenant.
If you are weighing a specific office, shop or flat, we can go through the lease, the loan and the tax with you before you commit. Talk to the Realty Hunting team, or browse our commercial property listings.
