Conceptual · Article 3.1.1.5

Direct Real Estate — Commercial.

Higher Yields Than a Home. And a Landlord's Job to Match.

Published as on 22 July 2026

Direct commercial real estate means buying physical income-producing space — an office floor, a shop, a warehouse, an industrial shed — in your own name, not through a REIT or a fund. Its appeal is straightforward: Grade-A offices yield 6-8%, retail 7-9% and warehousing 5-6%, well above residential's 2-4%. But that premium comes attached to a far larger cheque, vacancy periods of 6-18 months when a tenant leaves, round-trip transaction costs of 10-15%, and a tax, GST and RERA regime unlike anything a homebuyer meets. It is a product built for investors who have both the capital and the appetite to be the landlord.

6–8%

Grade-A Office Yield

7–9%

Retail Yield

₹50L+

Typical Ticket

12.5% LTCG

After 24 Months

Executive Summary · Page 2

Executive Summary · 6 Findings

Owning a commercial property directly is often sold as premium passive income. It is neither wholly passive nor low-risk. You are buying a business — a single tenant, in a single location, financed on harsher terms than a home, governed by GST and RERA, and locked up for years at a time. The rental yield is real and better than residential. So are the vacancy gaps, the 10-15% cost of getting in and out, and the day-to-day work of being a landlord.

Covers what direct commercial real estate is and how it differs from REITs and residential; the four asset categories and their yields; gross versus net returns and the vacancy trap; rental income under Income from House Property and the Section 24(b) interest deduction; capital gains at 12.5% after the Finance Act 2024; the GST and RCM rules that changed in October 2024; financing, RERA and the real risks; the honest comparison with listed REITs; and six questions Indian investors ask.

Key Findings

Physical space in your own name — not a REIT unit.

Direct commercial real estate is an office floor, retail shop, warehouse, industrial shed or commercial plot bought outright. It is distinct from listed REITs, SEBI's SM REITs, and residential property — and the rules on tax, GST, financing and RERA differ sharply between them. The choice is a business decision, not a portfolio tweak.

Higher yields than a home, at a far bigger ticket.

Grade-A offices yield 6-8%, retail 7-9% and warehousing 5-6% gross — against residential's 2-4%. But entry starts near ₹50 lakh and runs to crores. The premium is compensation for concentration, illiquidity and management, not a free lunch.

Gross yield flatters; vacancy and costs bite.

Net yield runs 1.5-3% below gross once maintenance, property tax, upkeep and vacancy are counted. And when a commercial tenant leaves after lock-in, replacing it can take 6-18 months of zero income on a high-value asset. A single-tenant office concentrates that risk entirely.

Rent taxed under House Property; gains at 12.5%.

For most individuals, commercial rent falls under Income from House Property — a flat 30% standard deduction plus the full, uncapped Section 24(b) interest for a let-out property, in both regimes. There is no 80C on the principal. On sale after 24 months, LTCG is 12.5% flat without indexation under the Finance Act 2024.

GST is the part most investors misread.

Commercial rent attracts 18% GST; under-construction commercial carries 12% with input tax credit; a ready, completed resale carries none. Since 10 October 2024, an unregistered landlord's GST-registered tenant pays the 18% under Reverse Charge Mechanism — the compliance shifts to the tenant.

A HNI product — for most, a REIT is the answer.

Direct commercial suits HNIs with ₹5-10 crore-plus, business owners buying their own premises, or investors with deep local expertise. For salaried investors seeking exposure, listed REITs deliver Grade-A property with daily liquidity, diversification and a ₹10,000-15,000 ticket — usually the better risk-adjusted route.

At A Glance

Metric	Value	Detail
Asset types	Office / Retail / Warehouse	Plus plots
Gross yield	6–9%	vs 2–4% residential
Min ticket	₹50 lakh+	Often crores
Loan LTV	50–70%	~9.35–11% banks
Vacancy gap	6–18 months	On tenant exit
Rental tax	House Property	30% std deduction
LTCG (post 23 Jul 24)	12.5% flat	No indexation
Round-trip cost	10–15%	Stamp duty + more

Exhibit 01: Gross Rental Yields by Asset Class

Asset Class	Gross Yield	Lease Term
Grade-A Office	6–8%	3–9 yrs
Retail (Mall / High St)	7–9%	Variable + revenue share
Warehouse / Industrial	5–6%	5–9 yrs
Residential (compare)	2–4%	11 months

*Indicative gross yields, FY 2025-26, from CBRE / JLL / Knight Frank research. Net yields run 1.5-3% lower after maintenance, property tax, upkeep and vacancy. Commercial plots generate no rent — return depends entirely on eventual sale.

The Opening · Page 3

The Opening

Direct commercial real estate is the oldest income idea in India, dressed up in a modern number. Buy a 2,000 sq ft office in a Bengaluru business park for ₹2 crore, let it at ₹80 a square foot, and the rent works out to roughly ₹19.2 lakh a year — a gross yield near 9.6%, a figure no fixed deposit or residential flat can touch. That headline is what draws capital in. What the headline omits is everything that turns 9.6% gross into 7-8% net, and what happens in the months a tenant is gone.

"A commercial property does not pay you rent. A tenant does. Own a single office let to a single company and you have not bought an income stream — you have bought that company's decision to stay, renegotiated every few years, with 6-18 months of silence each time it says no."
Concentration, Not Diversification

The mechanics. Return comes from two places: rent while the asset is let, and appreciation when it is sold. Rent is the reliable half — commercial leases run 3-9 years with lock-ins and 15% escalations every three years. Appreciation is the uncertain half — highly location-specific, tied to the economic cycle, with real stretches of stagnation (2007-08, 2014-15, the COVID office slump of FY 2020-21). There is no clean index of commercial capital appreciation for individual investors, and any promise of one should be treated with suspicion.

The FY 2025-26 context. Two structural shifts frame the decision today. The Finance Act 2024 reset capital gains to a flat 12.5% without indexation for sales on or after 23 July 2024. And an October 2024 GST change moved the 18% rental liability onto GST-registered tenants of unregistered landlords under Reverse Charge. Both matter more than the yield an agent quotes.

The Honest Boundary: Direct commercial real estate is NOT passive income — it is an actively managed, single-asset business. It is NOT liquid — exit takes months and often a price concession. It is NOT diversified — one property, one location, often one tenant. It IS a legitimate way for HNIs and business owners to own a hard, income-producing asset — provided the capital is patient and the landlord role is welcome, not resented.

Structure

Part I

What It Is, the Four Categories & What Returns to Expect

Part II

The Tax & GST Machinery — Rent, Gains, and 18% GST

Part III

Financing, RERA, the Real Risks & Direct vs REIT

Part IV

The Verdict: When Ownership Actually Makes Sense

Use If

✓ Investable assets of ₹5 crore+

✓ Buying your own business premises

✓ Deep local micro-market expertise

✓ A 5–7 year-plus horizon

Do NOT Use If

✕ You want truly passive income

✕ You are a first-time property buyer

✕ Your horizon is under 5 years

✕ You may need to exit quickly

Part I

What Direct Commercial Property Is, Its Four Forms, and the Returns It Really Pays

Office, retail, warehousing and plots — how each behaves; why 6-9% gross yields beat residential but net yields run lower; and why appreciation is real, location-specific, and impossible to promise.

Part I · Page 4

The Four Categories

Type	Typical Tenant	Yield
Office	Companies, tech parks	6–8%
Retail	Shops, F&B, malls	7–9%
Warehouse	Logistics, manufacturing	5–6%
Plot	None (land bank)	Nil rent

Office space — fitted or bare-shell floors in business parks — leases to companies on 3-9 year terms with lock-ins, concentrated in Bengaluru, Mumbai, Hyderabad, Pune, Chennai and Delhi-NCR. Retail runs from high-street shops to mall units, often with a minimum-guarantee-plus-revenue-share rent. Warehousing rides e-commerce, supply-chain reshaping and PLI incentives on long 5-9 year leases. Plots pay no rent — the entire return rides on eventual sale or development.

Gross vs Net Yield

The Number That Actually Reaches You

Gross yield is annual rent divided by cost. Net yield subtracts maintenance, property tax, interior upkeep and vacancy losses — and the gap is typically 1.5-3% a year. A ₹2 crore office at ₹80/sq ft on 2,000 sq ft shows ~9.6% gross but nets closer to 7-8%. The single biggest destroyer of net yield is not cost — it is the empty month.

Where the Return Comes From

Source	Reliability	Driver
Rental income	Higher	Lease, escalation
Appreciation	Lower	Cycle, location
Escalation	Contractual	~15% every 3 yrs
Vacancy	Negative	6–18 mth gaps

Rent is the dependable engine, backed by lock-ins and periodic escalation. Appreciation is genuine over long, well-located holds but uneven — closely tied to the economic cycle, corporate clusters and infrastructure, with real periods of stagnation. Unlike equities, there is no reliable published series for commercial capital appreciation, so treat any confident CAGR figure with caution.

The vacancy reality: commercial leases typically run 9 years with a 3-year lock-in; after that, either side can exit on 3-6 months' notice. In a weak market, re-letting a standalone single-tenant office or warehouse can take 6-18 months — zero income on a crore-plus asset that still incurs property tax, maintenance and, if leveraged, EMIs. This is the risk residential landlords rarely face at the same scale.

Part II

The Tax and GST Machinery: How Rent, Capital Gains, and 18% GST Actually Work

Rental income under Income from House Property with its 30% standard deduction and uncapped Section 24(b) interest; a flat 12.5% LTCG after 24 months; and the GST rules — 18% on rent, 12% under-construction, and the October 2024 Reverse Charge shift — that most investors misjudge.

Part II · Page 6

Rental Income (House Property)

The Computation

Gross Annual Value, less municipal taxes paid, gives Net Annual Value. Then a flat 30% standard deduction (no documents needed) and the full Section 24(b) loan interest — uncapped for a let-out property, in both old and new regimes. On ₹12 lakh rent with ₹1 lakh municipal tax: NAV ₹11 lakh, less ₹3.3 lakh, leaves ₹7.7 lakh before interest.

No 80C, and a Regime Trap

Commercial loan principal gets no 80C — that benefit is residential-only. And under the new regime, a house-property loss cannot be set off against salary or business income at all; the old regime allows ₹2 lakh a year, carried forward eight years against future house-property income. Large loans give far less shelter than assumed.

Or Business Income

Own many properties and manage them like a business, and rent may be taxed as Business Income — allowing actual expenses and depreciation instead of the flat 30%. It is fact-dependent and litigated; portfolio owners should take a CA's view on the right head.

Capital Gains & GST

Scenario	Rate	Indexation
LTCG (on/after 23 Jul 24)	12.5% flat	No
LTCG (before 23 Jul 24)	20% w/ index or 12.5%	Lower of two
STCG (≤24 months)	Slab rate	N/A

Hold beyond 24 months for long-term treatment. Bought at ₹50 lakh in FY 2019-20, sold at ₹90 lakh in FY 2025-26: ₹40 lakh gain, ₹5 lakh tax at 12.5%. To defer, reinvest in a residential house under Section 54F (cap ₹10 crore) or in REC/PFC/IRFC bonds under Section 54EC (up to ₹50 lakh, within six months, 5.25% and a 5-year lock-in). Note: Section 54, the residential-to-residential rollover, does not apply to commercial gains.

GST: 18% Rent, 12% Under-Construction, RCM

Commercial rent attracts 18% GST; under-construction commercial purchases carry 12% with input tax credit; a ready, completed resale carries none. Since 10 October 2024 (Notification 09/2024), if an unregistered landlord lets to a GST-registered tenant, the tenant pays the 18% under Reverse Charge — no registration burden on you. Cross ₹20 lakh of taxable supplies and you must register anyway.

Part III

Financing, RERA, the Real Risks, and the Honest Comparison with REITs

Why commercial loans cost more and lend less; how RERA protects commercial buyers too; the six risks that make this an active business; and why, for most investors, a listed REIT does the same job better.

Part III · Page 8

Financing & RERA

Parameter	Home Loan	Commercial Loan
LTV	75–80%	50–70%
Rate (FY 25-26)	8.5–9.5%	9.35–11%
Tenure	Up to 30 yrs	10–15 yrs
80C principal	Yes	No

RERA Applies to Commercial Too

A common myth is that RERA is residential-only. Projects over 500 sq m or 8 units must register. Commercial buyers get the 70% escrow rule, the 10% advance cap, quarterly progress updates and a 5-year defect liability. Verify the registration number on the state portal — MahaRERA and Karnataka RERA both cover commercial — before booking any under-construction unit.

Higher rates and shorter tenures make EMIs heavy relative to the loan: ₹1.5 crore at 10% over 12 years is roughly ₹1.79 lakh a month — which must be serviced from rent of about ₹1.5-2 lakh on a ₹2 crore office. Leverage compresses the effective cash yield through the repayment years, and turns a vacancy into a cash drain.

The Six Real Risks

Vacancy, Cost & Illiquidity

(1) Vacancy & concentration — 6-18 month gaps on single-tenant assets. (2) Transaction cost — 10-15% round-trip (stamp duty 5-7%, registration, 1-2% brokerage each side, legal, 12% GST on under-construction). (3) Illiquidity — no exchange; weeks to months to sell, often at a concession.

Management, Title & Cycle

(4) Active management — renewals, escalations, HVAC, tax and GST/RCM compliance. (5) Title & regulatory — land-use conversion, OC, fire NOC, lift compliance must be verified independently. (6) Cyclicality — office and retail track the economy; the COVID slump hit both while warehousing surged.

Direct vs Listed REIT

Factor	Direct	REIT
Minimum	₹50L–crores	₹10–15k
Liquidity	Months	Minutes
Diversification	One asset	20–50+ assets
LTCG	12.5% / 24 mth	10% / 12 mth
GST	Complex	None

Part IV

The Verdict

A hard asset for those built to be landlords. A REIT for everyone else.

Part IV: The Verdict · Page 10

30-Second Summary

Direct commercial real estate is physical income-producing space — office, retail, warehouse or plot — owned in your own name. It yields more than residential (6-9% gross versus 2-4%), but the net figure runs 1.5-3% lower, and a single-tenant vacancy can mean 6-18 months of zero income on a crore-plus asset. Financing is dearer and shorter than a home loan, transaction costs run 10-15% round-trip, and the asset is deeply illiquid.

Rent is taxed under Income from House Property — a 30% standard deduction and uncapped Section 24(b) interest for let-out property, but no 80C on principal and no loss set-off in the new regime. Gains after 24 months are 12.5% flat without indexation, deferrable via Section 54F or 54EC. GST is 18% on rent (often shifted to the tenant via RCM since October 2024), 12% on under-construction, nil on completed resale. It is a HNI and business-owner product; for most, a listed REIT delivers the same exposure with liquidity and diversification.

"The right question is never 'what does commercial property yield?' It is 'am I equipped to run a single-tenant business, illiquid for years, and can I do it better than a REIT manager who owns fifty of them?' For most investors the honest answer is no — and that answer is not a failure, it is a portfolio decision."
The Final Orientation

The Bottom Line: Buy commercial property directly only if you have the capital to absorb a long vacancy, a horizon beyond 5-7 years, and either local expertise or a strategic reason such as your own premises. Underwrite on net yield after costs and vacancy, not the agent's gross. Do full title, OC, fire-NOC and lease due diligence, and verify RERA for anything under construction. Diarise advance tax and GST/RCM compliance. And before committing crores to one asset in one location, price the alternative honestly: a listed REIT gives Grade-A exposure, diversification and daily liquidity from ₹10,000.

ADWIZR · July 2026

Decision Rules

A Strong Case

✓ HNI with ₹5–10 crore-plus

✓ Buying your own premises

✓ Deep local micro-market edge

✓ Patient, 5–7 year-plus capital

A Weak Case

✕ Salaried, seeking passive income

✕ First-time property investor

✕ Horizon under 5 years

✕ Any need for quick exit

Three Misconceptions

What Investors Get Wrong

(1) "It's passive income." It is an actively managed, single-tenant business. (2) "The gross yield is what I earn." Net runs 1.5-3% lower, and a vacancy can wipe out a year. (3) "My loan gives me a tax shelter." No 80C on principal, and the new regime blocks house-property loss set-off entirely.

vs Residential Property

Higher Yield, Different Rules

Commercial yields 6-9% against residential's 2-4%, on 3-9 year leases rather than 11-month ones — but with 18% GST, larger tickets, harsher loans and longer vacancies. It is not "residential, but better income"; it is a different asset class with a different rulebook.

6–9%

Gross yield

Office / retail

12.5%

LTCG

After 24 months

10–15%

Round-trip cost

Entry + exit

Investor FAQ

Questions Indian Investors Ask

Six questions, answered directly.

Investor FAQ · Page 12

Frequently Asked Questions

Q1 Is it better to buy a shop or an office for investment?

Both are commercial real estate but they behave differently. Grade-A office space in established business parks typically offers 6-8% gross yields with long, stable leases (often 9 years with a 3-year lock-in) and creditworthy institutional tenants. Retail shops can yield more — 7-9% — but are far more sensitive to footfall, retailer health and e-commerce disruption, and malls add revenue-share rent complexity. For yield-focused investment with lower management intensity, Grade-A office in an established corridor is generally the more institutionally sound choice; retail suits investors with genuine local expertise in a specific high-footfall micro-market.

Q2 Can I get a home loan to buy commercial property?

No. Home loans are only for residential property. Commercial purchases require a commercial property loan or a Loan Against Property, which carry higher interest rates (roughly 9.35-11% from banks, higher from NBFCs), lower loan-to-value ratios of 50-70%, and shorter tenures of 10-15 years. Some investors pledge existing residential property as collateral for a LAP and deploy the proceeds into commercial real estate, but that layers leverage and raises risk. There is also no Section 80C deduction on commercial loan principal.

Q3 Is rental income from my commercial property fully taxable?

Not fully. Under Income from House Property you deduct municipal taxes paid, a flat 30% standard deduction on Net Annual Value, and the full loan interest under Section 24(b) for a let-out property with no cap. On ₹12 lakh annual rent with ₹1 lakh municipal tax and ₹6 lakh loan interest: NAV ₹11 lakh, less 30% standard deduction ₹3.3 lakh, less interest ₹6 lakh, leaves ₹1.7 lakh taxable. At a 30% slab that is roughly ₹51,000 of tax on ₹12 lakh of gross rent — an effective rate near 4.25%. Note the new regime blocks set-off of any house-property loss against other income.

Q4 What GST applies if I am an unregistered individual landlord?

Under CBIC Notification No. 09/2024-CT(Rate), effective 10 October 2024, if you are an unregistered individual landlord and your tenant is GST-registered, the tenant must pay 18% GST on the rent under the Reverse Charge Mechanism (RCM). You do not have to register for GST, charge it, or file returns — the obligation shifts to the registered tenant, who can usually claim input tax credit, making it cash-flow neutral for them. If both landlord and tenant are unregistered, no GST applies. Separately, if your taxable supplies including rent exceed ₹20 lakh a year, you may need to register anyway.

Q5 How is capital gains tax calculated when I sell after five years?

After a holding period of more than 24 months the gain is long-term. Under the Finance Act 2024, for sales on or after 23 July 2024 the rate is 12.5% flat without indexation. Example: bought for ₹80 lakh in FY 2019-20, sold for ₹1.5 crore in FY 2025-26, LTCG ₹70 lakh, tax ₹8.75 lakh. You may reduce this by reinvesting in a residential house under Section 54F (cap ₹10 crore) or in REC/PFC/IRFC capital-gain bonds under Section 54EC (up to ₹50 lakh, within six months). Section 54, the residential-to-residential rollover, does not apply to commercial gains.

Q6 Should I buy commercial real estate directly or invest in a REIT?

For most salaried Indian investors, listed REITs are the more practical and risk-appropriate choice. They give exposure to Grade-A commercial real estate with daily liquidity, professional management, portfolio diversification and a minimum of around ₹10,000-15,000, and their capital gains treatment (10% LTCG after 12 months) is more favourable than direct property (12.5% after 24 months). Direct commercial ownership makes sense only for HNIs with crores to deploy, specific local market expertise, or strategic reasons such as owning their own business premises — who can also carry the full landlord and compliance burden.

Key Terms & Definitions

Direct Commercial Real Estate

Buying physical, income-producing commercial space — an office floor, retail shop, warehouse, industrial shed or commercial plot — in your own name or through a company or partnership, as distinct from holding units in a REIT or SM REIT.

Gross vs Net Yield

Gross yield is annual rent divided by property cost. Net yield deducts maintenance, property tax, upkeep and vacancy losses before dividing — typically 1.5-3% lower. Net yield, not gross, is the number that actually reaches the owner.

Income from House Property

The head under which most individuals' commercial rent is taxed. It permits a flat 30% standard deduction on Net Annual Value and the full Section 24(b) loan interest (uncapped for let-out property), in both tax regimes — but no 80C on principal.

Reverse Charge Mechanism (RCM)

A GST rule under which the recipient, not the supplier, pays the tax. Since 10 October 2024, a GST-registered tenant renting from an unregistered commercial landlord must pay the 18% GST directly, and can usually claim input tax credit on it.

Section 54F / 54EC

Two ways to defer LTCG on a commercial sale: 54F, by reinvesting in a residential house (cap ₹10 crore, subject to conditions); or 54EC, by buying REC/PFC/IRFC bonds up to ₹50 lakh within six months, with a 5-year lock-in.

RERA

The Real Estate (Regulation and Development) Act, 2016 — fully applicable to commercial projects over 500 sq m or 8 units. It gives buyers the 70% escrow rule, a 10% advance cap, quarterly progress updates and a 5-year defect liability.