Can you legally use residential property for commercial purposes?

residential property commercial property

It is crucial to uncover the regulations regarding converting residential buildings into commercial spaces. This blog offers an extensive handbook, outlining the required paperwork, procedures for acquiring consent, and possible costs and sanctions related to using residential property for commercial purposes.

Consider Saleha, a dentist who lives in Vasai, as an illustration. Her goal is to transform her apartment into a clinic, a decision that is becoming more popular because of the rising rental prices in urban areas. Utilizing residential property for commercial purposes not only cuts down on commercial leasing costs but also minimizes time and money spent on commuting.

Although residential developments usually oppose extensive commercial use, there are rules permitting limited commercial operations in specific zones. Nonetheless, rules regarding the use of residential property for commercial purposes differ among states and even within various sections of the same city.Difference between Residential Property and Commercial Property

Let us understand the difference between residential property and commercial property:-
  • In residential zones: you'll find properties like apartments, plots, independent houses, and residential floors. These areas may also include hotels or motels, but they do not permit retail shops.
  • On the other hand: commercial zones consist of shopping malls, commercial shops, office buildings, hotels, clubs, and restaurants. These areas are governed by specific Commercial Zone legislation that dictates which types of businesses can operate there. For instance, certain commercial activities are restricted near religious sites such as temples, churches, or mosques.
Can a Residential Property be Used as Commercial Property?

Yes, it is possible to utilize a residential property for commercial activities as long as you receive the necessary legal authorization. Rules differ by state; some states permit up to 30% of a residential property for commercial purposes, while others allow up to 50%.

Now, let's think about who is able to run a home-based workspace. As per a legal expert from MB, certain professions like lawyers, accountants, doctors, and advocates are allowed to engage in commercial activities in residential zones. In addition, activities such as tutorials, dance classes, and yoga can be used for dual purposes.

Do special regulations exist for this? Asha Basu, who is a partner at S Jalan & Company, clarifies that although there is no specific rule for changing residential flats to commercial ones, it is allowed as long as there is no production or manufacturing taking place. Commercial activities on residential property must be conducted in a professional manner without causing disturbance to other residents in the society.

Nonetheless, obtaining consent from the housing association is necessary. Basu also mentions that, depending on the type of business, approval from local municipal authorities might be necessary to change a residential flat into a commercial space. For tenants using a residential property for commercial purposes, in addition to usual approvals, obtaining a no-objection certificate from the landlord is compulsory.

What does the law say about residential property being converted into commercial property?

Zoning Law is the legal structure governing the conversion of residential property to commercial property. This law controls the division of land into zones, determining allowed and restricted land use types. Its main aim is to protect neighborhoods from negative impacts of businesses and to preserve clear distinctions between residential and commercial zones. Zoning includes different categories such as residential, commercial, industrial, rural, combination zoning, agricultural, historic, and aesthetic zones, with the specific consideration for using residential property for commercial purposes.

What is the Process to Convert Residential Property into Commercial Property?

Converting a residential property into a commercial one can be a lengthy process. It's crucial to complete all necessary steps before commencing commercial activities to avoid potential penalties. Here's a simplified guide to converting residential property into commercial property:

Step 1: Visit your city's local municipal authority, such as the Municipal Corporation of Delhi if you reside in Delhi.

Step 2: Prepare an application addressed to the Municipal Officer requesting the property conversion, specifying the reasons for the conversion.

Step 3: Include company registration documents, business IDs, and other pertinent details like business size, address, and property nature with your application.

Step 4: Authorities will conduct an assessment of the proposed business to ensure it won't adversely affect the neighborhood or environment. If no issues are found, they will issue a business license

Documents Required for Conversion of Residential Property into a Commercial Property

When you decide to convert the residential property into a commercial property then, you will have to submit the following documents:-

  • A written application
  • Business registration document
  • Address proof 
  • Business ID
Penalty or Charges If Residential Property is Used as Commercial without Licence

The consequences of utilizing a residential property for commercial purposes without a license differ from city to city. In Noida, as an example, the fine equals 1% of the overall price of the property. If a property worth Rs 50 lakh operates without a license, the penalty would be Rs 50,000. It is crucial to comply with local regulations in order to prevent facing fines when using a residential property for commercial purposes.

Businesses Which Cannot Be Held in Residential Property
  • According to Supreme Court orders, the following activities cannot be held in residential properties:-
  • A Banquet hall cannot be constructed in a residential area.
  • A business cannot run in a residential area if it is a polluting environment, harmful, obnoxious, inflammable etc.
  • A liquor store cannot be in a residential area or a residential property.
  • Construction material cannot be sold in timber, marble, iron, steel, sand, firewood, and coal. 
  • Automotive repair and workshops should be outside of residential areas. 
  • Architects, chartered accountants, physicians and lawyers cannot operate in more than 50 per cent of residential coverage. 
Things to Keep in mind Before Converting the Residential Property to Commercial Property

If, according to the law, you are allowed to convert a residential property into commercial property, then you should be mindful of the following things:-

  • You must check with the local authority if you can open the business on your residential property or not. 
  • Get permission in writing from the local authority. 
  • If you are a tenant, you should get a landlord's permission. In such a case, the landlord can increase the rent too.
  • Check whether your client or customers use the parking area and other public facilities appropriately.  
  • Businesses should not hamper the security and peace of the neighbourhood. 
Benefits of Complying with Regulations When Converting Residential Property for Commercial Use

It's crucial to adhere to regulations when converting residential property for commercial use. Doing so offers several advantages:

Legal Protection: Compliance with regulations safeguards you from legal issues, ensuring smooth operations.

Property Value: Non-compliance can diminish your property's value and complicate its sale. Adhering to regulations preserves your investment and enhances its marketability at a favorable price.

Harmonious Living: Residential areas are intended for tranquility. Following rules helps maintain a peaceful environment and prevents disruptions from commercial activities.

Summing Up: Use of Residential Property as Commercial Property

Obtaining a license and all required permissions before using residential property for commercial reasons in India is extremely vital. Zoning regulations classify properties into specific zones with permitted and restricted uses, governing this practice. For example, specific activities like the sale of alcohol, car parts, machinery, or wood are not allowed in residential neighborhoods.

If you plan on changing residential property to commercial use, you must get a license from the local authority. Not obtaining this license can lead to penalties. Adhering to these regulations is crucial to guarantee legal operation and prevent facing legal consequences when using residential property for commercial purposes.

Frequently Asked Questions

Ans 1. Can a Residential Property be Used as Commercial Property? Yes, a residential property can be used as commercial property if you have legal permission.

Ans 2. No. 4216 of 1988, the Supreme Court held that the user of residential premises under tenancy for the purpose of the doctor's clinic did not tantamount to change of user.

Ans 3. Sale proceeds of residential property can be use for purchase of new house/residential property and it will be tax free. If the same is use to buy commercial property it is taxable as Long Term Capital Gain/Short term capital gain based on the holding period.

Ans 4. You can register a complaint with the municipal authority, inform the police, or file a Public Interest Litigation (PIL) in court.

Ans 5. Inthe case of "Subbayya Chettiar v. CIT", The Supreme Court ruled that section 6(2) creates an implication that a firm must be a resident in India and that it is their responsibility to establish that they are not residents. What Is Control And Management?

Ans 6. Doctors provide a 'service'If the doctor does not exercise a “reasonable degree of care” and breaches one of these duties, they can be liable for deficiency in service, the court said.

Ans 7. Under Section 54G and Section 54GA, if the sale proceeds are reinvested in specified business assets in specified areas or Special Economic Zones, capital gains can be exempted. This is how to save capital gain tax on sale of commercial property.