Financial Planning

NRIs: Income Tax aspects on renting out a property in India


NRIs Income Tax aspects on renting out a property in India
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If you are an NRI and wondering what you should do with your residential flat in India, you are at the right place. NRIs want to rent out their residential flat, but they are unsure of income tax aspects. In this article, we will answer your queries concerning income tax on renting a property in India.

Why should NRIs rent the property?

NRIs staying abroad must rent out their residential flat in India for two main reasons:

  • It takes care of the maintenance and other expenses related to the flat.
  • You generate a steady income that can help you with specific financial goals.

Rent a property - Get the basics cleared

You can rent your property in India as an NRI and receive the monthly income. The only difference is that the rent amount should be credited to your NRE or NRO account. You are free to repatriate the amount received. If you do not have the NRO/NRE account, you can ask your tenant to transfer the rent amount to your local account.

For either option, your tenant should submit Form 15CA online to the Income Tax Department. You may also need to produce an appropriate certificate from a Chartered Accountant (CA) certifying that all taxes are fully paid.

Do NRIs have to pay taxes on rental income?

Most NRIs are unaware of it, but they need to pay taxes on the rental income they earn in India. In fact, the tax is deducted at the source (TDS) by the tenant. Your tenant must obtain a TAN number and deduct tax of 30% from the rent amount and only transfer the balance to your account and share a TDS certificate.

What if a tenant does not deduct TDS? If the tenant does not deduct tax and you fail to declare your income and pay the tax, the IT department will hold you responsible in this case. If a tenant is not deducting TDS, it is your responsibility to declare the income and pay the required taxes.

Do NRIs have to pay taxes in the country of residence?

In general, as a resident of the country and getting global income, you are required to pay taxes. Hence, the tax is deducted from a source on your rental income in India, and your foreign income will be subject to tax in your residing country.

However, we have many countries with whom India has signed Double Taxation Avoidance Agreements (DTAA). India has signed DTAA with 88 countries (with 86 countries, it is in force). If you are not sure how you can benefit from the DTAA, you can take help from a financial advisor.

The DTAA rules are different in different countries. For example, India-US DTAA states that the rental income will be taxed in the country where the property is located. Hence, if you are an NRI resident in the US, you will only have to pay taxes on your rental income in India. However, you will have to disclose your rental income while filing your tax returns in the US. You will get a credit for taxes paid in India. You must check the tax laws for the country you are residing in or consult an expert.

Are there any exemptions around tax for rental income?

Yes, if your total income in India, including your rental income, is below Rs 1.6 lakh, you get a TDS exemption – your tenant should not deduct the TDS. However, the process for the exemption is not easy. The first thing you need to do is apply for a tax exemption certificate from the tax authorities. Once you have your certificate, submit the certificate to the tenant. The certificate issuance is at the discretion of the tax office. and he needs to be convinced about your case.

There is an alternative – you can file your returns and claim a refund of the TDS paid. Please note, in this case, the rental income may be taxed fully in the country of your residence. For example, if you are a US resident and your income is below the basic exemption limit in India, you pay no taxes in India*. However, your rental income gets added to your US income and taxes as per US laws.

What is a deemed rent?

Below are different scenarios related to deemed rent:

  • If you have one residential property in India and do not rent it out, it will be deemed to be self-occupied. In this case, there will be no tax liability for you.
  • If you give your property on rent, the rental income is taxed for that financial year.
  • If you have two houses in India and rent one out, the other will be deemed to be self-occupied. You pay tax only on the rental income of a single property.
  • If you have two houses and don’t rent any, then one will be deemed to be self-occupied, and the other deemed to be let out. It will be taxed based on the valuation of rent. You have the choice to choose any of the properties as self-occupied for taxes.

Conclusion

Taxation for NRIs is not simple, and taking an expert’s help to manage the taxes gets crucial in most cases. We at Right Horizons have years of experience helping NRIs with taxation and other money-related matters. Get in touch with us and leave all your financial worries to us.

*The tenant is supposed to deduct TDS irrespective of the value of the rentals. So, one would need to get a certificate not to deduct tax at source by disclosing all income data to the IT department and showing that your income is below the taxable limit. The IT officer may not easily give this, so technically possible, but practically difficult not to pay tax in India.

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