Taxation on Indian Rental Income for NRIs: Complete Details

If you are an NRI earning rental income from your Indian property, then it must be quite difficult for you to stay compliant with the Indian tax laws. It is important to follow all the regulations to avoid penalties and get high returns on your investments. There are many deductions and exemptions available for all the NRIs, so that they can help to reduce their tax liability. DTAA can also help them in preventing double taxation on the same income. As per the rules of NRI taxation, their rental income is subject to 31.2% TDS, but the taxable amount is reducible as they can claim a standard deduction of 30% on the annual rental value. 

To understand taxation better, we have prepared this guide for all the NRIs who have rented a property in India. By reading this blog, you will be able to understand how taxation works for the NRIs and what the consequences of non-compliance are. We have also talked about the common mistakes that NRIs make in case of the taxation on rental income and a compliance checklist for the NRI landlords and tenants. Understand all the exemptions from this content and reduce your overall tax liabilities. 

How to Determine NRI Status?

As per the laws of Indian Taxation, a Non-Resident Indian is a citizen of India or a Person of Indian Origin (PIO) who is living in a foreign country for carrying out business activities or employment. The correct classification is important because it directly impacts the tax implications for the NRIs, especially for those who have income from Indian sources.

Based on Physical presence

• An individual with a residential status in India spends less than 182 days in the relevant financial year, then he will be considered an NRI.
• Indian citizens with an income of more than 15lakhs, visiting India, have to stay less than 120 days in a FY to maintain the NRI status.
• Keep in mind that the day count encompasses the dates of arrival and departure. 

Based on Duration

• An individual must have stayed in India for 365 days or fewer in the past four financial years, and then they will be considered an NRI. 
• If an individual stays in India more than the provided limits, then they will be considered Resident and Ordinarily Resident (ROR) and Resident but not Ordinarily Resident (RNOR). 

This method of assessment is very sensible for the Indian tax authorities as it can provide you with the correct way of categorisation for tax purposes. It is crucial, especially for those individuals who do a lot of back and forth from India to their country of residence.

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Tax on Rental Income in India for NRIs

The process of calculating the taxes on the rental income in India for NRIs is very different from the process for residents. This section will make you understand the tax obligations much better so that you can manage the taxation. 

The taxation on rental income is obtained by calculating the Net Annual Value (NAV) of your property. Here are the steps: 

• Start with the gross annual rent received.
• Minus all the municipal taxes you have paid on the property.
• Apply a 30% standard deduction from the Net Annual Value.
• Deduct the interest you have paid if there is a home loan.

The obtained result will be considered as your taxable rental income. 

TDS Compliance is compulsory for the NRIs. Your tenant needs to deduct the TDS at the rate of 31.2% from the rent payment every month, no matter the amount. 

Tax Deductions and Exemptions Available for NRIs

The deductions and exemptions on taxation can help the NRIs to reduce their tax liability if they have a rental income in India. It can help you with effective tax planning and getting the benefits.

Tax Deductions and Exemptions 

The most important deduction on the rental income is the standard deduction of 30% on your Net Annual Value (NAV). This tax deduction applies directly, no matter the maintenance expenses, so if you spend less on a property, even then, you can claim the benefits.

You can also subtract the total amount of municipal taxes paid in the financial year from the gross rental income. If you have taken a home loan on the property, then there are some additional deductions that you can claim: 

• If the property is self-occupied, then there is an interest deduction under Section 24(b) of Rs 2 lakhs annually.
• If the property is rented out, then you can claim a full interest deduction. 
• Under Section 80C, you can get a deduction on the principal repayment amount of up to Rs 1.5 lakhs. 
• For qualifying loans, there will be an additional Rs 50,000 deduction under Section 80EE on the interest.

These deductions help the NRIs in reducing their taxable income in India and smoothly managing their tax obligations. 

DTAA Benefits

You can get an added tax relief if you are living in a country that has a DTAA (Double Taxation Avoidance Agreement) with India. India has signed this agreement with over 90 countries, including the USA, the UK, Canada, and Australia. It can protect you from paying double taxes on the same income, once in India and then in your country of residence. 

If the value of your actual tax liability is less than the standard TDS, then you can also apply for a reduced TDS certificate. Submit Form 13 under section 197 with the accurate income details and justification. To claim these benefits, it is essential to file the income tax returns. You should report your rental income correctly and receive the refunds for any extra deducted TDS.

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Checklist for Maintaining Compliance: For NRIs and Tenants

The careful attention of both the tenants and the NRI landlord is required to maintain tax compliance. If you stay within the boundaries of these requirements, then it can save you from a lot of penalties and legal complications.

For NRI Landlords

1. If you are an NRI Landlord, it is crucial to maintain the correct documentation at all times:

• Records of all the external income in detail.
• Updated lease agreements that show your NRI status.
• All TDS certificates have been collected from the tenants.
• Documentation of your current KYC details. Update it as soon as your residential status changes.

2. It is important to verify your Form 26AS regularly by using the income tax portal or the net banking facility of your bank. It can help you get all the tax deductions against your PAN card, and it can help you in reconciling the tax payments.

3. Apply for a Section 197 as soon as possible if you feel that your tax liability is less than your standard TDS rate. It also allows the reduced TDS deduction according to your financial conditions.

4. Always remember that if you have a resident tenant, then the rental income should always be credited in your NRO account, and if you have another NRI tenant, then they can pay through their NRE account. 

For Tenants of NRI Landlords

If you are renting a property from an NRI landlord, then here are the steps that you must follow:

1. You should obtain a Tax Deduction Account Number (TAN) by visiting the NSDL website.
2. You need to deduct the TDS at the rate of 31.2% from the rent payments monthly.
3. You need to deposit the TDS on the 7th of next month through Challan ITNS281.
4. You should file a TDS return quarterly by using the Form 26Q.
5. You need to issue the TDS certificate (Form 16A) to your landlord within 15 days of return filing. 

If the rent is more than Rs 5 lakhs annually, then you should get a Form 15CB from a CA before submitting the Form 15CA. 

Consequences of Non-Compliance

If the tenants fail to meet all the tax requirements, then the consequences are severe:

• Under Section 271C, if, as a tenant, you fail to deduct the TDS, then you have to face the penalties, which are similar to the tax amount not deducted. 
• Under Section 276B, if you fail to pay the deducted TDS amount, then it can lead to a jail for three months to seven years.

For NRIs: If they fail to report their rental income in India, then it can result in legal complications and penalties. It can also affect your tax position in your country of residence, as well as in India.

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Common Mistakes to Avoid for NRIs: Rental Income Taxation

Here is the list of a few common mistakes that you must avoid while considering taxation on the rental income for NRIs: 

• Incorrect classification of income: Many of the NRIs classify their rental income incorrectly by mentioning it under the wrong heads of income. It is very common that they confuse the rental income with business income. They should place it under the head "Income from House Property".
• Late or non-filing of taxes: If you fail to pay the taxes on time and file the income tax returns before the deadline, then it can lead to major penalties and even legal issues. This can also happen if you fail to include the income from rents in the ITR.
• Avoiding the benefits of DTAA: If you don't take advantage of DTAA (Double Taxation Avoidance Agreement), then there can be many tax liabilities. 
• Missing TDS Deduction: It is mandatory to complete all the rent receipts with a 30% TDS deduction on rent for the tenants, if it's more than Rs 50,000 per month. If you fail to do so, you have to face penalties and a tax notice.
• Improper records of Expenses: If there is a lack of proper expense records of maintenance, repair, and improvement of properties, the NRI won't be able to claim the deductions on taxable income.

Why Choose Visament?

For NRIs, it can be a daunting task to manage the rental income tax compliance as they are not physically present in India. With the correct knowledge about taxation on the rental income, everything seems very manageable. Apart from the TDS and other taxes, there are many exemptions and deductions that NRIs can claim on their rental income in India, which can only be claimed with the right knowledge. It can be a little difficult for the NRIs to maintain accurate records, documentation, rental agreements, etc, so many of them prefer to get expert assistance. 

At Visament, we provide expert services, and you can also choose to file your ITRs with our experts. With their deep knowledge of Indian laws and compliance, they can help you claim all the deductions and reduce your overall tax liability. The services on our platform are very affordable, and you can get your ITR filled from the comfort of your home. We have a special section for the services tailored for the NRIs, where you can get expert guidance as per your requirements. Choose Visament now and get 24/7 tax-related services.