TAX LIABILITIY OF NRI ON RENTAL INCOME:

What is Rental Income?

Any income earned in the form of rent from any property owned by the NRI shall
constitute rental income for the NRI. Usual provisions of Income Tax Act, 1961
related to “Income under head House Property” regarding municipal taxes,
standard deduction and deduction of interest shall apply here too.

NRIs who settle abroad may continue to own a house property in India. In
several cases such property is rented out and the rental income is deposited in
the local Indian bank account of the NRI.
Irrespective of an individual’s residential status, Income which is ‘earned’ in India
is taxable in India. Rental Income from a property which is situated in India is an
income earned in India.
Tax on Rental Income
Rental from both commercial and residential property is chargeable to tax under
the head Income from House Property. Add this rental income to any other
income the NRI earns in India. If the total Income earned in India is more than
the minimum exemption limit, tax is payable based on the tax slabs for the
financial year. In such a case a return must be filed by the NRI.

Conditions for an NRI to earn Rental Income

There are no such complicated conditions to be fulfilled for an NRI to earn rental
income in India. The only condition he has to fulfill is that –

 The proceeds of rent must be credited either only into his NRE account or NRO
account or remitted directly to his account in the country he is living.
 But if the remittance mode is opted for the receipt of rental income, a certificate
will be required from a chartered accountant certifying that all the taxes have
been paid on such to be remitted income and there is no further tax liability
related to such income in India.

TDS on Rental Income

The tenant is required to deduct TDS before making a payment to the NRI, on
rent payments to NRIs TDS is deducted @ 30%. The onus of deducting tax is on
the payer. So in case the payer does not deduct tax and the NRI too fails to
declare the income and pay the tax, the income tax authorities can hold the
payer responsible. Now there can be two situations –
When the total Income of the NRI is less than the minimum exemption
limit – If TDS has been deducted on rental income, a refund may be due to the
NRI. The only way to claim a refund is to file an Income Tax Return. All TDS
deductions are linked to the PAN and the NRI can check these details from
his Form 26AS.
When the total income of the NRI is more than the minimum exemption
limit – In such a case whether or not TDS has been deducted the NRI must file a
return and pay the tax which is due. In case TDS has been deducted it is
adjusted against his final tax liability. Since TDS is deducted at 30% and this rate
of tax is applicable in the highest tax slab of income more than Rs 10lakhs, a
refund situation may arise if the total income of the NRI is in a lower tax slab.

Procedure of Taxation:
Since the person concerned is an NRI, the amount of tax on such rental income
must be deducted at source by the payer of the rent and must be deposited in
the account of government by him only. Thus, TDS on rent for NRI shall be
deducted by the payer himself. He shall deduct the tax on rent received by NRI at
the rate of 30%.
For deducting TDS on rental income, he must have TAN number. After deducting
TDS, he must also provide TDS certificate to the NRI who in turn will use this
certificate to file his tax returns and obtain any refunds.

Calculation of Tax on Rent Received by NRI

For the purpose of calculating tax on rent received by NRI in India, the NRI
needs to add his rental income to any other income earned by him from India
such as income from interest, deposits etc. chargeable under other heads of
income. Thus, this total amount shall be his income taxable in India.
If his total income is less than minimum exemption limit chargeable to tax (Rs.
2.5 lakhs in general case), he isn’t liable to pay any taxes on such income. The
normal slab rates apply on incomes above that.

Is rental income taxed in the country of residence?

When you are an NRI, you are obviously a resident of another country for tax
purposes. And in most cases, countries levy tax on residents on their global
income. So it may happen that as per provisions of the Indian Income Tax laws,
tax will be deducted at source on income earned in India, as is in the case of
rent. But at the same time, that income will be subject to tax in your country of
residence. In such cases, we need to refer to the Double Taxation Avoidance
Agreements that India has entered into with various countries.

The India-US DTAA for instance provides that rent from immovable property will
be taxed in the country in which the property is situated. So NRIs who are
residents of US would have to pay tax on rental income in India. While they
would still have to declare that income while filing their tax returns in the US, they
would get a credit for taxes paid in India.

What is deemed rental income?

According to the Indian Income Tax Act, if a person (resident or NRI) owns more
than one house property, only one of them will be deemed as self-occupied.
There will be no income tax on a self-occupied property. The other one, whether
you rent it out or not, will be deemed to be given on rent. If you have not given
the second property on rent, you will have to calculate deemed rental income on
the second property (based on certain valuations prescribed by the income tax
rules) and pay the tax thereof. Now, the Income Tax Act does not specify if either
or both these properties must be situated only in India. But now, more and more
Indians are settling abroad. So from the reading of the Act, the rule of 'more than
one property' will apply to global properties."

What this means is that if you are an NRI and own only one property globally and
that property is in India, you would not have to pay any income tax on the
'deemed rental income' in India.
However, let us say you are an NRI resident in USA. You own and live in a
house in USA. You also own a house property in India. Even if you do not give
the property in India on rent, you would have to pay income tax on deemed rent
in India. The deemed rent is determined by certain valuation rules prescribed in
the Income Tax Act.

Remember that even if you have inherited a property in India and that is not your
only property, you would have to pay tax on deemed income

Is deemed income from house property taxed in foreign country?

You would need to look at the tax code in your country of residence. In the case
of NRIs in the United States, the US tax code does not tax deemed income.
However, you would still have to show the property if it is an investment property
in your tax return in the US (even though you do not have any rental income). If
you do not show this investment property, the problem will arise at the time of
sale of property as the amount spent on the maintenance, repairs and
renovations and depreciation on this property which may be eligible for deduction
or addition to your cost basis while calculating capital gains would become
difficult to establish. However, if you have not declared the property in your tax
returns, the US tax code may challenge the cost basis (purchase +
improvements + suspended losses) to claim a tax deduction at the time of sale.

Income tax exemption, possible?

If your total income in India, including rental income is below the basic exemption
limit of Rs 1.6 lakh, you can get a TDS exemption. But the process can be
complicated. You would need to apply to the tax authorities for a tax exemption
certificate and submit the certificate to the tenant. The issue of the certificate is at
the discretion of the tax officer and he needs to be convinced about your case.

In such cases however, the rental income may be taxed fully in the country of
your residence (based on the tax laws in that country.) So if you are a resident of
the US, even though your income is below the basic exemption limit in India and
you pay no taxes in India, this income will be added to your income in the US and
taxed according to US laws. No deduction under chapter VI like under section
80C, 80D etc are available to NRIs so the minimum exemption limit is the only
criteria for determining taxability.

Alternately, an easier way would be to file your returns and claim refund of the
TDS paid.

Conclusion:
Taxability of incomes of NRIs is a typical issue so all provisions must be taken
care of while calculating total income and tax payable. Rent earned by NRI in
India and thus tax on rent received by NRI gives way for a loophole for tax
planning.