Property is a well-liked investment option in India due to its ability to produce a steady stream of income through rental payments. NRIs who own property in India can lease it out and receive rental income, which is considered taxable in India. The tax is classified under the “Income from House Property” category and is treated similarly for both resident and non-resident Indians. As the rental income is earned in India, the NRI is responsible for paying the applicable tax in India.
As a Non-Resident Indian (NRI) owning property in India, the rental income you receive from that property is taxable in India. However, it could also be subject to taxation in your country of residency as most countries tax residents on their worldwide income. Whether this is the case depends on the tax laws of your country of residence. If there is a Double Taxation Avoidance Agreement (DTAA) between India and your country of residency, then the rental income may not be subject to tax in your country of residency.
In the case of Non-Resident Indians (NRIs) earning rental income from properties located in India, the presence of a Double Taxation Avoidance Agreement (DTAA) between India and the country of residency determines the tax liability. In the USA, there is a DTAA in place with India, meaning that the rental income earned by NRIs is not taxed in the USA. However, for countries without a DTAA with India, the NRI would be required to pay tax on their rental income in both India and their country of residency.
According to the India-US Double Taxation Avoidance Agreement (DTAA), rental income from immovable properties should be taxed in the country where the property is located. Thus, NRIs residing in the US are required to pay tax on their rental income in India. Although they must declare this income when filing their US tax returns, they can receive credit for taxes paid in India. It is recommended to review the tax laws of your country of residence or seek advice from a tax expert to ensure compliance. To summarize, the presence of a DTAA between India and the US means that NRIs earning rental income from properties in India are not subject to taxation in the USA.
Article 6 of DTAA of India and USA specifically deals with INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY). Here is the clause of agreement given below subtracted from the INDIA USA DTAA Tax Treaty.
1. Income derived by a resident of a Contracting State from immovable property (real property), including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.
2. The term “immovable property” shall have the meaning which it has under the law of the Contracting State in which the property in question is situated.
3. The provisions of paragraph 1 shall also apply to income derived from the direct use, letting, or use in any other form of immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.
Computation of Income from House Property for NRI
“Income from House Property” is defined as the yearly value of a property owned by an individual. For Non-Resident Indians (NRIs) receiving rental income, the municipal taxes are subtracted first. From the remaining amount, a standard deduction of 30% is allowed, as well as deductions for interest paid on home loans. NRIs can thus claim all of the deductions available to resident Indians from their “Income from House Property,” including standard deductions and home loan interest deductions. In other words, Non-Resident Indian (NRI) can claim all the deductions available to a resident from income from House Property such as:
- Deduction towards tax paid &
- Standard Deduction
- Interest on home loan deduction
Deductions available from the income from House Property for NRI
- STANDARD DEDUCTION: [Section 24(a)]
A Non-Resident Indian (NRI) is eligible to claim a standard deduction of 30% of the net annual value, regardless of any expenditures incurred by the taxpayer.
- INTEREST ON BORROWED CAPITAL: [Section 24(b)]
Interest on borrowed capital is eligible for deduction if the funds were borrowed for the purpose of purchasing, constructing, repairing, renewing, or reconstructing the house property.
Deemed Rental Income of NRI
As per the Indian Income Tax Act, if an individual (resident or Non-Resident Indian (NRI)) holds more than one house property, only one of them will be considered self-occupied and exempt from taxes. The remaining property will be deemed to be rented out, even if it isn’t, and the individual must calculate the deemed rental income based on valuations set by the Income Tax Rules. If the second property is not actually rented, tax must still be paid on the calculated rental income.
Manner of Computation of Income by NRI
The manner of computation of income by NRI on the rental income from immovable property is explained below:
|1.||Gross Annual Value||XXX|
|2||Less: Municipal Taxes paid||XXX|
|3||Net Annual Value||XXX|
|4||Less: Deduction under section 24|
|a)||Standard Deduction @30%||XXX|
|b)||Interest on Home Loan||XXX|
|d)||[(3- 4(c )]||XXX|
|5||Income from Home Property||XXX|
TDS on Rental Income of NRI
As an NRI (Non-Resident Indian), you will have to pay taxes on the rental income you earn from properties in India. The tenant is responsible for deducting TDS (Tax Deducted at Source) at the rate of 31.2 per cent and depositing it to the government. To do this, the tenant must obtain a TAN (Tax Deduction and Collection Account Number) and provide a TDS certificate to the NRI.
Important Points that NRI should consider while filing Income Tax Return
(i) A self-occupied house property or a portion of such property owned by an individual and used for personal purposes in the previous year, but not rented out, will be exempt from taxes.
(ii) If the interest on a home loan exceeds the rent received, there will be a loss under the House Property category, which can be offset against other sources of income.
(iii) If the loss cannot be offset with other sources of income, it can be carried forward for up to 8 years and offset against future income.
(iv) Rent proceeds for a Non-Resident Indian (NRI) must be credited to their NRO account and cannot be credited to an NRE account unless the individual crediting the account is also an NRI and the funds are debited from their NRE account.
(v) A Non-Resident Indian (NRI) does not need permission from the Reserve Bank of India when renting out any residential or commercial property.
Importance for NRI to file an income tax return (ITR) and report rental income in India
It is important for Non-Resident Indians (NRIs) to file Income Tax Return (ITR) and report rental income in India because:
- Legal requirement: As per the Indian Income Tax Act, 1961, NRIs are required to file ITR if they have taxable income in India.
- Avoid penalties: Failure to file ITR can result in penalties and fines imposed by the Indian tax authorities.
- Maintain compliance: Filing ITR and reporting rental income helps NRIs maintain compliance with the Indian tax laws and regulations.
- Claim income tax refunds: If an NRI has overpaid taxes, filing ITR can help them claim a tax refund.
- Maintain a clean financial record: Filing ITR and reporting rental income helps maintain a clean financial record, which can be useful in future financial transactions.
NRIs often face difficulties in complying with the Indian tax laws and regulations, especially when it comes to filing ITR and setting up a company in India. By providing services such as ITR filing, tax planning, and company set-up, we a chartered accountant firm in gurgaon helping NRIs navigate the complexities of the Indian tax system and ensuring their compliance with the law. This will not only help them avoid penalties and fines, but also maintain a clean financial record and take advantage of tax planning opportunities.