Acquiring property in India has become common among Non-Resident Indians (NRIs) due to the general permission granted to them for buying residential properties and renting them out. In cities like Gurgaon, Pune, Faridabad, Bangalore, NRIs are either holding or purchasing properties for rental income. However, it’s crucial to note that the rental income earned by NRIs is taxable in India.
Understanding the income tax implications on property rental for NRIs may seem difficult, but we aim to simplify the process in this article. While there are numerous blogs online discussing the Income Tax provisions for NRIs, practical aspects and comprehensive details are often lacking. Here, we’ll simplyfily into the entire scenario to make it easier for NRIs to file their income tax returns accurately.
Firstly, rental income in India is taxable, and the lessor is responsible for paying tax on the rental income earned from a house property. The rental income is taxed at the applicable slab rate. Currently, NRIs are taxed at the slab rate applicable to residential properties. It’s important to note that rental income up to INR 2.5 lakh is currently not liable to tax.
To calculate income tax as an NRI, it’s essential to understand the specific head of income under which it falls. Under the Income Tax Act, there are five heads of income: salary, house property, capital gains, business and professional income, and income from other sources.
- Income from Salary: This head includes income received by an NRI for services rendered to an employer. Salary includes wages, bonuses, commissions, allowances, perquisites, and profits in lieu of salary. Any income received by an NRI from a former employer or received after retirement is also considered under this head.
- Income from House Property: This head encompasses income earned from the ownership of property. It includes rental income from letting out a house, commercial building, land, or any other property. Additionally, deemed rental income from properties that are not let out but deemed to be let out is also included under this head.
- Income from Capital Gains: Capital gains arise when an asset is sold or transferred, resulting in a profit or loss. This head includes income earned from the sale of capital assets such as real estate, stocks, bonds, mutual funds, and other investments. Capital gains are classified into short-term capital gains and long-term capital gains.
- Income from Business or Profession: This head covers income earned from carrying on any trade, business, profession, vocation, or occupation. It includes income from self-employment, partnerships, sole proprietorships, freelancing, consultancy, and any other business-related activities. Expenses incurred for the purpose of business or profession are allowed as deductions to arrive at the net taxable income.
- Income from Other Sources: This head includes income that does not fall under the four aforementioned heads. It encompasses income from sources such as interest, dividends, winnings from lotteries, horse races, gifts received exceeding specified limits, and any other income not covered under the other heads.
So, Rental income from a house property is taxed under the “house property” head. The calculation is relatively straightforward: the rental income paid by the tenant to the NRI is taxable in the financial year it is received. Various factors, such as unrealized rent, advance rent, municipal value, fair rent value, and standard rent, may affect the calculation. However, Section 24 of the Income Tax Act allows NRIs to deduct 30% from the rental income as a benefit to cover expenses related to property maintenance, parking charges, and similar expenses.
Additionally, NRIs can benefit from deductions on interest paid on loans taken for the property, subject to certain conditions. Once all deductions are accounted for, the remaining income is subject to income tax at the applicable slab rate.
For NRIs renting out property, it’s important to consider TDS (Tax Deducted at Source). Tenants are required to deduct TDS at a rate of 31.20%, obtain a TAN number, and deposit the TDS with the government. The payment should be made to the NRI owner’s NRO or NRE account after deducting the specified TDS rate. Rent payments may also qualify for House Rent Allowance (HRA) deductions for employees.
In conclusion, NRIs should file income tax returns, even if their income is below the taxable threshold, as TDS is already deducted by the tenant. Additionally, there are considerations for joint ownership, deductions for interest, and situations where the property is partially self-occupied or in the name of a spouse.
As a tenant, compliance involves obtaining a TAN number, deducting TDS, and transferring rent to the NRI owner’s NRO/NRE account. This rent payment can also offer benefits, such as HRA (House Rent Allowance) deductions for tenant.
Happy reading, stay informed, and ensure compliance with tax regulations.
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