These days, NRIs are increasingly investing in India, driven either by economic growth opportunities or emotional ties, often with the intention of retiring in the country. Consequently, they opt for investments in real estate, benefiting from its appreciating value over time. Some NRIs find it convenient to rent out these properties for additional income and to ensure their proper maintenance. This blog will discuss the impact of such investments on NRI income, exploring the legal tax implications and discussing potential tax planning strategies for rental properties. It will also outline compliance measures NRIs should adhere to for smooth operations.
TDS rate applicable to property rented by an NRI
According to Indian income tax law, when a property is rented out, the tenant is legally required to deduct tax at source (TDS) from each payment made to the lessor. While there’s a threshold limit for resident lessor below which TDS isn’t deducted, this doesn’t apply to NRIs leasing out property. Section 195 mandates that when paying a non-resident, the payer must deduct TDS at the specified rate. For NRIs leasing property, TDS is deducted by the tenant at a rate of 30%, plus an additional 4%, totalling 31.2%. Therefore, the tenant is obligated to deduct 31.2% TDS from each payment made to the NRI lessor and transfer the remaining balance to the NRI’s NRO bank account.
Buyer needs to obtain a Tax Deduction Account Number (TAN).
There’s some confusion among tenants regarding whether TDS can be deposited and returns filed using a simple PAN number when the lessor is an NRI. Let’s clarify the specific aspects applicable to transactions with both NRIs and residents. When the lessor is a resident, the tenant can deposit the TDS and file the TDS return using the tax cum return form 26QC. However, this PAN-based filing isn’t available when the lessor is an NRI. In the case of an NRI lessor, the tenant must obtain a TAN number and deposit the TDS using their TAN, ensuring TDS is deposited with each rent payment occurrence.
TDS Return filing by tenant in case lessor is NRI
If the lessor is an NRI, the tenant deposits TDS on a monthly basis if the rent is paid monthly, while the TDS return is filed quarterly. Upon filing the TDS return, once processed, the tenant should furnish the NRI lessor with a TDS certificate. This certificate details the rent amount, TDS deductions, NRI’s PAN, and dates of payments and TDS deductions. It’s crucial for NRIs to request and retain this TDS certificate for future reference.
Tax Planning for NRIs when renting out property
Yes, you read it correctly. There are opportunities for tax planning available to NRIs when renting out property. Under section 24, NRIs can benefit from a standard deduction of 30% from the annual rental value. This deduction is applicable regardless of whether the expenses are incurred. Essentially, NRIs can claim this 30% deduction and treat the remaining 70% otherwise. Moreover, this entire 70% is not taxable if the property being rented out is financed through loans from banks or other financial institutions. In such cases, the interest on the loan can also be deducted from the rental income. But that’s not all. NRIs can further deduct municipal taxes paid on an actual basis during the year from the rental income. After these deductions, the net taxable income is calculated, and tax is levied based on either the old tax regime or the new tax regime.
Lower TDS certificate for NRIs
TDS is deducted at a rate of 31.20% on the rent paid by the tenant. However, it’s important to note that this deduction doesn’t represent the entirety of the income tax liability, which can be adjusted when filing the income tax return. As mentioned earlier, rental income is arrived at after deducting standard deduction of 30%, interest on home loan, and municipal taxes. This means that the actual tax liability should be lower than the TDS rate. Additionally, NRIs can choose to benefit from either the old or new tax slab regime, further reducing their tax liability. Therefore, NRIs have the option to apply for a lower TDS certificate by submitting the applicable form and providing income details to the assessing officer. Upon approval, the lower TDS certificate is issued to the NRI, who can then share it with the tenant. The tenant should deduct TDS at the rate specified in the lower TDS certificate. Obtaining a lower TDS certificate is advantageous for NRIs as it prevents funds from being blocked, allowing them to freely repatriate the funds to their overseas bank account. If a lower TDS certificate is not obtained, NRIs can claim the excess TDS as a refund after filing their income tax return. The due date for filing income tax returns for NRIs is July 31st following the completion of the financial year, which runs from April 1st to March 31st.
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