Understanding Rental Income Taxation for NRIs and PIO
If you are a Non-Resident Indian (NRI) or PIO (Person Of Indian (Origin) and own a property in India, then this blog is for you. Many NRIs are investing in Indian real estate by getting influenced by its returns potential. They hold their property until it reaches their desired appreciation rate and then sell it.
But in this whole process, their property is left empty. To utilise that period into income, they rent their property and earn some more chunks out of it. But as soon as their property starts providing returns, they become liable for paying taxes, and this taxation process includes many rules and regulations. Let's understand these rules to simplify your taxation process if you are an NRI.
Who Is Considered An NRI In India?
Any Indian-origin person or a person who is an Indian resident but does not reside in India is called NRI. The status of an NRI is determined by section 6 of the Income Tax Act. An individual is a resident of India if he satisfies any of the following conditions:
• Resided in India for a minimum of 182 days (previous year)
• Lived for a minimum of 60 days in India and a minimum of 365 days in four immediately preceding previous years.
There are exceptions to the rule at this point.
If an Indian citizen or Person of Indian Origin (PIO) earns more than Rs 15 lakhs (excluding income from foreign sources) in a financial year, the 60-day rule mentioned earlier changes to 120 days. If an Indian citizen leaves India for employment outside, such as a crew member or for a job abroad, the 60-day rule changes to 182 days.
So, an Indian citizen or PIO with an income of over Rs 15 lakhs (excluding foreign income) is considered a resident in India unless they are being taxed in another country. So, if you cannot satisfy any of the above requirements, hurrah! You are an NRI; now you pay taxes. Let's understand.
What is the TDS rate for rent to NRI?
In the 2017 Budget, new rules were introduced for a tax deduction on rent paid in India. Tenants who pay rent for properties owned by NRIs must now deduct 31.2% tax at the source. This means the tenant will subtract the tax before paying the rent and send the deducted amount to the tax authorities.
How much is the NRI tax on rental income in India?
TDS on rent payable to NRI under Section 195
Under Section 195 of the Income Tax Act of 1961, if you're paying rent to a Non-Resident Indian (NRI) or a foreign company, you must deduct 31.2% of the rent as tax at source (TDS). After deducting the TDS, you must submit Form 15CA to the Income Tax Department.
How to calculate tax on rental income for NRI
For example, let's say, Mr Singh, an NRI, rents his house to Mr and Mrs Kumar for Rs. 40,000 a month. According to the rule, Mr and Mrs Kumar must deduct 31.2% of Rs. 40,000, which is Rs. 12,480. This means they will pay Mr Singh only Rs. 27,520 (Rs. 40,000 - Rs. 12,480). The TDS of Rs. 12,480 must be sent to the Income Tax Department.
How to avoid TDS on rental income for NRI?
NRIs (Non-Resident Indians) can get a Certificate of Exemption under Section 197 of the Income Tax Act if their total income from India is below the tax-free limit. This certificate helps them pay less tax or sometimes even no tax on their rental income.
To get this certificate, NRIs need to apply to the Assessing Officer (AO), who will review their income and decide if they should pay lower taxes or be exempt from paying taxes based on their situation.
DTAA Agreement
The Double Tax Avoidance Agreement (DTAA) is a deal between India and other countries to stop taxpayers from paying tax twice on the same income. If an NRI lives in a country with a DTAA with India, they may get relief from double tax or special tax rates on income earned in India, including rental income. Over 90 countries, such as the USA, Canada, the UK, and Australia, have DTAA agreements with India.
In conclusion, NRIs earning rental income from properties in India must pay taxes through TDS at 31.2%. To reduce or avoid this tax, NRIs can apply for a Certificate of Exemption under Section 197 if their income is below the taxable limit. Additionally, NRIs may benefit from Double Tax Avoidance Agreements (DTAA) with India, which can help lower their tax burden.
References
Clear Tax. 2024. “TDS Deduction on Rental Property Owned by NRI.” ClearTax, June 11, 2024. https://cleartax.in/s/nri-owned-rental-property-tds
ICICI Bank. 2024. “NRI's guide to renting out property in India.” ICICI Bank. https://www.icicibank.com/nri-banking/nriedge/nri-articles/nris-guide-to-renting-out-property-in-india
Tax2win. 2024. “Is your Landlord an NRI? Know TDS Deduction on Rental Property Owned by NRI.” Is your Landlord an NRI? Know TDS Deduction on Rental Property Owned by NRI. https://cleartax.in/s/nri-owned-rental-property-tds
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