Rental Income for NRIs from Renting Their Houses and Tax Impact
Are you an NRI and do you have a house or property in India? What will you want to do with it? Should you rent it out and earn from it? What should the person who is taking the house on rent do? Is there any tax implications on the income earned in form of rent? If yes, how is an NRI supposed to file income tax returns to show that income? There are actually various questions that need to be addressed and clearly explained. This is precisely what this article is all about. Stay with us as it will take some time to read this article. Also, stay focused and read between the lines. At times, we may get a bit technical but we promise to provide the information in as simple language as possible.
NRI earning rent from house in India – What really happens?
In India, investing in property is a lucrative investment option. Why so? That’s because, this property that one buys can easily generate a continuous flow of income once rented out. Also, over time, the property’s value increases. This value appreciation creates scope for capital gains over years to come.
What about an NRI? Is an NRI allowed to buy any property in India?
Yes… Indian law allows an NRI to buy a property in India but there are conditions. An NRI is allowed to buy an immovable property in India EXCEPT for the following:
|Agricultural Land||All these three variants of immovable property fall under RBI or Reserve Bank of India’s general permission.|
That’s not the end…
The question that now pops out is how can an NRI buy the allowed property types? Put in other words, what money source should be used by the NRI? What are the tax implications while purchasing a property? Let us find out the same in a tabular format:
|Funds to be used for purchase of property by an NRI||If an NRI wants to purchase a property in India, he or she will have to use funds that are present in his or her NRE or NRO account. The NRE is the abbreviated form of Non-Resident External Accounts and NRO stands for Non-Resident Ordinary Accounts. There is an alternative. The NRI can use the method of inward remittance through funds repatriation using channels of normal banking. NO OTHER METHOD WILL BE ALLOWED. This means that if the NRI is thinking of making a purchase using foreign currency or using a travelers’ check, it will not be allowed.|
|Tax Deduction at Source by NRI||In case the NRI is purchasing a property, whose price exceeds INR 50 lakhs, the NRI will be responsible for taking out 1% of the price as TDS and pay the remaining to the seller. The TDS thus deducted must be submitted to government account by the NRI on the seller’s behalf. This rule was implement on June 1, 2013. Interestingly, this rule is not meant only for NRIs. Even resident Indians need to follow this rule.|
Assuming that an NRI has purchased a property…
Here are the questions that follow:
- If the NRI is not living in the house, what will he or she do with the property?
- If the NRI is making some money from the property he or she purchased, is he or she liable to pay income tax?
- What about TDS on the rental income earned by the NRI?
Let us find out answers to these questions:
|What should NRI do with the property?||Well, the NRI is not living in India. So, the NRI will definitely not live in that property. Instead of making the property just sit and collect dust, the NRI can rent out the property to someone who is a resident Indian.|
|Where will the rental income be deposited?||The money that the NRI earns in form of rent cannot be deposited anywhere else except for either NRO account or an NRE account.|
|Tax implications on the rental income||The rental income earned by the NRI will be accounted as ‘income that has been earned from a house’. Hence, the NRI will have to pay tax on that. The NRI may have already paid taxes that have been charged by the local authorities. So, that money will be deducted. Again, post deduction, the income tax will kick in. The NRI can claim 30% deduction in that as well but subject to taxation rules for NRIs.|
|TDS||The NRI needs to pay TDS as well. However, the onus of deducting TDS falls on the tenant. The tenant will be responsible for deducting TDS at 30.9% and pay the remaining amount to the NRI.|
|Taxation post TDS deduction||Once the TDS has been deducted by the tenant, the remaining amount that the NRI earns also comes under the gamut of income tax however, the threshold limit will be there. If the threshold income limit crosses after TDS deduction, NRI needs to pay tax as per the defined slab.|
|In case more TDS has been deducted||This may happen and actually happens quite a lot. However, an NRI will have the provision for filing a return claim of 30%. Similarly, threshold exemption benefit as well as lower slab rates can be claimed by the NRI if such situations arise.|
How will the NRI get the money of rental income?
What’s the use of earning money if you really cannot use it? The same applies to NRIs as well even in case of the rental income. The money that the NRI is earning as rental income should reach the NRI. How will that happen? The NRI cannot simply withdraw the money to the bank account of the country where he or she is living. There is a specific process that has to be followed. This process is mentioned in the steps below:
- The NRI has to pay all due taxes first.
- Once the taxes have been paid, the NRI needs to get in touch with a chartered accountant and use form 15CB to get a certificate. This certificate will state that all due taxes have been paid and that the remaining balance amount can be remitted to the bank account of the NRI in the country where he or she is living.
- In a single financial year, no more than $1 million can be remitted outside India. The NRI needs to keep this in mind.
IMPORTANT: Starting April 1, 2016, some changes were introduced in 15CA and 15CB forms. As of today, these forms should be used only and only if:
- The amount that will be taxed has crossed the limit of INR 500,000.
- Certificate or assessment order has not been obtained.
How is an NRI defined?
We have talked about rental income. However, are you an NRI? This is a big question because if you are not an NRI as per the rule book of Income Tax Act, then your rental income will be taxed just as in case of a resident Indian. So, you need to determine whether you are an NRI or not.
Income Tax Act states that a RESIDENT INDIAN is a person who, in a given fiscal year (which starts on April 1 of one year and ends on 31st March of the next year), has:
- During the current fiscal year, lived in India for 182 days.
- During the previous fiscal year, lived in India for 60 days.
- During last 4 years (which includes the current fiscal year as well), has lived in India for 365 days straight, that is, for 1 whole year.
If you do not satisfy any one of the above three conditions, you are an NRI.
There are other conditions as well!
What if you are leaving India for employment which will take place outside India? What if you are not living in India for 1 complete financial year but only come to India for visiting family member only for a short span of time? Will you be considered as NRI?
In these cases, you are not an NRI but also, you cannot be counted as resident Indian because you do not satisfy the conditions 2 and 3. In such a case you will become either ROR or RNOR. The ROR is called Resident and Ordinarily Resident while the RNOR is called as Resident but Nor Ordinarily Resident.
So, need to know whether you are actually an NRI or not. If you are an NRI, all that is stated above about the rental income earning will hold true for your case. Else, rules will change for you.
Important rules for the tenant taking a property on rent from NRI
Needless to say, if NRI who is renting out a property has to play by certain rules, the tenant who will be taking the property on rent will have a set of rules or guidelines to follow. Such rules and guidelines are mentioned below:
|Permission from RBI not needed||The NRI who is giving away his or her property on rent is not required to get any RBI permission. If the tenant is asking the NRI to show any such permission, it is not a valid demand. This rule holds true for both commercial as well as residential property.|
|Rent must be credited to NRO account||The NRI needs to have an NRO account. The tenant on the other hand needs to credit the rent directly to the NRO account. The only way the tenant can credit the money to NRE account of the NRI is when the tenant himself or herself is an NRI and the rent is getting debited from his or her NRE account.|
|TDS||The tenant will be responsible for collecting TDS from rent payment and depositing the same to the government account. The TDS rate will be 30%. It is not the responsibility of the NRI who is giving away his or her property on rent.|
|SHEC and Education Cess||The tenant will also be responsible for collecting SHEC and Education Cess from the rent he or she pays. These taxes should be collected along with TDS. When collected along with TDS, the effective rate becomes 30.9%. Hence, the tenant should collect TDS at the rate of 30.9%. However, the tenant will have to keep in mind that Double Taxation Avoidance Agreement provisions may be present for relevant country (that is with the country where the NRI is living) and hence, collect TDS accordingly.|
|TAN is necessary||Any person who collects TDS needs to have a TAN or Tax Account Number. Since the tenant will be responsible for collecting TDS, he or she will have to have a TAN. In case he or she doesn’t have TAN, he or she will have to apply for one if he or she intends to take a property from an NRI on rent. One needs to apply for TAN at https://tin.tin.nsdl.com/tan/ by filling up the online form known as Form 49B. The TAN, just like PAN is a 10-digit alphanumeric number.|
|PAN required too||The tenant will have to have his or her PAN as well to be able to deduct the TDS. In addition to that, the tenant will also need to have the PAN of the NRI who is renting out his or her property in India. This rule is stated under Section 195 of Income Tax Act.|
|Challan 281||The tenant has to deduct TDS using the challan 281. The details that are to be entered in the form are:
· Tax Applicable: Non-Company Deductees (0021)
· Payment Type: TDS/TCS Payable by Taxpayer (200)
· Payment Nature: Other sums payable to a non-resident – 195.
In case you are paying TDS from rent for April 1, 2016 to March 31, 2017 (for example), the assessment year must be 2017-2018.
|TDS Certificate||The tenant will be responsible for providing the NRI with the TDS certificate so that neither the NRI and nor the tenant gets into problem with Income Tax. The NRI can get details of the TDS using Form 26AS.|
What kind of tax implications the NRI has to face?
In India, if there is an income generated in form of rent from a property present in India, it will be considered as income and the owner of the property needs to pay tax irrespective of the place of residence of the owner. This means that even an NRI needs to pay taxes to Indian government. Here are some rules that an NRI needs to keep in mind:
- If income is coming in form of rent from a property which is residential or is commercial, it will be taxed. The tax will fall under “Income from House Property” head.
- If the property is used for service apartments or as home stay purpose, the income earned in form of rent will be considered as business income. In either case,deductions can be claimed however, there will be differences in quantum as well as type of payments and expenses.
- If the rental income in a year exceeds 1 lakh rupees, the owner of the property needs to provide PAN details.
- There is something called ‘deemed to be let out’ property. This means that if an NRI has a property which vacant and has not be rented out, it will still be considered for tax because it will fall in the category ‘deemed to be let out’.
As we said, when the income comes in form of rent from either a commercial property or a residential property, it will be taxed and the tax head that will be used is Income from House Property. Good thing however is that the NRI can actually claim several deductions. The deductions that will be allowed are given below:
- 30% of the total value taxable. This is the standard deduction.
- The taxes that have been paid to any local authority. For example, water tax, municipal tax etc.
- If any loan has been taken out for repair, renewal, acquisition, construction etc. of the property in question, the interest paid for the loan amount can be deducted.
- If a part of the principal amount of the loan has been paid, it will also get deducted. This deduction will be allowed under 80C but there is a maximum limit of Rs. 1.5 lakhs.
- Finally, there is interest deduction for preconstruction period.
Rental Income and NRI’s Country of Residence
An NRI will fall under a different country’s jurisdictions and hence, will be subjected to different laws when it comes to taxation. It has been found that most of the countries will tax their residents not just for their income in home country but on their global income (that is income the residents earn from all over the world). So, if an NRI is paying tax on the rental income he or she earns in India, it is important that the NRI checks out the DTAA or Double Taxation Avoidance Agreement. What is this? It is actually an agreement that India has entered with many countries to ensure that the NRIs do not end up paying tax for the same income twice in two different countries. Once such country with which India has entered an agreement is USA.
Let us assume that an NRI lives in USA and has an immovable property in India which she or he rents out. He or she will be earning rental income and that income will be taxed in India. Now, in USA where the NRI is actually living must disclose his or her earning that takes place in India (remember global income taxation rule). Because of the global income taxation rule, USA will tax the NRI for that rental income he or she earns in India. That’s not good, is it? This is where DTAA or Double Taxation Avoidance Agreement comes in.
What DTAA will do is once the USA taxes the NRI for his or her global income, DTAA will help to credit the amount to tax the NRI paid in India to the NRI’s bank account in USA. This credit will be given by USA and not India. So, the NRI will basically pay tax only once.
It is very important that an NRI knows about the taxation rules in the country where he or she resides. In case the NRI is not aware of the same, he or she should hire a tax consultant of the country to avoid any kind of tax issues because it will be considered a serious crime not to pay taxes irrespective of the country where he or she lives.
How will the NRI file Income Tax in India?
India’s domestic tax laws state that even an NRI needs to pay certain taxes which include things like:
- Income earned from a property in form of rent. The property can be a residential house or commercial property.
- Interest earned on various investments and deposits etc.
Again, since they are required to pay taxes, they can also enjoy various deductions. Some of the deductions that they can avail include:
- Deductions under section 80C for repayment of a part of principal amount of any home loan taken by the NRI.
- Deductions under section 80C against several types of investments etc.
If an NRI is earning income in form of rent from a property located in India, he or she will have to add that rental income to all other incomes he earns in India, for example, interest income. The other income types are calculated under other heads such just as the rental income comes under Income from House Property head. This means that the total income he or she earns in India will be considered while filing Income Tax. The TDS that is collected from the NRI will be linked to the PAN of the NRI. TDS collected from NRI can be checked by the person using Form 26AS.
However, if the NRI’s income comes only and only in form of income from long term capital gains or income from investment, it is not necessary for the NRI to file taxes. Also, TDS has already been collected and the TDS collected covers all the taxes he or she had to pay, the NRI does not need to file Income Tax return.
However, it is always recommended to file Income Tax Returns as it will help to maintain a proper record of all finances. In case the income of the NRI exceeds Rs. 2.5 lakhs per year from India, he or she has to pay taxes. Remember that Rs. 2.5 lakhs is the exemption limit. Income below or till that level will not be taxed. Beyond that level, the normal tax slabs that are prevalent in India will kick in and the NRI will have to pay taxes accordingly.
A couple of things to remember:
- In case TDS has been deducted and the income of the NRI in India doesn’t exceed the exemption limit, the NRI will get a refund. However, for claiming that money back, filing an Income Tax Return is mandatory. The TDS rate applicable in case of NRI is 30%. Normal, 30% tax is for highest annual income slab, which is INR 10 lakhs. In case the income of the NRI is less than that taxation slab, TDS refund will be in place and hence, ITR will be required.
- In case the annual income of NRI in India exceeds the exemption limit of INR 2.5 lakhs (which is the minimum exemption limit), Income Tax Return has to filed under all circumstances irrespective of whether TDS has already been collected or not. If TDS has already been collected, the collected TDS will get adjusted against the final tax liability that the NRI will have.
Few important points to be remembered
- If the NRI has a property in India that he or she rents out, income is generated in India and hence, the tax liability will also arise on Indian soil. Thus, NRI needs to pay tax in India as per domestic tax laws prevailing in India.
- The tenant is responsible or deducting TDS from rent that he or she needs to pay to the NRI. In case the tenant fails to do so, the tenant will have to pay a fine.
- It may happen that rental income from other country may be taxable in the country where the NRI lives. If that is the case, Double Taxation Avoidance Agreement has to be checked. India may have an agreement with the country where the NRI is living. The DTAA states clearly that if rental income is generated in a country, tax will be collected in that country only where the property is located. So, an NRI living in USA and having a property in India earns rent from India against his or her property, only India will be taxing the NRI not USA.
Certain 80C deductions that NRIs cannot avail
While certain 80C deductions can be availed by NRIs, there are some 80C deductions that NRIs will not enjoy. Those deductions are:
- Investments made in Senior Citizens Savings Scheme.
- 5-year Deposit Scheme from Post Office.
- Any investment NRI makes in NSC.
- Investments made towards PPF account.
Please note that NRIs are not allowed to open a PPF account in the first place. However, if a person already had a PPF account before becoming an NRI, he or she will be allowed to continue investing in PPF till the account becomes mature after completing 15 years. After 15 years, the NRI will be allowed to continue with the PPF account but further investments will not be allowed.
Well, that’s all about rental income for NRIs and the taxation rules that apply. In case you have any questions, feel free to ask questions. We will try to answer your questions as soon as possible.