Tax on Rental Income in India for NRIs: What You Need to Know

As an NRI dealing with rental income properties in India, he needs to know the taxes applicable to stay compliant and optimise his earnings. As high-net-worth NRIs increasingly invest in premium real estate across major Indian metros, properly managing NRI rental income tax can significantly impact their investment portfolio’s performance.

Since tax rates may go up to 30%, or even more if additional surcharges are applied on a considerable rental income; effective tax planning becomes significant for safeguarding and enhancing the rental returns.

Due to the overlapping of International Tax Treaties or Double Taxation Treaties, Indian Income Tax rules and regulations and mandatory provision of TDS, it becomes necessary for such affluent non-resident Indians owning rental properties in India to know their tax liabilities.

Understanding NRI Status

According to Indian tax laws, an NRI is an individual who is a citizen of India or a PIO staying in a foreign country for employment or carrying out business activities. This classification is crucial as it directly impacts tax implications for NRIs, particularly concerning their Indian income sources.

Physical Presence Test

• Any person who has a residential status in India and spends less than one-half year, which is 182 days or less in a particular fiscal year, is an NRI.
• For Indian citizens visiting India, the limit is 120 for a total income exceeding ₹15 lakhs during the financial year.
• Thus, the day count encompasses arrival and departure dates.

Duration Based Criteria

The NRI status also considers a look-back period of previous years:

• He/She should have stayed in India for not more than 365 days in the four fiscal years immediately preceding the relevant fiscal year.
• Any person who goes over these limits shall be deemed to be a Resident but Not Ordinarily Resident (RNOR) or Resident and Ordinarily Resident (ROR).

This assessment method also makes a lot of sense for the Indian tax authorities as it provides the right categorisation for tax purposes, especially for people who spend most of their time travelling between India and their home country.

Taxation of Rental Income in India

Tax Classification

• In NRI tax filing in India, rental Income from House Property is the category under which one can declare it.
• The rent income is taxable in India, even if received or spent outside India.
• The total rental income should be disclosed in the ITR-2 for the Indian Income Tax Return.

Applicable Tax Slabs

• For NRIs, rental income is taxed at a flat rate of 30 %.
• Additional surcharge applies based on income levels

• 5% surcharge if the income earned crosses ₹ 50 Lakhs
• An additional 15% is applied if the income generated is more than ₹ 1 crore.
• A 4% Health and Education cess is levied on the tax amount.

Available Tax Deductions

• Standard Deduction: 30% of the annual rental value is allowed as a standard deduction.

• All the taxes paid to local governments within the financial year are allowed expenses.
• Further, interest paid on home loans can also be claimed up to ₹2,00,000 per annum.
• Depreciation on capital assets, maintenance charges and insurance premiums are allowed if paid by the owner.

Read Also: Home Loan vs Land Loan – All You Need to Know

Double Taxation Avoidance Agreement (DTAA)

The DTAA is a treaty signed between the Indian government and the governments of other countries to avoid tax imposition on the same form of income in both countries. These agreements are of considerable use for NRIs receiving rent from Indian properties as they specify essential tax deductions and liability.

India currently holds DTAAs with more than 85 countries, including the United States, the United Kingdom, Canada, and the United Arab Emirates. These treaties build up an appropriate international atmosphere for investment in the real estate business and create a fair tax condition.

DTAA Benefits for NRIs

• NRIs can get tax exemptions in the country of residence for taxes paid in India regarding renting out property.
• The tax credit availability depends on the DTAA’s particularities in place for the respective countries.

Key Advantages Include:

• Claiming treaty benefits as long as it should enable firms to obtain lower effective tax rates.
• Adoption of easy methods of filing tax returns.
• Exemption from conflicting claims of the tax authorities of the two countries.

Tax Implications for NRIs on the Sale of Property

The capital gains tax for NRI property is classed into:

1. Short-term Capital Gains: Any profit which arises from the sale of a property within two years of purchasing or acquiring it. Such gains are considered to be ordinary income and are subjected to taxation.
2. Long-term Capital Gains: This is the profit earned from the sale of a property after 24 months has been exceeded. These gains are accorded special tax treatment with indexation advantages.

Read Also: Commercial Property vs Residential Property: Which is a Better Investment?

Tax Rates

For rental income deductions NRI, the applicable tax rates are:

• For Short-term Gains: Included in total income and is subjected to income tax rates of 30% plus the applicable surcharge.
• For Long-term Gains: Flat 20% rate after taking advantage of indexation allowance.

NRIs can claim tax exemptions under:

• Section 54: Exemption on the ability to roll over the capital gains to buy another residential property within some specified periods.
• Section 54F: Exemption up to the specific amounts if the entire sale proceeds are used to acquire a new residential property.
• Capital Gains Account Scheme: Ability to pass the gains to another person shortly to qualify for the exemption when reinvestment cannot be done immediately.

Common Mistakes NRIs Make Regarding Tax on Rental Income

• Missing TDS Deduction: Failure to complete proper rent receipts with mandatory 30% TDS to tenants for rent above ₹50,000 a month, resulting in tax notice and penalties.

• Incorrect Income Classification: Incorrect classification of rental income under wrong heads of income, especially mixing rental income with business income instead of placing the same under ‘Income from House Property’.

• Overlooking DTAA Benefits: Failure to take advantage of the available Double Taxation Avoidance Agreements would lead to unnecessary tax-levying.

• Improper Expense Records: Lack of adequate records of properties’ maintenance and repair and improvement expenditure that entitles an NRI to claim rent income deductions from the Indian Income Tax law.

• Late or Non-Filing: Failing to pay taxes, file the returns before the set deadline, or include the income from rents can lead to penalties and legal issues.

Understanding NRI tax filing in India is crucial for non-resident property owners to maintain compliance and optimise their tax benefits. Planning and documentation are critical to efficient taxation, whether simple rental income taxation or complex capital gain. By staying informed about NRI rental income tax obligations, maintaining accurate records, and seeking professional guidance, NRIs can effectively manage their property investments while avoiding costly penalties.

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Frequently Asked Questions

• What is the tax rate on rental income for NRIs in India?

The tax rate for TDS on rent to NRI is 30% (as per section 195 of the Income Tax Act 1961, along with the Finance Act 2023) plus cess and surcharge combined not exceeding 39% in case of opting for the new regime under the Income Tax Act 1961.

• Are there specific exemptions available for NRIs?

There is a standard deduction of 30% on the annual rental value and a 100% exemption on municipal taxes paid. NRI rental income tax can tax exemptions up to ₹2 lakhs annually on home loan interest and principal repayment under Section 80C.

Further, Section 54 allows the exemption of capital gains tax in the sale of property if the proceeds are utilised to purchase another house within the stipulated time frame. To avoid the issue of double taxation in a country of residence, NRIs can also benefit from Double Taxation Avoidance Agreements (DTAA).

• How does the taxation process differ for NRIs compared to resident Indians?

Your global income will be taxable in India if you fall under the category of residents as defined under the Income Tax Act of India. But if you are an ‘NRI,’ then income earned or accrued in India only is taxable in India.

• What are the penalties for non-compliance in tax filing?

An administrative non-compliance penalty for failing to submit a return involves fixed-amount penalties assigned according to the taxpayer’s taxable income. It can cost as little as₹ 250 up to ₹16,000 for each month the non-compliance persists.

• Can NRIs claim deductions on home loan interest for rental properties?

Being an NRI per the income tax definition, you can avail of a tax deduction on interest paid and loan repayment on your home loan if you file income tax returns in India. On the same lines, you are allowed a deduction of up to ₹1.5 lakh on the principal component of the housing loan under Section 80C.