Indians who have moved abroad temporarily or permanently do not always sell-off their property before they leave. Some make strategic investments in real estate for income purposes while some rent out their inherited house. There are also foreign citizens who own residential properties in India.
Either way, if you live in one such property where the homeowner lives out of the country, here are some tax rules you should be aware of to understand how to go about it.
Who is an NRI as per Indian Income Tax law?
To be considered as a resident for income tax purposes, the person is required to be residing within India for a period of at least 182 days (around 6 months) in a given financial year. He/she is also a resident for tax purposes if he/she has lived in India for 2 months (60 days) of the previous year and 365 days in the last 4 years.
Otherwise, the person is an NRI (Non-Resident Indian).
The first thing you should know is that the income that the NRI is making in India is taxable in their hands within India and you are required to deduct tax from their rental income on their behalf.
What are the tax implications on an NRI's income from rent in India?
Any income from house property is taxable in the hands of an NRI in the same manner as it is for a resident. Non-residents can also claim a refund on taxes if their income is within tax-exempt limits, apply standard deduction, claim interest deduction on interest paid towards a home loan, etc.
Rental income example:
Mr A lives in Singapore and owns a house in Bengaluru that he has rented out. Mr A asks the tenant to transfer the rent payable to his NRE or NRO account held at an Indian bank. Any amount received by him as rental income is taxable.
Also, interest earned on the NRO (Non-Resident Ordinary) account is taxable. Please note that interest earned on NRE (Non-Resident External) accounts are not taxable.
What is the responsibility of the tenant?
- If you are a tenant who pays rent to an NRI (the owner of the property), you must remember to deduct tax at the rate of 31.2 percent. This will be "tax deducted at source" or TDS.
- When you transfer the amount towards rent to your landlord either to an account in India or a bank account outside India (in the country of the NRI's residence), you need to deduct the tax payable before you make the transfer. As you are the one deducting the tax on the taxpayer's behalf, it will be "tax collected at source" or TCS and as per the provisions governed by Section 195 of the Income-tax Act, 1961, you are obligated to do so.
- You will be required to obtain a TAN (tax-deduction account number) as per Section 203A of the Income Tax Act to make such a deduction. It can be obtained at the NSDL website online.
- Tax needs to be deducted every month and only the remaining amount needs to be paid to the landlord.
- Submit the aggregate amount to the tax authorities online.
- On payment, the tenant is required to file Form 15CA and submit it online to the income tax department. In some cases, Form 15CB from a chartered accountant is required before uploading Form 15CA online.
- The TDS or TCS that was deducted from the rent paid in this calendar month must be paid by the seventh of following calendar month.
- Make sure the payment is made on time to avoid prosecution under Section 276B of the Income Tax Act.
When is the rental income not taxable?
If the NRI landlord's total income earned in India (from all their investments) is below taxable limits or he or she is eligible for a lower tax deduction, he or she can make an application in the prescribed form to the Indian tax authorities for a lower tax deduction certificate or nil tax deduction certificate under Section 195(2) and 195(3).
Tax (if applicable) is then required to be deducted at the rate prescribed in the certificate for the period specified in the certificate.