Property is a favourite Indian asset class and one of the main reasons for this is its ability to generate regular cashflows through rent.
Now we will look at the various aspects involved when an NRI rents out a property in India.
The definition of NRI for the purposes of repatriation will be that of the FEMA and for the purposes of income tax will be that prescribed in the Income Tax Act.
Can NRIs earn rental income?
An NRI can rent out property that he owns in India. The rent proceeds can be credited to the NRE or NRO account. Rent proceeds received in these accounts can be freely repatriated. If you do not have an NRE or NRO account, the proceeds can also be directly remitted abroad but you would need an appropriate certificate from a chartered accountant certifying that all taxes have been duly paid.
Is rental income taxed in India?
Yes, since this income is earned in India, tax will be payable by the NRI in India. In fact, tax will be deducted at source by the payer of the rent. The payer of the rent, in this case, must obtain a TAN number and deduct TDS of 30 per cent from the rent amount. He must also provide a TDS certificate to the NRI.
"The onus of deducting tax is on the payer. So in case the payer does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible," explains Sandeep Shanbhag, Director, Wonderland Investments.
Having said that, if the tenant does not deduct tax at source, it is prudent to file your tax returns and pay the taxes thereof.
Is rental income taxed in the country of residence?
When you are an NRI, you are obviously a resident of another country for tax purposes. And in most cases, countries levy tax on residents on their global income. So it may happen that as per provisions of the Indian Income Tax laws, tax will be deducted at source on income earned in India, as is in the case of rent. But at the same time, that income will be subject to tax in your country of residence. In such cases, we need to refer to the Double Taxation Avoidance Agreements that India has entered into with various countries.
The India-US DTAA for instance provides that rent from immovable property will be taxed in the country in which the property is situated. So NRIs who are residents of US would have to pay tax on rental income in India. While they would still have to declare that income while filing their tax returns in the US, they would get a credit for taxes paid in India.
It is prudent to check the tax laws of the country that you are resident of or consult an expert in that country.
What is deemed rental income?
According to the Indian Income Tax Act, if a person (resident or NRI) owns more than one house property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. The other one, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property (based on certain valuations prescribed by the income tax rules) and pay the tax thereof.
Now, the Income Tax Act does not specify if either or both these properties must be situated only in India. Vikas Vasal, Executive Director of KPMG India explains, "At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of 'more than one property' will apply to global properties."
What this means is that if you are an NRI and own only one property globally and that property is in India, you would not have to pay any income tax on the 'deemed rental income' in India.
However, let us say you are an NRI resident in USA. You own and live in a house in USA. You also own a house property in India. Even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.
Remember that even if you have inherited a property in India and that is not your only property, you would have to pay tax on deemed income.
Is deemed income from house property taxed in foreign country?
You would need to look at the tax code in your country of residence. In the case of NRIs in the United States, the US tax code does not tax deemed income. However, Ganga Mukkavilli, a New York City basedCPA whose firm, CPAs, Taxes & Associates PC, specialises in international accounting, taxes and small businesses says that you would still have to show the property if it is an investment property in your tax return in the US (even though you do not have any rental income ).
"If you do not show this investment property, the problem will arise at the time of sale of property. Suppose you sell a property on which you had no rental income for US tax purposes but had deemed income as per India Tax code, then the amount spent on the maintenance, repairs and renovations and depreciation on this property which may be eligible for deduction or addition to your cost basis while calculating capital gains would become difficult to establish.
However, if you have not declared the property in your tax returns, the US tax code may challenge the cost basis (purchase + improvements + suspended losses)to claim a tax deduction at the time of sale," he explains.
"Of course, any investment properties with rental income and related expenses must be reported on Form Schedule E in the US tax returns and rental activities by nature are always treated as 'passive' investments with restrictions on deductibility of the net rental losses. Always consult a tax expert as passive activity rules are quite cumbersome," he adds.
Income tax exemption, possible?
If your total income in India, including rental income is below the basic exemption limit of Rs 1.6 lakh, you can get a TDS exemption. But the process can be complicated. You would need to apply to the tax authorities for a tax exemption certificate and submit the certificate to the tenant. The issue of the certificate is at the discretion of the tax officer and he needs to be convinced about your case.
Alternately, an easier way would be to file your returns and claim refund of the TDS paid.
In such cases however, the rental income may be taxed fully in the country of your residence (based on the tax laws in that country.)
So if you are a resident of the US, even though your income is below the basic exemption limit in India and you pay no taxes in India, this income will be added to your income in the US and taxed according to US laws.
Can NRIs earn rental income?
An NRI can rent out property that he owns in India. The rent proceeds can be credited to the NRE or NRO account. Rent proceeds received in these accounts can be freely repatriated. If you do not have an NRE or NRO account, the proceeds can also be directly remitted abroad but you would need an appropriate certificate from a chartered accountant certifying that all taxes have been duly paid.
Is rental income taxed in India?
Yes, since this income is earned in India, tax will be payable by the NRI in India. In fact, tax will be deducted at source by the payer of the rent. The payer of the rent, in this case, must obtain a TAN number and deduct TDS of 30 per cent from the rent amount. He must also provide a TDS certificate to the NRI.
"The onus of deducting tax is on the payer. So in case the payer does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible," explains Sandeep Shanbhag, Director, Wonderland Investments.
Having said that, if the tenant does not deduct tax at source, it is prudent to file your tax returns and pay the taxes thereof.
Is rental income taxed in the country of residence?
When you are an NRI, you are obviously a resident of another country for tax purposes. And in most cases, countries levy tax on residents on their global income. So it may happen that as per provisions of the Indian Income Tax laws, tax will be deducted at source on income earned in India, as is in the case of rent. But at the same time, that income will be subject to tax in your country of residence. In such cases, we need to refer to the Double Taxation Avoidance Agreements that India has entered into with various countries.
The India-US DTAA for instance provides that rent from immovable property will be taxed in the country in which the property is situated. So NRIs who are residents of US would have to pay tax on rental income in India. While they would still have to declare that income while filing their tax returns in the US, they would get a credit for taxes paid in India.
It is prudent to check the tax laws of the country that you are resident of or consult an expert in that country.
What is deemed rental income?
According to the Indian Income Tax Act, if a person (resident or NRI) owns more than one house property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. The other one, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property (based on certain valuations prescribed by the income tax rules) and pay the tax thereof.
Now, the Income Tax Act does not specify if either or both these properties must be situated only in India. Vikas Vasal, Executive Director of KPMG India explains, "At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of 'more than one property' will apply to global properties."
What this means is that if you are an NRI and own only one property globally and that property is in India, you would not have to pay any income tax on the 'deemed rental income' in India.
However, let us say you are an NRI resident in USA. You own and live in a house in USA. You also own a house property in India. Even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.
Remember that even if you have inherited a property in India and that is not your only property, you would have to pay tax on deemed income.
Is deemed income from house property taxed in foreign country?
You would need to look at the tax code in your country of residence. In the case of NRIs in the United States, the US tax code does not tax deemed income. However, Ganga Mukkavilli, a New York City basedCPA whose firm, CPAs, Taxes & Associates PC, specialises in international accounting, taxes and small businesses says that you would still have to show the property if it is an investment property in your tax return in the US (even though you do not have any rental income ).
"If you do not show this investment property, the problem will arise at the time of sale of property. Suppose you sell a property on which you had no rental income for US tax purposes but had deemed income as per India Tax code, then the amount spent on the maintenance, repairs and renovations and depreciation on this property which may be eligible for deduction or addition to your cost basis while calculating capital gains would become difficult to establish.
However, if you have not declared the property in your tax returns, the US tax code may challenge the cost basis (purchase + improvements + suspended losses)to claim a tax deduction at the time of sale," he explains.
"Of course, any investment properties with rental income and related expenses must be reported on Form Schedule E in the US tax returns and rental activities by nature are always treated as 'passive' investments with restrictions on deductibility of the net rental losses. Always consult a tax expert as passive activity rules are quite cumbersome," he adds.
Income tax exemption, possible?
If your total income in India, including rental income is below the basic exemption limit of Rs 1.6 lakh, you can get a TDS exemption. But the process can be complicated. You would need to apply to the tax authorities for a tax exemption certificate and submit the certificate to the tenant. The issue of the certificate is at the discretion of the tax officer and he needs to be convinced about your case.
Alternately, an easier way would be to file your returns and claim refund of the TDS paid.
In such cases however, the rental income may be taxed fully in the country of your residence (based on the tax laws in that country.)
So if you are a resident of the US, even though your income is below the basic exemption limit in India and you pay no taxes in India, this income will be added to your income in the US and taxed according to US laws.
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