Real estate investments are popular among Non-Resident Indians (NRIs) for several reasons, including getting rental income in India. Tax deducted at source (TDS) on the rental income is one such important aspect for NRIs to understand before renting/leasing out properties in India.
Who is legally considered an NRI (for tax purposes)?
In general, if an individual stays in India for less than 182 days in a financial year, they are considered an NRI, for tax purposes. There are some more conditions to this. To be able to understand taxation and resident status in its entirety, please refer to this blog.
TDS on rent paid to Non-Resident Indians
As the name implies, TDS, or Tax Deducted at Source, refers to tax collected by the Indian government at the point of the source of the income. As per Section 195 of the Indian Income Tax Act, rental income for NRIs is also subject to TDS. And like all TDS, the person transferring the money, in this case the tenants of NRI landlords, are required to pay the rent to the landlord after the deduction of TDS. They are supposed to deduct TDS at the rate of 31.2% (30% tax plus 4% cess) of the rent. This TDS amount is deposited by the tenant directly with the Indian Income Tax Department.
Let’s understand this with the help of an example. You are a UAE-based NRI who owns a residential property in Mumbai. Let us assume you have let out the property on monthly rent of INR 1,00,000/- to Mr. Vikas. As per Indian tax law, Vikas needs to deduct 31.2% TDS (i.e. INR 31,200/-) and deposit the same with the IT Department. The remaining sum of INR 68,800/- will be transferable to your account on a monthly basis.
Discover how Aadhar Card for NRIs can help with financial and legal transactions in India.
Process to Deduct TDS on Rent Paid to NRIs
Here is the simple process to follow when deducting TDS on rent paid to NRI landlords, which you can share with your tenants:
Tenants living on NRI landlords' property must apply for a tax account number (TAN) using Form 49B through the NSDL website.
Once the TAN is issued, tenants are required to deduct 31.2% TDS from the rent every month before making a payment to the NRI landlord.
Tenants can deposit the TDS online by visiting the Income Tax portal and navigating to “e-Pay Tax” after logging in with their credentials.
Tenants also need to file the TDS return with the Income Tax Department through Form 27Q every quarter.
After furnishing the TDS return, tenants can download Form 16A (TDS Certificate) from the TRACES website and provide it to the NRI landlord.
If the tenant is paying to a foreign bank account (doing an outward remittance), then they should upload Form 15CA to the Income Tax e-portal each time they make rent payments to the NRI property owner. If the total annual rent exceeds INR 5,00,000, they must obtain Form 15CB from Chartered Accountant before uploading Form 15CA.
Penalties on Non-Payment of TDS on Rent Paid to NRIs
TDS deducted from the rent paid to NRIs must be deposited with the government by the 7th of the following calendar month. Non-compliance will attract interest, penalties, and legal actions under Section 276B of the Income Tax Act. This includes:
Tenant will be liable to bear 1.5% per month interest (from the time of deduction till the time of payment) if the TDS is not submitted on time to the government. If TDS is deducted but not paid, a penalty equal to the TDS amount may be levied.
Tenant may need to pay a penalty equivalent to the total TDS amount unpaid as per Section 271C of the IT Act.Non-payment may also attract prosecution u/s 276B of the IT Act, which may lead to imprisonment between 3 months to 7 years.
Important Points to Note:
If there are multiple tenants, each of them needs to file their share of TDS separately under their respective TANs.
The rental income earned by the NRI should be credited to their NRO (Non-Resident Ordinary) account. However, if the rent payer is also an NRI, he/she can transfer the amount to the NRE (Non-Resident External) account from their NRE account.
If an NRI chooses to receive the rental income via remittance, it is important to obtain a Form 15CA/CB certificate.
NRIs are required to file timely income tax returns every year and report the rental income under the head of ‘Income from House Property’. They can also claim a refund of TDS if it was deducted in excess and make use of exemptions or exceptions, if any.
The rate of TDS is applicable for rental income earned by NRIs on both residential and commercial properties.
Exemptions for TDS on Rental Income
TDS on rental income for NRIs can be exempted only in the following cases:
Certificate of exemption: NRI property owners can apply for a ‘Certificate of Exemption’ from the Income Tax Department if their total income in India is below the basic exemption limit. With this certificate, NRIs can claim lower or even zero TDS under Section 197 of the IT Act using Form 13, as per the order of the Assessment Officer.
DTAA provisions: Depending on the terms and conditions of the tax treaty (DTAA) between both countries, NRIs may get a tax exemption or lower TDS rates on rental income. India currently has over 90 active DTAAs with countries across the world, including major Indian expat destinations such as USA, UK, UAE, Canada, and Australia.
Important note: Based on the Union Budget 2024, taxpayers can no longer report rental income under ‘Profits and Gains of business or profession’. Consequently, they cannot claim corresponding business expenses, which earlier allowed a substantial reduction in tax liability.
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Conclusion
Knowing the tax implications on property investments is of utmost importance for NRIs as a tool in ensuring compliance as well as optimisation of tax liabilities. Proper knowledge about the applicable tax rates on individual transactions and timely filing of income tax returns are some factors that would empower NRIs to take informed financial decisions.
