Real estate investments are popular among Non-Resident Indians (NRIs) for several reasons, such as the typical long-term nature of these investments, as a potential future residence for retirement, and also as a source of rental income. In order to gain the desired benefits from such investment, you should have a thorough understanding of underlying regulations to ensure tax and legal compliance, as well as optimize your tax liability. Key considerations include repatriation rules, legal and regulatory compliance, and tax implications. Tax deducted at source (TDS) on the rental income is one such important aspect for NRIs to understand before investing in properties in India.

TDS on rental 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 source of income. As per Section 195 of the Indian Income Tax Act, rental income for NRIs is also subject to TDS. Tenants of NRI landlords are required to pay the rent after the deduction of TDS on the rental amount at the rate of 31.2% (30% tax plus 4% cess). This TDS amount is deposited by the tenant directly with the Indian Income Tax Department.

Let’s understand this with the help of an illustration. You are a UAE-based NRI owning a residential property in Mumbai. Let us assume you have let out the property on a monthly rent of INR 1,00,000/- to Mr. Vikas. As per Indian tax law, Mr 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.

Process to deduct TDS on rent paid to NRI

Here is the simple process to follow to deduct 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 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 property owner.
  • Tenants also must 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 need to 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% per month interest if the TDS is not submitted on time to the government.
  • 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

  • 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 15CB certificate from a Chartered Accountant stating that all the applicable taxes are already paid.
  • 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.
  • File income tax return in India: If the TDS on rental income is deducted in excess, NRIs can claim a refund by filing the income tax return in India. NRIs must report their rental income under ‘Income from House Property’. This would also allow one to claim deductions on annual municipal tax paid, standard deduction (30%), and, principal as well as interest on home loan for the property.

Important note: The Union Budget 2024 has brought in an important change in the taxation of rental income from residential properties. Individual taxpayers can no longer report rental income under ‘Profits and Gains of business or profession’, and, thus, cannot claim corresponding business expenses, which earlier allowed a substantial reduction in tax liability. This was a widespread practice in the short-term housing rental market (such as homestays and B&Bs). Henceforth, all rental income must be reported as ‘Income from House Property’ from FY 2024-25.

Conclusion

In conclusion, understanding the tax implications on property investments is crucial for NRIs to stay compliant and to optimise their tax liabilities. A detailed understanding of applicable tax rates on each transaction and the importance of filing income tax returns on time can help NRIs make informed financial decisions.