Income Tax on Rent Earned by Non-Resident Individuals (NRI)

Due to flexibility given by FEMA (Foreign Exchange Management Act, 1999) Rules, 2000 NRI can smoothly invest in India without many hindrances which made the way for Investment in Real estate sector (immovable properties). Therefore, an NRI’s who owns property in India and earning rental income thereon comes under the purview of Income Tax Act, 1961 and hence Rental Income earned by an NRI is taxable.
Income tax on rent received by NRI’s is taxable under House Property and is levied in the same manner as Resident Indian. The computation is explained below:

Gross Annual Value= XXX
(-) Municipal taxes paid= XXX
= Net Annual Value= XXX
(-) Deductions u/s 24:
Standard deduction @30%= XXX
Interest on Home Loan= XXX
= Income from House Property= XXX
On the above amount, NRI shall pay tax by way of TDS u/s 195 which will be deducted by the buyer at the time payment and TDS shall be deducted @30% on the above net amount and which effectively comes out to be 21.84% after cess and deduction of standard deduction u/s 24.
An NRI can make an application to the Income Tax Officer to issue a certificate for the lower deduction of TDS. If the officer issues such certificate, then TDS on rent shall be deducted on the rate specified in the certificate.
 
Income Tax on Rent Received in the Country of Residence
1. If an NRI has a property located in India, the rent received by the NRI on such property is taxable in India u/s 195 of the Income Tax Act, 1961.
2.  Whether it is taxable in the country of residence depends on the tax laws of the country in which he is residing.
3. If the country has Double Tax Avoidance Agreement (DTAA) with India, then in such case tax won’t be levied in the country of residence.
4. If the country of residence of NRI does not have DTAA with India, then income earned by way of rent shall also be taxable in the country of residence of NRI.

Procedure of deducting TDS u/s 195 by the buyer
1. The buyer should first obtain Tax Deduction Account Number or TAN, as per Section 203A of the Income Tax Act, 1961, before claiming TDS tax deductions. It can be obtained by submission of Form 49B. The buyer should have his/her own PAN number as well as the PAN number of the NRI seller to complete the Form 49B submission process.
2. The TDS deducted by the buyer as per Section 195 has to be deposited through Challan or Form number for TDS payment on or before the 7th of the following month in which TDS deductions have been made.
3. After deposition of the TDS as per Section 195, the buyer has to file TDS return through the electronic medium by submitting Form 27Q. TDS returns are filed on a quarterly basis. TDS deductions made in the first quarter, that is, between 1st April and 30th June of a particular financial year must be filed on 15th July of that year. TDS deducted during the second quarter, which is between 1st July and 30th September of a financial year, has to be filed on 15th October. TDS deductions for the third quarter between 1st October and 31st December should be filed on 15thJanuary. TDS deductions for the fourth quarter between 1st January and 31st March have to be filed on 15th May
4. After filing the TDS returns, as per Section 195, the buyer can issue a TDS certificate, referred to as the Certificate of Deduction of Tax or Form 16A, to the NRI seller. It is mandatory for the buyer to issue this certificate to the seller within 15 days from the due date of filing for TDS returns for that quarter.

Some important points to be kept in mind while dealing with NRI foreign transactions
1. The rent proceeds will have to be credited to the NRO (Non –Resident Ordinary Rupee) Account of the NRI. It cannot be credited to the NRE (Non-Resident Rupee) Account.

2. RBI permission is not required by the NRI at the time of giving any residential or commercial property on rent.
3. NRO account has restricted Repatriation rules. This means one cannot remit more than 1 million USD including taxes from your NRO account in a financial year. It also requires an undertaking along with a certificate from a chartered accountant in Form 15CB.