NRIs must file your income tax return on rental income from Indian property the right way. Learn about the tax deductions you can claim and how to file your return without hassles.
NRIs having rental property in India, whether residential or commercial, must pay file an income tax return in India. The reason is that Section 195 of the Income Tax act is applicable here. Under Section 195, Tax Deduction at Source (TDS) is applicable at 30% without any exemption limit. If the NRI’s total income in India is below taxable limit, then refund on this TDS is available once Income tax return is filed and the TDS is entered there.
Section 195, which covers TDS, applies to NRIs having income from India from multiple sources:
Related:
What are the TDS rates applicable to NRIs?
Rental income falls under the 30% TDS category. Even property sale by NRI to a resident leads to 20% TDS. All of these TDS amounts have 4% additional cess like every other income tax payment. With the cess, the TDS rate becomes 31.2% for rental income.
There is no minimum exemption limit for this TDS.
The TDS is deducted against the PAN of the NRI. This means that the NRI must have a valid PAN number which is not inactive: What should NRIs do if your PAN has become inoperative?.
If PAN of NRI landlord is not known then while depositing TDS, the placeholder PAN PANNOTAVBL is to be used along with contact details of the NRI.
Rental income must be received in the NRO account of the NRI.
The person paying the rent to the NRI needs to apply for a TAN number. This rule is also applicable to cases like TDS on cases like buying property from an NRI. The deductor must pay the TDS under Challan ITNS 281 by the 7th of the next month.
For example, if rent is paid on the 5th of the month, the TDS must be paid by the 7th of the following month. The remaining rent is then paid to the NRO account of the NRI on the 5th and the TDS paid on the TIN-NSDL by 7th of the next month. They will also have to fill Form 15CA on the IT website for each rent payment. If annual rent exceeds ₹5 lakhs/year then an additional Form 15CB is to be filled.
If the tenant does not follow this process then there is 1.5% penalty/month on them on the TDS amount. Also, for rent exceeding ₹5 lakhs a year, the tenant must consult a CA to obtain Form 15CB.
30% is a very high amount for TDS. Rental income might be small in general but 20% is the TDS rate on immovable property as well without any minimum limit. Here the NRI can take the Lower Deduction Certificate (LDC) under Section 197 sometime before the property sale is registered.
If the total rent and other taxable income in India (i.e income excluding tax-free NRE FD) is expected to be below the exemption limit for the NRI, they can apply for a Certificate of Exemption under Section 197. The tenant should be made aware of this certificate so that they deduct a lower TDS amount as per the Certificate.
Once the tenant pays the TDS and has filed the TDS return for the quarter, they can generate Form 16A to the NRI. This form is similar to the Form 16 that salaried employees receive from their companies and has the same purpose: provide details of income, which is rent, and the tax paid which is the 31.2% TDS. The NRI uses the Form 16A in their income tax filing in India.
To file the income tax return in India, the NRI must have the relevant number of Form 16A from their tenant. After they can file the usual ITR for their tax return:
Other types of income in India might require ITR 3 or others. If TDS exceeds the actual tax liability of the NRI, then a refund will be issued to the NRO account.
Power Of Attorney (POA) does not change ownership. It allows another person to take financial decisions on behalf, like signing property rental or sale agreement on behalf of the NRI. Therefore, receiving rent in the resident bank account of the POA holder, like the NRI’s family member in India, does not mean that TDS is not there.
It is the responsibility of the tenant to deduct the TDS at the correct rate irrespective of whether POA is there or not as long as the owner of the property is an NRI.
India has Double Tax Avoidance Agreement (DTAA) with most of the countries where an NRI is expected to reside. Under DTAA, income is taxed only once: either in India or in the home country of the NRI.
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This post titled NRIs: How to File Your Income Tax Return on Rental Income from Indian Property first appeared on 13 Aug 2023 at https://arthgyaan.com
