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NRI’s guide to renting out property in India
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Rules, provisions and regulations governing taxation of NRI rental income
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Types of bank accounts needed to receive and repatriate Indian rental income
The below content is purely for informational purposes and is not intended to constitute advisory of any kind. The position reflected in this article has been updated as of November 15, 2023.
As a Non-Resident Indian (NRI)/Overseas Citizen of India (OCI)/Person of Indian Origin (PIO) renting out an immovable property in India, you might want to understand how taxes are to be paid. With more and more NRIs becoming property owners (commercial and residential) in India, rent can be yet another source of income. It's crucial to get a grasp of the tax regulations to make smart choices and be compliant with the Indian tax laws.
You are required to file your Income Tax Return (ITR) as per the Income Tax Act 1961, if your total income including rent;
Exceeds the threshold of exemption, i.e., ₹2.5 lakh* as per the existing tax regime or ₹3 lakh as per the new tax regime; or
There is any tax payable or refundable after deducting Tax Deducted at Source (TDS) on such rent by your tenant.
* The Finance Act 2023.
Let us understand this with the help of an illustration.
Rohit is an NRI who owns a house in India. He is looking to find a tenant for his house. To be compliant with the Indian tax laws, he will need to:
Open a Non-Resident Ordinary (NRO) account to receive the rental income. The rental income is treated as current income for that Financial Year (April-March) and can be freely repatriated i.e., transferable in that year, subject to necessary tax compliances and documentation, if applicable.
Open a Non-Resident External (NRE) He can receive the rental income in an NRE account only from another NRE account i.e., if he is renting his property to an NRI. Your tenant cannot transfer this income from an ordinary resident savings account to an NRE account. Rohit can choose to register the lease rental agreement. Indian registration authorities provide a facility to register the agreement online, which can also be availed by NRIs. On the Indian income tax portal he can validate his tenant’s Form 26AS, Annual Information Statement (AIS)/Taxpayer Information Summary (TIS) with the following details:
Rent received/receivable.
TDS thereon deducted by his tenant.
Obtain the TDS Certificate (Form 16A) from the tenant.
While the responsibility to deduct TDS on rent lies with the tenant, Rohit is responsible for ensuring that the correct amount of rent and TDS duly reflects in his Form 26AS. If he finds a mismatch between the TDS and the amount being reflected in Form 26AS, he should inform the income tax department through their website and also request the tenant for corrective action.
What is deemed rent?
The concept of deemed rent comes into effect when an individual taxpayer owns more than two house properties. In such a case, if the third property is vacant, then a deemed rent for the financial year needs to be offered to tax. Deemed rent is an estimation of the annual rent received on an immovable property basis its fair market value. NRIs who own more than two residential properties that are not rented out, must declare the deemed rent as rental income from their third property onwards while filing ITR.
So, while filing the Income Tax Return (ITR), Rohit must:
Declare the rent (whether actual or deemed) that he is entitled to receive from all their his properties in India.
Evaluate the possibility of availing deductions, such as taxes, standard deductions and interest paid on home loans.
The deductions available under the old and new tax regime
Old tax regime
Please note, tables are best viewed on desktops and in landscape mode on mobile phones.
| Nature of expense | Self-occupied property | Let out property | Deemed let out property |
|---|---|---|---|
Property tax |
Nil |
Amount paid |
Amount paid |
Standard deduction |
Nil |
(Rent reduced by property tax) *30%, irrespective of actual expenditure |
(Rent reduced by property tax) *30%, irrespective of actual expenditure |
Interest on home loan |
Interest paid on loan borrowed including 1/5th of the total amount of pre-construction interest. However, the maximum deduction available is ₹200,000 |
Interest paid on loan borrowed including 1/5th of the total amount of pre-construction interest |
Interest paid on loan borrowed including 1/5th of the total amount of pre-construction interest |
New tax regime
| Nature of expense | Self-occupied property | Let out property | Deemed let out property |
|---|---|---|---|
Property tax |
Nil |
Amount paid |
Amount paid |
Standard deduction |
Nil |
(Rent reduced by property tax) *30% irrespective of actual expenditure |
(Rent reduced by property tax) *30% irrespective of actual expenditure |
Interest on home loan property |
Nil |
Interest paid on loan borrowed including 1/5th of the total amount of pre-construction interest |
Interest paid on loan borrowed including 1/5th of the total amount of pre-construction interest |
Quick Tip
If the income from your house property results in a loss, you are only allowed to set off a loss of ₹2 lakh against 'income from other heads' in the same tax years. The remaining balance can be carried forward for up to eight tax years and can only be set off against 'income from house property'
The tax rate for TDS on rent to NRI is 30% (Section 195 of the Income Tax Act, 1961, read with the Finance Act, 2023) plus applicable cess and surcharge, cumulatively capped at a maximum of 39%* as per the new tax regime under the Income Tax Act, 1961.
*As per provision of section 195 of the Income Tax Act, 1961 (“The Act”) read with item 1(b)(O) of the Part II of first schedule of Finance Act, 2023, for tax at the rate of 30% and surcharge at the rate of 25 % on tax as per section 115BAC being default regime, and cess at the rate of 4% on tax and surcharge. Aggregating to maximum tax rate of 39%
Did you know?
You can opt to claim a deduction of up to ₹1.5 lakh for the principal repayment of home loans under the old tax regime. This limit falls within the overall cap for deductions under Chapter VIA, which includes other payments, such as life insurance premiums.
Tax obligations: Know your responsibilities
The responsibility of deducting TDS on rent and depositing it with the Tax authorities lies solely with your tenant.
However, if your tenant fails to deduct the TDS on rent and has paid gross rent, you are obligated to pay the advance tax on such taxable rent. In case you don’t pay advance tax, the same can be paid as self-assessment tax along with interest on or before the filing of your ITR.
Amit, an NRI owns two flats in Maharashtra, India. He has let out his first flat in Pune and receives ₹50,000 monthly rent for it. Amit has paid a property tax of ₹25,000 to local authorities towards such property. This expense is a permissible deduction while computing income tax. As he has not obtained a ‘Lower Deduction Certificate’ (NRIs can apply for a certificate to reduce their TDS), the tenant deducts tax at the rate of 31.2% (As per section 195, TDS will be deducted at 30% plus applicable cess) on the rent due. His second flat in Mumbai is classified as a ‘self-occupied property’ as his parents live there. He had taken a home loan to purchase this property. While he pays Equated Monthly Instalments (EMIs) towards the loan, the interest payable on the loan can be claimed as a deduction under the old tax regime.
In such case depending upon the tax regime opted by Amit, his income computation would be as follows:
| Particulars | Old regime (In INR ) | New regime (In INR) |
|---|---|---|
Pune (let out property) |
|
|
Rent received |
6,00,000 |
6,00,000 |
Less: Annual property tax paid |
(25,000) |
(25,000) |
|
5,75,000 |
5,75,000 |
Mumbai (self- occupied property) |
|
|
Rent received |
Nil |
Nil |
Less: Deduction on interest paid on home loan |
(1,00,000) |
Nil |
|
(1,00,000) |
Nil |
Total income from house property |
4,75,000 |
5,75,000 |
Total income from other sources |
2,00,000 |
2,00,000 |
Total taxable income |
6,75,000 |
7,75,000 |
Tax liability (as per tax slabs) |
47,500 |
32,500 |
Add: Health and education cess |
1,900 |
1,300 |
Total tax liability |
49,400 |
33,800 |
Less: TDS on rental income deducted by tenant and reflected in 26AS |
(1,87,200) |
(1,87,200) |
Refund |
(1,37,800) |
(1,53,400) |
In the above case, if Amit’s tenant deducts ₹1,87,200 but erroneously reports only ₹1,80,000 in the TDS returns filed, Amit’s Form 26AS will also show a lower amount of TDS. Amit needs to ensure that the same is corrected by the tenant in order to claim the full amount of TDS credit while filing his tax return in India. Amit should also report on the portal that the TDS of ₹1,80,000 is incorrect.
Conclusion
Income originating from an Indian property can be credited to your NRE/NRO accounts, allowing for convenient repatriation. This income is taxable in India and you need to file ITR on the same. You should speak to a tax expert to understand the tax implications on your rental income.
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Frequently Asked Questions
As an NRI, what are the options for receiving rental income from property in India and how can you repatriate the funds to your overseas bank account?
To receive rent from a property in India, it is necessary to utilise either an NRO account or an NRE account. These accounts let you repatriate this income to your overseas bank account conveniently. However, please note that when you receive the rent in an NRO account, only the same Financial Year’s rent is considered as current income and can be repatriated without restrictions, subject to necessary tax compliances and documentation. An NRO account restricts repatriation of capital income (such as proceeds from maturity of FD, sale of property, redemption of mutual funds, shares, etc.) to up to USD 1 million* per Financial Year cumulatively for all NRO accounts held in India. But the current income (such as rental income, dividend from investments, pension, interest from Fixed Deposits (FD) and bank accounts, etc.) is easily repatriable. You can receive rent in the NRO account from any resident account.
However, if you receive the rental income in your NRE account, it is freely repatriable without any restrictions. Please note, you can receive rental income in an NRE account, only from another NRE account. Your tenant cannot transfer this income from an ordinary resident savings account to an NRE account.
This case is applicable if an NRI rents a flat for his resident relatives in India from another NRI who has a flat in India. Rohit, an NRI who stays in Canada and has a flat in Mumbai. Vikas is another NRI who stays in London. Vikas wants to take a flat in Mumbai for his parents, who are Indian residents. Vikas takes Rohit’s flat on lease for his parents. In this case, Vikas can pay the rent from his NRE account to Rohit’s NRE account.
*Current income, such as dividends, rental income, interest etc earned in a financial year (April-March) in your NRO account can be repatriated (net of tax) without any limitations.
I have paid regular maintenance on my property in India and incurred expenses towards general repairs. Am I eligible for any deductions?
No, you are not eligible to claim a deduction for expenses on maintenance of your property and for general repairs. However, you are eligible for deductions towards:
- Property taxes paid during the Financial Year and
- A standard deduction of 30% on your rental income every year, irrespective of whether such expenses are being incurred or not.
Let us understand this with the help of an example:
Varun, a United States (US) based NRI owns a flat in a cooperative housing society in Bhopal. He earns a rental income of ₹5,00,000 per Financial Year from this property. However, he also incurs expenses such as maintenance charges of ₹10,000 and annual property tax of ₹40,000.
To arrive at Varun’s tax liability as an NRI, property taxes and standard deduction will need to be deducted from the rental income. So, in this case, the taxable rental income would be ₹3,22,000.
It is essential to note that only the taxable rental income is subject to TDS, and not the entire rental income received.
Amount (in Rs.) |
|
Gross annual value (actual rent) received |
5,00,000 |
Less: Property taxes paid |
40,000 |
Net annual value |
4,60,000 |
Less: Standard deduction of 30% on ₹4,60,000 (even though, expenses incurred of ₹10,000) |
1,38,000 |
Net taxable rent |
3,22,000 |
Varun shall not be able to claim an actual deduction for the maintenance charges of ₹10,000. However, he is allowed a standard deduction of 30% irrespective of actual expenses on repairs and maintenance. As a result, the taxable rent would be ₹3,22,000.
Is there an option for deducting TDS at lower rates for NRIs?
Yes*, a written application needs to be made to the income tax officer either by the landlord or the tenant. The application must be submitted along with the estimated tax computation for the relevant Financial Year and projections for the next two years with supporting documents of income, last Financial Year’s tax returns, etc. will need to be submitted to substantiate that TDS ought to be deducted at lower rates on account of low income. The income tax officer will study the details and if satisfied, they can issue an approval for a lower rate of TDS.
*Section 195(2), Section 195(3) and Section 197 of Income Tax Act, 1961
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