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  7. TDS Deduction on Rental Property Owned by NRI - Applicable Tax Rates

Is your Landlord an NRI? Know TDS Deduction on Rental Property Owned by NRI

Updated on: 27 Sep, 2024 11:23 AM

Non-resident Indians (NRIs) often invest in properties in India and let them for rent. Are you planning to rent a property from a landlord who is a non-resident Indian (NRI)? There are some rules applied in this case, like deducting tax before making a rent payment to the NRI.

Now, the question that comes in is, Does the income tax rule apply to rent paid for properties owned by NRIs? Let us know in the blog below.

Contents

Who is an NRI?

NRI is an Indian citizen but not a resident of the country. Under section 6, we can determine the residential status of an individual. According to this section 6, the following conditions hold for residents: -

  • During previous years, he/she must have resided in India for at least 182 days.
  • He/she must have resided in India for 60 days during the previous year and for 365 days during the immediately preceding previous years at least.

Thus, accordingly, an NRI is one that doesn’t satisfy any criteria. Read more here.

According to Section 195 of the Income Tax Act of 1961, an individual living in a house owned by a Non-Resident Indian (NRI) or a person/entity paying rent or interest to an NRI or a foreign company must mandatorily deduct a TDS of 31.2% while paying rent. Upon TDS payment, the tenant needs to submit Form 15CA to the Income Tax Department

For example, suppose Mr. Nair is an NRI who let out his property to Mr. and Mrs. Jhangir for a monthly rent of Rs. 50,000. As per the NRI rent TDS section, Mr. and Mrs. Jhangir have to deduct 31.2% of the rental amount every month while making rental payments to their landlord.

So, the actual amount that they would pay is Rs. (50,000 – 31.2% of 50,000), i.e., 34,400. The TDS of Rs. 15,600 has to be deposited with the income tax department.

How is Tax Deducted at Source?

Firstly tenants must have a TAN. This TAN stands for the tax account number and this can be received via the NSDL website. As soon as you receive the TAN or the tax account number, the tenant can easily deduct tax each month and pay the remaining amount that needs to be paid to the landlord.

Also, as per rule, the tax must be paid by the 7th of the following calendar month, and for the month of March, TDS must be paid by 30th April.

How to File TDS Returns on Payment Made to Non-Resident?

Tenant must file a TDS return and this needs to be done within a month. This month is counted from the end of each quarter for the TDS paid to the NRI. For example, you must file returns by 31 July 2019 for the TDS on rent paid for April, May, and June 2019. Tenant also needs to provide a TDS certificate by means of Form 16A to the landlord within a period of 15 days from the due date for filing quarterly TDS return.

To know more on how to file TDS return on the rent paid to the NRI, connect with our tax experts.

Penalty for not paying TDS

The TDS must be paid on time, i.e., by the seventh of the following calendar month. If the tenant does not pay the TDS on time, it attracts prosecution under Section 276B of the Income Tax Act, 1961.

Did you know?

Requirement to deduct TDS on rent paid to NRIs wasn’t always the case? It was only introduced in Budget 2017! This means that tenants who rented from NRI landlords before 2017 wouldn't have had to deal with TDS deductions.

Tax on rental income exemption for NRIs

Certificate of Exemption (Section 197): NRIs can obtain a Certificate of Exemption under Section 197 of the Income Tax Act if their total income from India is below the exemption limit. This certificate allows them to have a lower tax liability or potentially be exempted from paying tax on rental income. The application for this certificate needs to be made to the Assessing Officer (AO), who will then decide on the tax rate or exemption based on the NRI's circumstances.

Double Tax Avoidance Agreement (DTAA): The Double Tax Avoidance Agreement is an agreement between India and other countries to prevent taxpayers from paying tax twice on the same income. Under this agreement, if an NRI's country of residence has a DTAA with India, they might be eligible to claim benefits such as relief from double taxation or special rates on income earned in India, including rental income from properties situated in India. Different countries have different provisions within the DTAA, and more than 90 countries, including the USA, Canada, UK, Australia, and others, have such agreements with India.

Things to Know:-

  • Tenants must fill 15CA on the income tax portal each time rent is paid.
  • If the annual rent paid exceeds the desired amount, which is Rs.5 lakh, the tenant needs to take a form 15CB from CA.

Frequently Asked Questions

Q- What is NRI income tax?

NRI (Non-Resident Indian) income tax refers to the taxes levied on income earned in India by someone who is considered a non-resident for tax purposes. This typically applies to income from Indian assets, investments, or business activities.

Q- Who is considered an NRI for taxation purposes in India?

An individual is considered an NRI if they do not meet the criteria of a resident or ordinarily resident in India under the Income Tax Act. Typically, if an individual has stayed in India for less than 182 days in a financial year, they are considered an NRI.

Q- Is TDS applicable on rental income earned by an NRI from property in India?

Yes, as per Indian tax laws, TDS is applicable on rental income earned by an NRI from property in India. The tenant or the person responsible for making the payment is required to deduct TDS before making the rental payment to the NRI landlord.

Q- What is the TDS rate applicable to NRIs for rental income?

The TDS rate on rental income for NRIs is usually 30% of the total rental income. However, this rate may vary based on the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the country where the NRI resides.

Q- What is the procedure for deducting TDS on rental income paid to an NRI?

The tenant or the person responsible for making the rental payment to the NRI landlord is required to deduct TDS at the applicable rate before making the payment. They must obtain a Tax Deduction Account Number (TAN) and deduct TDS using Form 15CA and 15CB.

Q- Can an NRI claim a refund for excess TDS deducted on rental income?

Yes, NRIs can claim a refund for any excess TDS deducted. They can file an income tax return in India to claim a refund if their actual tax liability is lower than the TDS deducted.

Q- What are the consequences of not deducting TDS on rental income paid to an NRI?

Failure to deduct TDS or non-compliance with TDS provisions can attract penalties and legal consequences as per Indian tax laws. The Income Tax Department may impose penalties and interest on the due amount.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.