Non-residents should understand the tax implications while renting out property
Mr and Mrs Das were eagerly eyeing the Skype screen on their desktop. Sharp at 8:30 pm on Sunday night, their son called from the US. After the pleasantries about health and weather, the NRI son jumped to more pressing matters.
“I am very hassled by the flats in Pune. I want to sell them,” he said.
“You are getting decent rent from the two flats. The tenants are IT professionals and there is no hassle,” Mrs Das protested.
“Mom, there are tax issues with rent. I have not been declaring it, as the bulk of my income is made in the US. I am not sure what trouble will come,” he said. “And rather than let it sit in India, I want to convert the money to USD and bring it here. What taxes should I pay, what are the procedures for those?” he asked.
His father checked with chartered accountants on the tax aspects, and was ready by the next call.
“Yes, your concern is valid. There are a few problems with the way things are now,” Mr Das told his son. “The number one issue is that the rent must be paid to your NRO account, and not to the regular account that was opened when you were a resident here,” he said.
The son responded: “That is not an issue. I have an account. I will inform the tenant.”
Mr Das explained that the rent received is taxable in India. “But the difficult issue is that the tenant has to pay the TDS on the rent,” Mr Das noted cryptically.
The son said: “Your email says the tenant must get a Tax Deduction and Collection Account Number (TAN). He must deduct 31.2 per cent tax from the monthly rent and deposit it with the Income Tax authorities against the NRI’s PAN number. The tenant must also submit Form 15CA online.
“A certificate from a CA in Form 15CB may also be required, under some conditions — for example, if the payment exceeds ₹50,000 in a single transaction or ₹2,50,000 in a financial year. Your email says, in case the tenant has not deducted TDS on the rent, he will be liable to pay fines for not complying with the provisions.”
Tax in India
“No wonder it is tedious! But dad, my income-tax slab will not be at 30 per cent in India,” he exclaimed. Mr Das explained that an NRI can claim a tax refund by filing a return in India. NRIs are eligible for tax benefits, like any resident. For example, they can claim various deductions, and yearly income up to ₹2.5 lakh is tax-free.
Mr Das said that income from property is computed after deductions such as municipal taxes. If a home loan was taken, benefits such as interest and principal repayment deduction are available. Stamp duty and registration charges paid on the purchase of a property can also be claimed under Section 80C.
Avoiding double tax
Mr Das added that the tax treatment in the NRI’s country of residence would vary. “Some countries may not include it as part of their tax, but others such as the US require you to declare the income.”.
“Does that mean I have to pay tax twice?”, asked the son. Mr Das was a bit dismayed that his IIT-graduate son did not know the concept of Double Tax Avoidance Agreements (DTAA). He explained what a DTAA was, and said that an NRI can obtain a tax credit for the amount paid in India.
Mr Das noted that rental income is a current-account transaction, and is repatriable. “After the tax is paid, you must get a certificate from a CA in Form 15CB that all taxes have been paid and the amount proposed to be remitted is eligible for remittance.
“You can then repatriate the rent. There is an upper limit of $1 million in a financial year.”
Mr Das’s son said: “I don’t think it is practical for tenants, who are individuals, to get a TAN, file forms and pay tax. If I propose this to the tenant, he will vacate. Can I make it a joint property and let mom receive the rent?”
“There is no restriction on gifting, and legally, an NRI can jointly own a property with a resident,” Mr Das responded. “Tax rules are based on the status of the first owner, and the rules are different for residents — for example, TDS is not due on rent unless it exceeds ₹50,000 a month.
“But the issue would be that it will be taxable to the first holder, and repatriation issues must be looked into,” Mrs Das quickly chipped in, as she was not too keen on the idea.
The writer is co-founder, Rana Investment Advisors