“Property is one of the most preferred asset classes for NRIs for the rental income, though many NRIs believe they need not pay any tax on the rents they receive. They have to, but with some riders,” said Benoy Sasi, international lawyer at the DIFC, who practises tax law in India.
A recent notification from the Indian tax authority stipulated that NRI landlords are required to pay 31.2% of the rent as tax, unless they furnish certificates stating that their total income in India is below the tax exemption limit.
It is now the responsibility of the tenants to deduct tax at source (TDS) each month from the rental payment and remit to the government. This deducted tax can be claimed as refund if their annual income is below the prescribed taxation limit.
NRIs usually earn income in India from their investments in securities, interest on deposits and rental from real estate.
In its last budget, the Indian government upped the personal income tax limit to INR 500,000 ($6,963, £5,329, €6,080) per year from INR250,000, meaning individuals earning up to INR500,000 would get a full tax rebate and can have a tax saving of up to INR12,500 for all taxpayers in this bracket.
Individuals, including NRIs, who are eligible for this concession have to file their income tax returns and can claim a refund as the case may be.
Onus on tenant
The notification says that if the landlord is an NRI, the tenant is required to deduct 31.2% tax each month from the rental payment. The rider is that if the tenant fails to deduct tax from an NRI landlord, he will face a penalty equal to the tax not deducted.
The rule does not prescribe any lower limit for tax deduction. For example, even if the rent is INR5,000 per month, the tenant will have to deduct TDS and remit to the government.
So, the first responsibility is on the tenant to ascertain if the landlord is an NRI. There are instances when the property is registered in the name of non-NRIs.
It is clarified that the tenant first needs to obtain a tax deduction account number (TAN). Once the TAN number is obtained , the tenant can deduct tax every month and pay it online. The landlord needs to be paid only the balance amount, after deducting the tax.
It is further clarified that the tax needs to be paid by the tenant by the seventh of each calendar month following the month in which the tax is deducted. For example, if he pays rent and deduct tax on 5 June, the tax must be deposited with the government by 7 July.
This will ensure that the tenant remits to the government the tax he has deducted from the rent. Failure to remit the deducted tax will attract prosecution under Section 276B of the Income-tax Act, 1961, leading to imprisonment of three months to seven years.
Similarly, if the tenant fails to deduct the tax from the NRI landlord can attract a penalty equal to the tax not deducted, but not prosecution.
The tenant is also required to file a tax return for the tax paid on the rent given to an NRI landlord within one month of the end of each quarter.
For example, for the April-June quarter, the TDS return has to be filed by 31 July. However, for the January-March quarter, the return can be filed by 31 May.
The tenant is also required to issue a TDS certificate in Form 16A to the landlord within 15 days from the due date for filing quarterly TDS return.
The rule says that the tenant should fill in Form 15CA online on the income tax portal while paying rent each time.
If the annual rent payment is more than INR500,000, the tenant needs to obtain Form 15CB from a chartered accountant.