Introduction: Income from Property in India Taxed for NRIs
“How is income from property in India taxed for NRIs?” is a common concern for those living abroad yet maintaining ties with the Indian property market. As Indian real estate becomes a preferred investment for NRIs due to emotional attachments, attractive returns, and favorable government policies, the rules and obligations around tax become crucial to understand for sound financial planning. This article outlines all you need to know on how income from property in India is taxed for NRIs, blending practical steps with workable examples.
Legal Foundations: Income Tax Act Provisions for NRIs
Scope of Taxation
- Section 5(2) of the Income Tax Act, 1961: NRIs are only taxed on income that accrues or arises in India or is received/deemed to be received in India.
- Section 6 (Residential Status Test): Validates NRI status for each financial year; changes in status (e.g., RNOR, ROR) can have retrospective consequences.
Example: If an NRI becomes RNOR for FY 2025–26, only Indian-sourced income and income from a business controlled in India is taxable; foreign income isn’t, providing a multi-year window for favorable tax planning.
Interplay with FEMA and Black Money Act
- FEMA, 1999 (Sections 6 and 9) govern acquisition/transfer of immovable property and dictate reporting requirements.
- Black Money (Undisclosed Foreign Income and Assets) Act, 2015: Any undisclosed assets (e.g., foreign property income not declared in India) attract penal consequences.
Understanding the Basics: Residential Status and Its Impact
You must determine your residential status each year, which dictates your tax liability on property income. According to Indian law, an NRI has been out of India for more than 182 days in the preceding financial year. Only income earned or accrued in India—including rental and capital gains from Indian properties—becomes taxable in India.
Key Types of Property Income for NRIs
- Rental Income: Money you earn by letting out a property (residential, commercial, or land).
- Capital Gains: Profits you realize from selling a property.
The way income from property in India is taxed for NRIs depends on which of these two income types applies. Let’s focus on the specifics of each.
Rental Income: Taxation and Procedures
Income earned by NRIs from leasing or renting their property in India is taxable in India. Here’s how it works:
How Rental Income is Computed
Gross rental income is the total rent received. From this, certain deductions apply:
- Standard Deduction: 30% of net annual value (rental income minus municipal taxes paid) deductible for repairs and maintenance, regardless of actual expenses.
- Municipal Taxes: Property taxes paid during the financial year are deductible.
- Interest on Home Loan: If you have a loan on the property, the interest part of EMIs is deductible from rental income.
Example:
Suppose you own a flat in Bengaluru which you rent out for ₹50,000 a month. You pay ₹12,000 annually as municipal taxes. Here’s how your income from property in India taxed for NRIs calculation shapes up:
- Annual Rent Received: ₹6,00,000 (₹50,000×12)
- Less: Municipal Taxes Paid: ₹12,000
- Net Annual Value: ₹5,88,000
- Less: Standard Deduction (30%): ₹1,76,400
- Net Income: ₹4,11,600
If you paid ₹2,00,000 in housing loan interest, you can also deduct it, bringing taxable income from property even lower.
TDS and Procedural Aspects (Section 195)
- Obligation: Tenants must deduct TDS at 30% + surcharge + cess (not just 5% as for residents—section 194-IB not applicable for NRIs).
- Tenant Compliance Flow:
- Obtain TAN.
- Deduct TDS from monthly rent.
- Deposit it with the government by the 7th of the next month.
- File Form 15CA/CB for remittance (if funds are remitted abroad).
- File Form 27Q quarterly, issue Form 16A to NRI.
- Double Non-Compliance: Both the tenant and NRI can face penal interest (u/s 201(1A)) and prosecution for failure.
Example: An NRI in the US leases a Mumbai flat for ₹75,000/month. The tenant must:
- Deduct roughly ₹25,000 as TDS.
- File Form 15CA/CB before remitting the remainder to the NRI’s foreign account via banking channels compliant with FEMA Section 6(3).
- Maintain all transactional documents for audit defense.
Capital Gains on Sale of Property
Short-Term & Long-Term Distinction
- Short-Term: Sale within 24 months. Gains taxed at slab rates (usually 30%), TDS at 30% applies.
- Long-Term: Held for 24+ months. Gains taxed at 20% + indexation, with TDS at 20%. NRIs cannot opt for special exemption slabs available to residents such as Section 54 for more than one house (after Budget 2019).
TDS Provisions (Section 195)
- Buyer’s obligations: Even individual buyers must deduct TDS when buying from NRIs (unlike from residents, where no TDS may be needed if under ₹50 lakh property—section 194-IA).
- Lower/No TDS Certificate: File Form 13 online with the jurisdictional Assessing Officer; process can take 21–60 days.
- Practical Tip: Execute sale agreements subject to lower TDS cert. approval to avoid excess tax outflow.
Capital Gains Tax Exemptions
- You can potentially save capital gains tax by:
- Buying another residential property in India within one year before or two years after the sale, or constructing one within three years (Section 54).
- Investing up to ₹50 lakh in NHAI or REC bonds within six months (Section 54EC).
- Using Section 54F for gains on selling assets other than property, provided you reinvest in a house.
Cross-Border Taxation & Compliance
India’s DTAA Network
- Form 10F Compliance: File Form 10F, Tax Residency Certificate (TRC), and self-declaration to claim lower tax rates or credits under DTAA.
- Common Countries:
- USA DTAA: Rental income taxed where property is located, but credit for Indian tax can be claimed in the US return via IRS Form 1116.
- UAE/No DTAA: Rely more on Indian domestic provisions.
Case Law: ITO v. Rajeev G. Kalathil (2019): Clarifies calculation of capital gains and DTAA benefits for repatriation purposes.
FEMA Reporting and Repatriation
- Annual Declaration: File Form 15CA/CB for every outward remittance of rent or sale proceeds.
- Authorised Dealer (Bank) Requirements: KYC, proof of original investment, tax paid, and CA certificate.
- Remittance Ceiling: Up to $1 million per financial year out of sale proceeds of assets acquired using foreign exchange.
Conclusion
How is income from property in India taxed for NRIs? Understanding the tax rules governing both rental and capital gains income helps NRIs make better investment decisions and remain compliant. Careful planning, utilizing available deductions, and ensuring thorough paperwork mean you pay only what’s required—nothing extra. For peace of mind, consult a qualified tax advisor or chartered accountant, but with these insights and examples, the process is much less intimidating.
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