Home Sweet Home is actually a truism in more ways than one.
Beside the obvious reason of the home offering us a world of our own, a house also has the potential to generate wealth through rental income. NRI investors often invest in homes with this dual purpose of earning rental out of them while away, and settling down when they return.
It is always a prudent choice for an NRI to rent out idle property. Rentals have increased substantially over the years in major cities and for those willing to let out their property, this is a good opportunity to earn money from their otherwise idle asset. Here are a very useful tips which can help NRIs’ to better manage their rentals in India.
What kind of rental agreement to choose?
There are two kinds of rental agreements which happen in India, – the Rental Lease Agreement and the Leave and License Agreement. Since NRI owners of property are not expected to be in or around their property holding, the agreement needs to be drawn up in a firm and unambiguous manner. Both the above mentioned agreements might look similar at first, but are entirely different in form and nature.
The Rental Lease Agreement is a temporary transfer of ownership from the owner to the lessee. In contrast, the Leave and License Agreementdoes not allow transfer of ownership.
As there is no ownership transfer, Leave and License Agreements are better.
How to receive the rental amount?
An NRI can receive the rental income directly into their accounts abroad provided they have the necessary certification from a chartered accountant that all relevant taxes have been settled.
Alternatively, the tenant can deposit the rental amount into the NRE or NRO account held by the NRI owner. The money can then be simply repatriated.
What are the tax implications for the rental income?
The rental income which is generated in India is necessarily taxable. The rule laid down specifies that the tax is to be deducted at source. This means that the NRI owner will receive the rental amount net of tax in his account. The tenant is required to deduct tax at the rate of 30% from the original rent amount and deposit it after obtaing a TAN. A TDS certificate is also to be issued by the tenant to the landlord for the amount of tax deposited.
If the tenant fails to deduct tax at source and/or deposit it, then he can be held liable for the same by the Income Tax authorities. This will also result in creating a hindrance for the NRI taxpayer to declare his taxable income. However, if the NRI has paid the taxes and filed the return then there is no problem.
It is often that the income from rents is taxable in the country where it is repatriated. This is a situation where the rental income is taxed twice, once in India and in the other instance, the country where the NRI resides. The NRI owner of the property would do well to find out if there exists a DTAA (Double Taxation Avoidance Agreement) between India and the country of his residence.
India has a DTAA with USA and therefore rental income for NRIs’ from USA is taxed only in India.
What is Deemed Rental Income?
The Indian Income Tax act specifies that in case an individual owns more than one house property, only one is deemed as self occupied and any or all of the others are considered to be let-out and for such properties’, tax needs to be paid on deemed rental income. This rule applies, irrespective of the residential status of the individual.
The Act also makes it clear that if the NRI has only one residential property in the world and that property is located in India then they need not pay tax on the deemed rental income in India.
The moment an NRI becomes the owner of more than one house property, whether through purchase or inheritance, her or she is liable to pay tax on the deemed rental income of such property. If only one property is owned and that is inherited and not purchased, then the owner is not liable to pay any tax on the same.
As an NRI holder of house property in India, one should pay careful attention to the following issues while letting-out the property for rent:
i. The type of rent agreement being entered into.
ii. The best option for getting bank credit for the rental income amount.
iii. The taxability implication of the house properties owned in India.
At the end of the day it is always useful to exercise discretion and NRI investors would do well to thoroughly research the above stated options before taking a final call.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at email@example.com
Do you think CBDT should extend Tax Audit Report and relevant ITR Due Date? Please Comment, Vote, Retweet and Like.— Tax Guru (@taxguru_in) September 18, 2018