Income Tax Rules for Taxability of Rental Income Received by Non-Resident Indians (NRIs)

For the Non-Resident Indians, Investment opportunities galore in India. Be it into equity market directly via stocks or through mutual funds, fixed deposits in NRO or NRE account, real estate including flats, plots, or commercial properties, gold, government schemes, etc.

Out of the above, Rental income from residential or commercial property has been one of the good option considering the regular cash flow of income in the form of rental along with capital appreciation benefit.Considering, Indexation benefit on cost of purchase also available at the time of sale of immovable property reduces the taxability liability.

In this article, I would like to write specifically about the taxation of rental income received in the hands of NRIs. The intricacy involved, points to be taken care of and how to avail maximum benefit while calculating taxes.

You probably know that you earn income by renting out your property and will have to pay tax on income earned. What you may not know is that Indian Income Tax laws give you the rebate on an income from house property. Many times in this article you will find the word ‘House Property’. This does not refer to only a property that is meant to be a constructed house, technically as per Income Tax act, a house property could be your home, an office, a shop, a building, or some land attached to the building like a parking lot. The Income Tax Act does not differentiate between a commercial and residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return. An owner for the purpose of income tax is its legal owner, someone who can exercise the rights of the owner in his own right and not on someone else’s behalf.

Lets now see how to calculate the income from house property in a step by step guide:

  1. Calculate Gross Annual Value (GAV) of the property: The gross annual value of a self-occupied house is zero. For Actual let-out property, GAV is actual rent received or Expected rent whichever is more. And for any vacant house property which cannot be claimed as SOP and becomes deemed let out property, GAV is expected rent for whole year. Deemed let explained later in this article.

2. Reduce Amount of Property Tax: Property tax, when paid, is allowed as a deduction from the GAV of property. Keep a copy of the receipt of the tax paid for records.

3. Calculate Net Annual Value(NAV): Net Annual Value = Gross Annual Value – Property Tax.

4. Deduction of Flat 30% as Standard Deduction: 30% on NAV is allowed as a deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section. So you do expense or don’t, do more or less, its immaterial. You get a flat deduction.

5. Reduce Home Loan Interest Component: Deduction under Section 24 is also available for accrued interest on capital borrowed for the House Property (i.e. interest accrued during the current F.Y. as well as pre-construction period). In case of SOP House Property, maximum ceiling under this section is 30,000 which increases to 2,00,000 if loan is taken for purchase or construction of House Property. In case of actual rent out properties, full interest accrued is taken into consideration.

6. Calculate Income from House Property: The resulting value is your income from house property. This is taxed at the slab rate applicable to you.

7. Adjustment for Loss from House Property: When you own a self-occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads. Note: When a property is let out, its gross annual value is the actual rent or expected rent whichever is higher. Technically, if someone deliberately undercompute rental income( municipal value or fair rent value of property) is considered as actual rent.

The other intricacies involved and benefits available:

Tax Deduction on Principal Repayment:

The deduction to claim principal repayment is available for up to Rs. 1,50,000 within the overall limit of Section 80C. However, few conditions need to be seen while seeing the applicability of the same.

Tax Deduction for First-Time Homeowners: Section 80EE

Section 80EE recently added to the Income Tax Act provides the homeowners, with only one house property on the date of sanction of loan, a tax benefit of up to Rs 50,000.

Tax Benefits on Home Loans for Joint Owners, A tool for tax planning:

The joint owners, who are also co-borrowers of a self-occupied house property, can claim a deduction on interest on the home loan up to Rs 2 lakh each. And deduction on principal repayments, including a deduction for stamp duty and registration charges under Section 80C within the overall limit of Rs.1.5 lakh for each of the joint owners. These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.

You may have taken the loan jointly, but unless you are an owner in the property – you are not entitled to the tax benefits. There have been situations where the property is owned by a parent and the parent and child together take up a loan that is paid off only by the child. In such a case the child, who is not a co-owner is devoid of the tax benefits on the home loan.

Therefore, to claim the tax benefits on the property:

1. You must be a co-owner in the property.and;

2. You must be a co-borrower for the loan.

Each co-owner can claim a deduction of maximum Rs 1.5 lakh towards repayment of principal under section 80C. This is within the overall limit of Rs 1.5 lakh of Section 80C. Therefore, you can avail a larger tax benefit against the interest paid on a home loan when the property is jointly owned and your interest outgo exceeds Rs 2 lakh per year.

It’s important to note that the tax benefit of both the deduction on home loan interest and principal repayment under section 80C can only be claimed once the construction of the property is complete.

Deemed Rental Income if more holding more than 2 residential properties:

As per the amendment in Finance Act 2019, assessee can consider a maximum of 2 properties as self-occupied property, and remaining house property is to be treated as deemed let out. So you can hold a maximum of 2 residential houses as vacant, however, if you hold more than 2, the 3rd property is considered as if given on rent. Fair market value of rent that can be received is to be calculated and that is part of total income. Other benefits like standard deductions apply.

Here are a set of examples which will clear your confusion:

  1. If you have one house, given on rent – pay tax on rental income (Let-out)
  2. If you have one house, not given on rent – don’t pay tax (Self-Occupied)
  3. If you have two houses, both given on rent – pay tax on rental income of both
  4. If you have three houses, all not given on rent – Two would be considered as Self Occupied and no tax is to be paid on it. The Third one is to be considered as Deemed Let Out and tax is to be paid based on rent received on a similar property (Fair Market Value).

Deemed rental income has been a botherance and a part of ignorance to many Non-Resident Indians. So a person having 4 vacant properties in Mumbai at a posh location will have 2 properties as self-occupied and the other 2 will be considered as deemed let out. Ofcourse the let out value will have good value considering the location and that too in Mumbai. So if imagined 2 properties can fetch rent of total Rs 20 lacs per annum, the assessee is falling in higher tax bracket and is required to file a tax return and pay tax on the same. So ignorance can cost a big amount to the pockets, just because the right advice is not issued at the right time.

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