Owning residential or commercial property in India is a popular investment choice for many Non-Resident Indians (NRIs). While rental income from such properties provides a steady source of income, it also attracts tax obligations under the Indian Income-tax Act. Understanding how this income is taxed, the deductions available, applicable TDS provisions, and compliance requirements is essential for managing tax liability efficiently and avoiding unnecessary disputes.
This article explains the taxation of rental income earned by NRIs, the deductions available under the Income-tax Act, the impact of the old and new tax regimes, TDS obligations, and the compliance requirements associated with Income Tax Return (ITR) filing.
Is Rental Income Earned by an NRI Taxable in India?
Yes. Rental income earned by a Non-Resident Indian (NRI) from a property situated in India is fully taxable in India under the head “Income from House Property.”
Since the property is located in India, the rental income is taxable in India irrespective of the country in which the NRI resides.
The income is taxed according to the applicable income tax slab rates.
It is important to note that the tax rebate available under Section 87A is restricted to eligible resident individuals. Accordingly, NRIs are not entitled to claim this rebate, even if their total income falls below the threshold applicable for resident taxpayers.
How Is Rental Income Computed?
Income from house property is computed after allowing the deductions prescribed under the Income-tax Act. However, the deductions available may vary depending upon whether the taxpayer opts for the Old Tax Regime or continues under the default New Tax Regime.
The taxable rental income is generally determined after considering the following deductions.
1. Deduction for Municipal Taxes
Municipal taxes or property taxes actually paid to the local authority during the relevant financial year are deductible while computing income from house property.
These taxes are deducted from the Gross Annual Value (GAV) to arrive at the Net Annual Value (NAV).
Only municipal taxes that have been actually paid during the relevant financial year qualify for deduction.
2. Standard Deduction
After determining the Net Annual Value (NAV), NRIs are entitled to claim a standard deduction of 30% towards repairs and maintenance of the property.
This deduction is available under both the Old Tax Regime and the New Tax Regime.
One of the key advantages of this deduction is that it is allowed irrespective of the actual expenditure incurred. Taxpayers are not required to maintain bills, invoices, or any documentary evidence to claim this deduction.
3. Deduction for Home Loan Interest
Where the property has been purchased, constructed, or repaired using a home loan, the interest paid on such loan is generally allowable as a deduction while computing income from house property.
However, the treatment of home loan interest differs under the two tax regimes.
Under the Old Tax Regime
The entire interest paid on a rented (let-out) property can generally be claimed as a deduction.
Where the interest payable exceeds the rental income, the resulting loss from house property may be adjusted against other eligible income, such as capital gains, up to ₹2 lakh during the same financial year, subject to the applicable provisions. Any unabsorbed loss may be carried forward in accordance with the provisions of the Income-tax Act.
Under the New Tax Regime
The deduction for home loan interest in respect of a rented property is restricted to the amount of rental income.
Accordingly, the deduction cannot create a net loss from house property that can be set off against other heads of income or carried forward to subsequent financial years.
Taxpayers should therefore evaluate the implications of the applicable tax regime before computing their taxable rental income.
Tax Slabs and Basic Exemption Limits Applicable to NRIs
The basic exemption limit determines the level of income up to which tax is not payable.
For NRIs, the applicable basic exemption limits are:
| Tax Regime | Basic Exemption Limit |
| New Tax Regime (Default) | ₹4,00,000 |
| Old Tax Regime | ₹2,50,000 |
Where the NRI’s total taxable income remains within the applicable basic exemption limit, the progressive tax liability may be nil.
However, taxpayers should remember that certain categories of income may be taxable at special rates and the rebate available under Section 87A is not available to NRIs.
TDS on Rental Income Paid to NRIs
When a resident tenant pays rent to a Non-Resident Indian (NRI) for a property situated in India, the tenant is legally required to deduct Tax Deducted at Source (TDS) under Section 195 of the Income-tax Act before making the rental payment.
Unlike rental payments made to resident landlords, where TDS is applicable only after prescribed monetary limits are crossed, TDS under Section 195 is required to be deducted from the very first rupee of rent paid to an NRI, irrespective of the rental amount.
The responsibility for deducting and depositing the tax rests entirely with the tenant.
Applicable TDS Rate
The rate of TDS depends upon the NRI’s total taxable income in India.
Income up to ₹50 Lakh
Where the NRI’s total income in India does not exceed ₹50 lakh, TDS is generally deducted at an effective rate of 31.2%, comprising:
- Income Tax – 30%
- Health and Education Cess – 4%
This effective rate applies to the majority of rental transactions involving NRIs.
Income Exceeding ₹50 Lakh
Where the NRI’s total income exceeds ₹50 lakh, the applicable surcharge increases the overall TDS liability.
Depending upon the level of income, the effective TDS rate may increase progressively and can reach approximately 39% after considering the applicable surcharge and Health & Education Cess.
Tenant’s Compliance Responsibility
The tenant is responsible for complying with all TDS requirements prescribed under Section 195.
This includes:
- Obtaining a Tax Deduction and Collection Account Number (TAN).
- Deducting TDS before making the rental payment.
- Depositing the tax with the Income Tax Department within the prescribed timelines.
- Completing the applicable TDS compliance requirements.
Failure to comply with these obligations may expose the tenant to interest, penalties, and other consequences under the Income-tax Act.
Can an NRI Apply for a Lower TDS Deduction?
Yes.
In many cases, the TDS deducted under Section 195 may be significantly higher than the NRI’s actual tax liability.
This is because TDS is deducted on the gross rental payment, whereas the final tax liability is computed after allowing deductions such as:
- Municipal taxes, where eligible.
- Standard deduction of 30%.
- Home loan interest deduction, wherever applicable.
Consequently, many NRIs end up with excess tax deducted during the financial year.
To avoid this, an NRI may apply to the Income Tax Department for a Lower Deduction Certificate by filing Form 13.
If the Income Tax Department is satisfied that the estimated tax liability is lower than the standard TDS rate, it may issue a certificate authorising deduction of tax at a reduced rate.
The NRI should provide this certificate to the tenant, who can thereafter deduct tax at the rate specified in the certificate instead of the normal rate prescribed under Section 195.
Which Bank Account Should Receive the Rental Income?
Rental income received from a resident tenant should be credited directly to the NRI’s Non-Resident Ordinary (NRO) Account.
Rental receipts from resident tenants cannot be credited directly to an NRE Account.
Maintaining the appropriate bank account is an important compliance requirement under the Foreign Exchange Management Act (FEMA) and the applicable Reserve Bank of India (RBI) regulations.
NRIs should therefore ensure that their rental receipts are routed through the appropriate banking channel.
Is Filing an Income Tax Return Mandatory?
An NRI is required to file an Income Tax Return (ITR) where the gross total income in India exceeds the applicable basic exemption limit.
The applicable exemption limits are:
- ₹4,00,000 under the default New Tax Regime.
- ₹2,50,000 under the Old Tax Regime.
However, even where the total income is below the applicable exemption limit, filing an Income Tax Return is often advisable.
This is particularly relevant where TDS has been deducted on rental income.
Since tax is deducted at source at a relatively high rate under Section 195, the actual tax liability may be considerably lower after claiming the deductions available under the Income-tax Act.
By filing the Income Tax Return, the NRI can:
- Report the rental income correctly.
- Claim all eligible deductions.
- Compute the actual tax liability.
- Claim a refund where excess TDS has been deducted.
Therefore, deduction of TDS does not eliminate the requirement or benefit of filing an Income Tax Return.
Which ITR Form Should an NRI File?
NRIs earning rental income from property situated in India cannot file ITR-1 (Sahaj).
Depending upon the nature of their income, they are generally required to file:
- ITR-2, where income consists of house property, capital gains, or other eligible sources without business or professional income; or
- ITR-3, where the NRI also has income from business or profession in India.
Filing an incorrect return form, such as ITR-1, may result in the Income Tax Department treating the return as defective.
Accordingly, taxpayers should carefully select the appropriate ITR form based on the nature of their income before filing the return.
Can NRIs Claim DTAA Benefits on Rental Income?
Yes.
Non-Resident Indians residing in countries that have entered into a Double Taxation Avoidance Agreement (DTAA) with India may be eligible to claim relief from double taxation on rental income earned from property situated in India.
Since rental income from immovable property located in India is taxable in India as the source country, the same income may also become taxable in the NRI’s country of residence, depending on its domestic tax laws.
To prevent the same income from being taxed twice, most DTAAs permit the taxpayer to claim a Foreign Tax Credit (FTC) in the country of residence for the taxes paid in India.
The availability and extent of such relief depend upon the provisions of the applicable DTAA between India and the country of residence. Therefore, NRIs should review the relevant treaty provisions before claiming treaty benefits.
Key Takeaways
- Rental income earned from a property situated in India is taxable in India under the head “Income from House Property.”
- NRIs are taxed according to the applicable income tax slab rates and are not eligible for the rebate under Section 87A.
- Municipal taxes actually paid to the local authority are deductible while computing the Net Annual Value (NAV).
- A standard deduction of 30% of the Net Annual Value is available for repairs and maintenance without requiring any bills or documentary evidence.
- The treatment of home loan interest differs under the Old and New Tax Regimes. Under the default New Tax Regime, the deduction cannot create a loss from house property that can be set off against other income or carried forward.
- The tenant is required to deduct Tax Deducted at Source (TDS) under Section 195 from the very first rental payment made to an NRI.
- Depending upon the NRI’s total income, the effective TDS rate generally ranges from 31.2% to approximately 39%, after considering the applicable surcharge and Health & Education Cess.
- Where the expected tax liability is lower than the prescribed TDS, the NRI may apply for a Lower Deduction Certificate by filing Form 13, enabling the tenant to deduct tax at the reduced rate specified by the Income Tax Department.
- Rental income received from a resident tenant should be credited only to the NRO Account and not directly to an NRE Account.
- Filing an Income Tax Return enables NRIs to report rental income correctly, claim eligible deductions, and obtain a refund where excess TDS has been deducted.
- NRIs earning rental income should generally file ITR-2, or ITR-3 where business or professional income is also earned in India.
- DTAA provisions may enable NRIs to claim a Foreign Tax Credit in their country of residence, thereby reducing or eliminating double taxation on the same rental income.
Conclusion
Rental income from property situated in India continues to be fully taxable in the hands of Non-Resident Indians under the provisions of the Income-tax Act. While the income is chargeable to tax in India, NRIs can optimise their tax liability by claiming the deductions available under the Act, complying with the applicable TDS provisions, maintaining the appropriate banking arrangements, and filing the correct Income Tax Return within the prescribed time.
The introduction of the New Tax Regime as the default tax regime makes it even more important for NRIs to understand how deductions, particularly those relating to home loan interest, differ from the Old Tax Regime. Proper evaluation of the applicable tax regime, timely application for a Lower Deduction Certificate where eligible, and accurate reporting of rental income can significantly improve tax efficiency.
Additionally, NRIs residing in countries that have a Double Taxation Avoidance Agreement (DTAA) with India should examine the treaty provisions to claim relief from double taxation through the Foreign Tax Credit mechanism, wherever applicable.
A well-planned approach to tax compliance not only helps minimise tax outflow but also ensures smooth processing of Income Tax Returns, timely refunds, and compliance with the requirements of the Income-tax Act, FEMA, and other applicable regulations.
Ushma & Associates – Chartered Accountants
📞 Contact: +91-9910075924
Disclaimer
This article is for general informational purposes only and does not constitute professional advice. Income Tax Laws are subject to changes, and interpretations may vary. Readers are advised to consult a qualified professional before making any decisions