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TDS on Rent for NRIs: How Tax on Rental Income Works for NRIs?
Editorial Team - Dec 06 - 9 min. read
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According to Section 195 of the Income Tax Act of 1961, an individual living in a house owned by a Non-Resident Indian (NRI) must mandatorily deduct a TDS of 31.2% while paying rent. Upon TDS payment, the tenant needs to submit Form 15CA to the Income Tax Department
Are you a Non-Resident Indian (NRI) who has rented out their property in India? Or perhaps, you are planning to rent a property from an NRI landlord?
If yes, then you must familiarise yourself with specific guidelines for the same. First, you must verify that your landlord has a designated representative in India to address legal or maintenance matters on their behalf.
Second, you must ensure the existence of a comprehensive rental agreement, clearly specifying the terms and conditions of your tenancy. It should encompass details such as monthly rent, security deposit, and other fees or charges involved.
Furthermore, you must be aware of the laws related to TDS on rent payments to NRIs. As per the Income Tax* Act of 1961, if your landlord is an NRI, then merely ensuring timely rent payments might not suffice to comply with the legal complications. You need to fulfil numerous other responsibilities, neglecting which could lead to financial and legal troubles.
This article explores the intricacies of how the TDS on rent for NRIs work and other necessary details you must know. Keep reading.
What is TDS on rent for NRIs?
TDS stands for Tax Deducted at Source. It is a mechanism used by the Government of India to collect income tax in advance. It involves the deduction of a certain percentage of payments as taxes while making specified payments, such as salary, interest, commission, rent, and other types of income.
The person or company responsible for making the payment is known as the ‘deductor’ and the individual receiving the payment is known as the ‘payee’. The deductor deducts the TDS on behalf of the payee, and then, remits the same to the government.
As per Section 195 of the Income Tax Act of 1961, a person or entity paying rent or interest to an NRI or a foreign company must deduct a TDS at the time of making the payments. The TDS amount is withheld by the tenant and remitted to the government on behalf of the NRI landlord. As a tenant, you must ensure that the NRI rent TDS is deducted and deposited as per the prescribed rates and timelines to avoid penalties.
Applicable Rate for NRI Rental Income TDS
The usual TDS rate on rent paid to NRIs is typically higher than that for resident Indians. As per the proposals made in the Union Budget 2017, the applicable NRI TDS rate is 31.2%.
It means that the tenants who are living in properties owned by NRIs are required to deduct 31.2% of the rental amount while making the payments. Additionally, the tenant must fill up Form 15CA on the income tax portal every time after making the rent payment.
For example, suppose Mr Verma is an NRI who owns a residential apartment in Delhi. He decided to let out his property to Mr and Mrs Dubey for a monthly rent of ₹25,000. Now, as per the NRI rent TDS section, Mr and Mrs Dubey have to deduct 31.2% of the rental amount every month while making rental payments to their landlord.
So, the actual amount that they would pay is ₹(25,000 – 31.2% of 25,000), i.e., ₹17,200. The TDS of ₹7,800 has to be deposited with the income tax department.
Exceptions and Exemptions
While the above-mentioned rules for TDS on rent for NRI landlords are generic, some specific exceptions and exemptions can be applicable under the following circumstances:
- DTAA Provisions
NRIs can claim the benefits of Double Taxation Avoidance Agreements (DTAA) to reduce their TDS rate. It is a treaty signed between India and different nations to protect NRI taxpayers from paying double taxes on their income in India as well as their residence countries.
- Lower or Nil TDS Certificate
An NRI can also obtain a lower TDS certificate from the Income Tax Department of India to reduce their TDS rate. This certificate is provided under section 197 to NRIs whose total income in India is below the tax exemption limit.
- Rental Threshold
If the annual rental amount is below a specific threshold, the deduction of TDS is not mandatory, even for NRI landlords. This threshold may vary depending on the changes proposed during the annual budget.
Who is an NRI as per the Income Tax Laws of India?
In general terms, any Indian citizen or a person of Indian origin who is living abroad can be considered an NRI. However, section 6 of the Income Tax Act defined specific provisions for an individual to be known as an NRI for taxation purposes.
According to this section, an individual qualifies as an NRI if they are a citizen of India and meet any of the following conditions:
- If the person has stayed in India for less than 182 days during the preceding financial year for employment, business, education, or any other purpose
- If a person has stayed in India for less than 60 days during the preceding financial year and for less than 365 days collectively during the four immediately preceding financial years
A person who does not meet any of the conditions mentioned above cannot be termed as an NRI and has to abide by the taxation rules for resident individuals.
Filing Returns for NRI Rental Income TDS
Upon the deduction of the TDS, the tenant needs to file quarterly TDS returns. Below is the procedure for filing returns for rent payments to NRIs TDS:
Step 1 – Obtain a TAN number
The person deducting TDS on rent payments to an NRI or PIO is required to obtain a Tax Account Number (TAN) from the official website of the Tax Information Network of the Income Tax Department.
Step 2 – Deduction of the TDS
Once the tenant has obtained their TAN, they can deduct 31.2% TDS for NRI property rent. The TDS amount has to be submitted to the income tax department through TDS returns and the remaining rent can be paid to the NRI property owner.
Step 3 – Fill out Form 15CA
Upon the deduction of the TDS, the tenant must fill out Form 15CA on the income tax website by the 7th of the subsequent month.
Step 4 – Quarterly TDS returns
Additionally, the tenant needs to file quarterly TDS returns through Form 26Q and issue TDS certificates to the property owner through Form 16A within the next 15 days.
To Conclude
Understanding the rules for TDS on rent for NRIs is essential for property owners as well as tenants. It helps them avoid certain legal and financial troubles. In case a tenant fails to file TDS returns within the stipulated time, it may attract severe penalties or even imprisonment under sections 271C and 276B of the Income Tax Act of 1961.
