Optimizing NRI Rental Income in India

Many NRIs have or plan to have residential property in India. They may choose to rent out these properties while they are abroad. In this article we will first explain the laws regarding rent and their impact on taxation. Next, we talk about investing rental earnings in order to optimize NRI rental income in India. 

Optimizing NRI Rental Income in India
Optimizing NRI Rental Income in India

Rental Laws:

How NRIs Collect Rent 

  • The tenant can transfer money to the NRI’s Non – Resident Ordinary (NRO) account. The regulations allow for $1 million NRO funds to be repatriated per financial year.
  • The rent can also be remitted directly to the NRIs foreign bank account. Prior to doing this, the tenant has to submit form 15CA online to the Income Tax Department. Form 15CB might have to be submitted before form 15 CA, depending on the case. A chartered accountant must certify the payment details such as the TDS rate, DTAA (if applicable) and any other information required about the remittance. 
  • The remittance will be permitted upon the submission of form 15CA and 15CB to an authorized bank. 

NRI Tax on Rental Income

As the rental income is earned within India, the tax on it must be paid in India. The tax must be paid according to the marginal income tax rate for an NRI. Take the income from your house property that has been adjusted for tax. Now add this to your other incomes such as salary capital gains and other sources. This will give you the total income and tax slab rate.

Rental income is taxed on an accrual basis and not a receipt basis. 

NRI Rental Income TDS 

TDS is tax deducted at source.

  • The tenant must deduct a mandatory TDS of 31.2 % from the rent each month. 
  • The tenant must get a Tax Deduction and Collection Account Number (TAN) 
  • The tenant must deposit the TDS amount later and give the landlord a TDS certificate. 
  • If the TDS exceeds your tax liability, you will receive a tax refund. This will happen after you file for your tax return. 
  • You can apply for a TDS certificate to deduct TDS at a reduced rate, if you would like to skip the refund process. This would be with the Jurisdictional Assessing Officer of the Income Tax Department.
  • One you receive this certificate, the tenant can now deduct the TDS at the rates agreed and deposit it in lieu of the NRIs PAN. 

Determining Property Income Per Year 

  • Ascertain the gross annual value of the property.
  • It will be higher than the actual rent or standard rent the property is likely to get.
  • Municipal taxes such as property tax per year are permitted as a deduction in order to compute the Net Annual Value (NAV) of the property.
  • 30% of the NAV can be deducted immediately as a standard deduction for repair and maintenance expenses. 
  • Interest payments on home-related loans upto Rs 2 lakhs per financial year can be deducted in order to ascertain the house property income for the purposes of tax. 

Losses 

  • If the interest payments exceed the rental income in a year, NRIs can report losses. 
  • Existing tax provisions allow NRIs to set-off losses by up to Rs 2 lakh of their house property from income from other areas including their salary. 
  • The rest of the loss can be taken on for up to eight succeeding years and can only be set-off by income from the house property. 

Deemed Rent 

As an NRI, if you have more than one residential property, one is supposed to be self-occupied and the other is deemed as rented out. There will be no tax on the self occupied property. There will be an estimated rent for the property that is deemed to be rented out .

  • If you have one residential property in India and you don’t rent it out, it will be considered  to be self-occupied. There will be no tax liability on this residential property.
  • If you one residential property and rent it out, the rental earnings will be taxed per year.
  • If you own two properties and one is rented out, then one will be considered to be self occupied while the rented out property will be taxed. 
  • If you have two houses and neither of them is rented out, then one will be deemed to be self-occupied while the other will be deemed to be taxed as if rented out. You can choose which house you would like to be deemed as self-ocupied. 

Double Taxation

There will be no double taxation if the country you reside in has a Double Tax Avoidance Agreement (DTAA). India has a DTAA with 90 countries. This includes the US, UK, Canada, Australia, Singapore, Germany and the UAE. Usually, according to these agreements, the country in which the property is located has taxation rights on the rental income.

Rental Income Investment:

Begin Investing NRI Rental Income

  • You can invest in mutual fund schemes that can be fully repatriated or are non-repatriable. 
  • Non-repatriable schemes have a non-repatriable principle. The income distributions are repatriable. 
  • In order to invest in India, you must make your rental agreement such that the rent goes to your NRO account. This will allow you to invest in India. 
  • You will also need to have a complete Know Your Customer (KYC) process in order to invest. 

Amount to Invest

You will have to plan for the maintenance and upkeep of your house or houses in India. You must calculate a reasonable annual estimate for these expenses and deduct them from your annual rental receipts. 

Due to 31.2% TDS you may not get the full amount. You should therefore calculate your tax liability and post tax rental income for the purposes of investment.

Where to invest NRI Rental Income

  • Make an investment plan based on your financial goals
  • A retirement investment plan would require the target retirement corpus. 
  • You can determine asset allocation and the durations of monthly investments required by the mutual funds.
  • You can use the rental income in India or use it elsewhere.

Investment Strategy for Rental Income in India

Parking your money in the bank earns you approximately 3% annually. If you were to invest in an equity fund via a Systemic Investment Plan (SIP) on the other hand, you could earn upto 10-12% per year in the long term. 

A rental income of Rs. 40, 000  invested in equities (SIP) over 7 years could grow to Rs. 52 lakh instead of 37 Lakh Rupees if it were just sitting in your in your bank account.” 

  • SIP makes you a disciplined investor. SIP payments are entirely automated making them convenient.
  • There is usually a 5-10% increase in rent each year. You can match this with a top-up SIP with which you can increase your SIP at periodic intervals. 
  • You must fix an SIP date which is a minimum of one week away from the tenant’s last payment date.
  • You should keep a balance buffer in case of any delay in payment
  • If no tenants are present for some months, then you can pause the payments. 
  • The tax refund amount could be invested in a ultra-short term debt fund. You can choose a STP Systematic Transfer Plan into a target equity or debt fund. 

To ask any questions related to the rights of NRIs, PIOs, and OCIs, you can download SBNRI App from the Google Play Store or App Store. You can also use the SBNRI app for investment in stock market/ mutual funds, NRI account opening, tax filing, etc. To ask any questions, click on the button below. Also, visit our blog and YouTube channel for more details. 

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FAQs

Which NRI account can the tenant transfer money to ?

The NRI’s NRO account. 

Is rental income in India taxable for NRIs  ?

Yes, it is.

What is the Double Tax Avoidance Agreement (DTAA) ?

There will be no double taxation if the country you reside in has a Double Tax Avoidance Agreement (DTAA). India has a DTAA with 90 countries. This includes the US, UK, Canada, Australia, Singapore, Germany and the UAE. Usually, according to these agreements, the country in which the property is located has taxation rights on the rental income.

What is the full form of TAN ?

Tax Deduction and Collection Account Number

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