Rental income from property situated in India is a common source of income for many Non-Resident Indians (NRIs). However, such income is subject to Indian income tax laws, irrespective of the country in which the NRI resides. Understanding the applicable tax provisions, available deductions, Tax Deducted at Source (TDS) requirements, and compliance obligations is essential for accurate tax reporting and avoiding unnecessary tax liabilities.
This article explains how rental income earned by NRIs is taxed in India, the deductions available, TDS provisions, filing requirements, and the relief available under the Double Taxation Avoidance Agreement (DTAA).
Is Rental Income Earned by an NRI Taxable in India?
Yes. Rental income earned by a Non-Resident Indian (NRI) from a property located in India is fully taxable in India under the head “Income from House Property.”
The income is taxed according to the applicable income tax slab rates. Since the tax rebate available under Section 87A is restricted exclusively to eligible resident individuals, NRIs are not entitled to claim this rebate, even if their total income falls below the taxable threshold.
How Is Rental Income Taxed?
The taxable income from house property is computed after allowing the deductions prescribed under the Income-tax Act. However, the extent of these deductions depends heavily on whether you choose the default New Tax Regime or opt for the Old Tax Regime.
The following deductions are generally available while calculating taxable rental income:
1. Municipal Taxes
Municipal taxes or property taxes actually paid to the local authority during the relevant financial year can be deducted from the gross rent to arrive at the Net Annual Value (NAV). Only taxes actually paid out of pocket during that specific financial year are eligible for deduction.
2. Standard Deduction
NRIs are entitled to claim a flat deduction of 30% of the Net Annual Value (NAV) of the property towards repairs and maintenance. This deduction is allowed under both tax regimes and is fixed irrespective of the actual expenditure incurred. No bills, invoices, or supporting documents are required to claim it.
3. Home Loan Interest Deduction
If the property has been purchased, constructed, or repaired using a home loan, the interest paid on such a loan is allowable as a deduction. However, the rules diverge by tax regime:
- Under the Old Tax Regime: The entire interest paid on a rented (let-out) property can be claimed. If the interest exceeds the rental income, it creates a “loss from house property” which can be set off against other Indian income (like capital gains) up to ₹2 Lakhs in the same year, and the rest can be carried forward.
- Under the New Tax Regime: Interest on a rented property is deductible only up to the amount of the rental income. It cannot create a net house property loss to offset other types of Indian income or to be carried forward to future years.
Tax Slabs & Basic Exemption Limits for NRIs
The basic exemption limit determines whether an NRI must pay tax. For NRIs, this limit is defined as:
- New Tax Regime (Default): The basic exemption limit is ₹4,00,000.
- Old Tax Regime: The basic exemption limit is ₹2,50,000.
If an NRI’s total income in India stays below these respective thresholds, their progressive tax liability is zero.
TDS on Rental Income Paid to NRIs
When rent is paid to an 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.
Unlike transactions between resident Indians where TDS is only deducted above certain limits, TDS on payments to an NRI must be deducted from the very first rupee, regardless of the total rental amount.
The Effective TDS Rate
- Base Income up to ₹50 Lakhs: The effective TDS rate is 31.2% (30% base tax + 4% Health and Education Cess). This applies to the vast majority of rental transactions where the NRI’s total Indian income is under ₹50 Lakhs.
- Income exceeding ₹50 Lakhs: Surcharges apply progressively, which can push the final effective TDS rate up to a maximum of 39%.
The tenant is entirely responsible for obtaining a Tax Deduction and Collection Account Number (TAN) and depositing this tax with the government. Failure to do so exposes the tenant to severe interest and penalties.
Can an NRI Apply for a Lower TDS Deduction?
Yes.
A 31.2% deduction on gross rent often leads to an overpayment of tax, especially after factoring in the 30% standard deduction and low slab rates. If the NRI expects that their actual tax liability will be lower than the standard TDS rate, they can apply to the Income Tax Department for a Lower Deduction Certificate by filing Form 13 online.
Once issued, the NRI can share this certificate with the tenant, authorizing them to deduct tax at the significantly lower rate specified in the order.
Which Bank Account Should Receive the Rental Income?
Rental income received from a resident tenant in India must be credited directly to the NRI’s Non-Resident Ordinary (NRO) Account.
Such rental receipts cannot be credited directly to an NRE Account when paid by a resident Indian. Maintaining the appropriate account types is an essential compliance requirement under the Foreign Exchange Management Act (FEMA) and RBI guidelines.
Is Filing an Income Tax Return Mandatory?
Filing an Indian Income Tax Return is mandatory if the NRI’s gross total income in India exceeds the basic exemption limit (₹4,00,000 under the New Regime or ₹2,50,000 under the Old Regime).
However, even if the income falls below these limits, filing an ITR is highly recommended and practically necessary to claim a refund of the 31.2% TDS deducted by the tenant. Deducting TDS does not fulfill your tax filing obligations.
Correct ITR Form Type
NRIs cannot file ITR-1 (Sahaj). They must file their returns using ITR-2 (or ITR-3 if they also have business or professional income in India). Attempting to file an ITR-1 will cause the Income Tax Department to mark the return as defective.
Can NRIs Claim DTAA Benefits?
Yes.
NRIs residing in countries that have a Double Taxation Avoidance Agreement (DTAA) with India can claim relief from double taxation. Since rental income from Indian property is taxable both in India (source country) and usually in the country of residence, the NRI can typically claim a Foreign Tax Credit (FTC) in their country of residence for the taxes paid in India. This prevents the same rental income from being taxed twice.
Key Takeaways
- Rental income from Indian property is fully taxable under “Income from House Property.”
- NRIs are not eligible for the tax rebate under Section 87A.
- A 30% standard deduction on the Net Annual Value is available without needing to submit bills or proof of expenses.
- Home loan interest deductions cannot create a carry-forward loss under the default New Tax Regime.
- Tenants must deduct TDS under Section 195 at an effective baseline rate of 31.2% from the very first rental payment.
- NRIs can lower this burden by applying for a Lower TDS Certificate via Form 13.
- Rent must be deposited into an NRO Account, never directly into an NRE Account.
- NRIs must file ITR-2 to report income or claim a refund of excess TDS; ITR-1 is not permitted.
- DTAA provisions allow NRIs to claim a Foreign Tax Credit overseas to avoid double taxation.
Conclusion
Rental income from Indian real estate remains a lucrative avenue for NRIs, but it demands careful navigation of the Income-tax Act. Transitioning to the New Tax Regime as the default mechanism requires NRIs to carefully evaluate how they claim home loan deductions. By implementing proactive compliance measures—such as setting up an NRO account, utilizing Form 13 for lower TDS, and filing the correct ITR-2 form on time—NRIs can effectively optimize their tax outflow while remaining fully compliant with Indian law.
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