Q: I am an NRI living outside India. I have a house property in India. I do not have any other income earning from India. Am I supposed to pay tax and file Income Tax Return in India?
A: Irrespective of the fact, whether you are resident or non-resident, rental income earned from the property in India will be taxed at India only. You need to assess the income and pay the tax on such rental income and file income tax return by the prescribed due date.
Q: This is undue hard compliance as I am already declaring my global income in my country of residence. This will amount to paying tax both at my country of residence and at India.
A: India has signed up double taxation avoidance agreements with over 85 countries worldwide. You need to find out, whether your country of residence and India have signed a double taxation avoidance agreement. In case is no such treaty, then only it may amount to double taxation. It will further depend upon the law of taxation of your country of residence.
Q: And what if the double taxation avoidance agreement exists?
A: The taxability may well differ based on rules defined in the treaty. Although most of the tax treaties allow the country to tax the rental income on the basis of the location of property. The other country may extend the benefit of such tax paid either by way of exemption or deduction.
Q: If you can please elaborate more on the meaning of ‘exemption’ and ‘deduction’.
A: Sure, exemption means the country of your residence will not tax the Indian rental income at all. In the deduction method, you need to calculate tax on such rental income as well. However, you will the deduction of tax paid in India while discharging tax liability at your country of residence.
Q: Will there be any tax deduction from the rental amount by the tenant to me while remitting me the rent from India?
A: Yes, the tenant mandatorily needs to deduct tax @ 30% plus applicable surcharge and cess.
Q: Does that mean, if such tax has been deducted by the tenant from my rent, I need not file any tax return at India?
A: No, you must file the Income Tax Return at India in such a case. The non-filing of return will lead to heavy penal consequences.
Q: The tax deduction rate of 30% appears to be on a very higher side. How can I reduce it?
A: The Income Tax Act of India gives various tax deductions to persons earning rental income. These deductions include:
1. standard deduction on rent,
2. deduction on account of interest paid on home loan taken for the property and
3. deduction of municipal taxes paid.
Further, depending on your tax slab, the tax burden may also get a substantial reduction irrespective of TDS rate.
Q: If it is so, can I ask the tenant to not to deduct tax @ 30% and reduce the tax deduction accordingly as per above said deductions and my tax slab?
A: Yes, there is a way to opt for such mode. There is a defined process for this as per Section 197 of the Income Tax Act. You need to approach to your India jurisdictional tax officer and place a lower tax deduction request in the prescribed format. Once the tax officer is satisfied with your claim, he will issue an order specifying the lower tax deduction rate against such rental income. Only through this order, the tenant is allowed to deduct tax at a lower rate.
Disclaimer: Though the utmost professional care is exercised while compiling the write-up, you must exercise your due diligence or consult your tax expert to reach to any conclusion while planning your taxes. The author reserves the right not to be responsible for the topicality, correctness, completeness or quality of the information provided.