Pachu is an NRI settled in the USA. He inherited a commercial building and a residential apartment located in India from his parents. He lets out both and earns rental income from them. What are the things Pachu must keep in mind while filing his Income Tax Returns in India?
Pachu is an NRI settled in the USA. He inherited a commercial building and a residential apartment located in India from his parents. He lets out both and earns rental income from them. What are the things Pachu must keep in mind while filing his Income Tax Returns in India?
Rental Income Taxability
Rental income from a property situated in India is taxable in the hands of the owner irrespective of the residential status. Income Tax Law prescribes a specific method of computing taxable rental income.
The property is taxable on the basis of its annual value. Gross annual value (GAV) less municipal taxes (property tax & water tax) paid during a financial year gives the Net annual value (NAV). After reducing a flat 30% standard deduction, the taxable rental income is arrived at.
GAV is higher of the following:
A) Amount at which the property might reasonably be expected to be let out
B) Actual Rent Receivable
In other words, GAV compares the actual rent received or receivable with expected rent that the property could fetch.
Housing Loan Deductions
If a property is purchased by availing a housing loan, a tax payer can claim the interest paid as a deduction from the taxable rental income computed (refer previous point).
If the interest paid is higher than the rental income(i.e. loss from house property), the same can be set off against other sources of income up to the extent of Rs. 2 Lakhs in a financial year. Balance of loss (if any) can be carried forward (up to 8 years) for set off against future rental income.
Principal repayment can be claimed as a deduction u/s 80C (limit Rs. 1.5 Lakhs). But this benefit cannot be availed if the tax payer opts for the new tax regime u/s 115BAC.
TDS Applicability
The person paying rent to the NRI is liable to deduct tax @ 30% plus surcharge and cess on the rent paid. Further TDS so deducted needs to be remitted within the 7th day of the subsequent month and a return of such TDS deducted and remitted needs to be filed with the Income Tax Department on a quarterly basis.
It would be good practice on the part of the NRI to reconcile the TDS reflecting in his/her FORM 26AS before filing the Income Tax returns.
NRO Vs NRE
Rental income from property located in India must be received only in an NRO account. One can receive it in NRE account if the person paying the rent is also an NRI and he remits the amount of rent from his NRE account.
Refund of Excess TDS
If the income of an NRI does not exceed the basic exemption limit, he/she is not required to file Income Tax Returns in India. However, when there is an excess TDS deducted (which would be the situation in most cases due to the higher TDS rate for NRIs), the excess amount so deducted can be collected as refund from the Income Tax department only on filing the Income Tax returns!
NRI and related tax issues
In spite of shifting base to different geographies, many Indians keep in touch with their roots, tradition, culture and rituals as that has been the way our DNAs are made!
Income tax as a subject by itself undergoes numerous changes every year and it could be quite cumbersome to keep a tab on the innumerable changes. Recent changes to the Income Tax Act changed the way NRIs are taxed in India. With the introduction of the term “deemed resident”, it becomes all the more important to review the residential status every year. The Income Tax law is more stringent now and has more tools to track and tap information to enable effective taxing of the NRIs.
Being an NRI, you have to deal not with one but with at least two country’s tax laws. We understand your needs and can be of tremendous support in keeping tax compliance in India on track. Our NRI services can help you save time and effort, while also minimizing the risk of penalties and legal issues arising from non-compliance with tax laws.
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With a 15 year experience in the Industry, Chocksi decided to commence his practice after the “Entrepreneurial Bug” bit him ! He is the Founder Partner of Chockalingam Unnamalai & Associates, Chartered Accountants.
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