TDS on Rent for NRIs: How Tax on Rental Income Works for NRIs?

Who is an NRI as per the Income Tax Laws of India?

In general, a Non-Resident Indian (NRI) is an Indian citizen or a person of Indian origin who lives outside India. However, for tax* purposes, the Income Tax Act defines specific conditions.
 

A person is considered an NRI if they are an Indian citizen and meet either of these conditions:
 

• They have stayed in India for less than 182 days in the previous financial year.
  

• They have stayed in India for less than 60 days in the previous financial year and less than 365 days in total over the four years before that.
   

If someone does not meet these conditions, they are treated as a resident for tax purposes and must follow the rules applicable to resident taxpayers.

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.

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 7^th 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.