How is an NRI taxed on India rent income?

—Name withheld on request

Rental income from the property situated in India is taxable in the hands of the owner of the house. The taxable rental income is calculated  as follows: 

Gross Annual Value less municipal taxes gives the net annual value (NAV). Reduce standard deduction of 30% of NAV and interest on housing loan from this, which will then be the taxable rental income. 

Gross Annual Value is higher of the following: 

-Amount at which the property might reasonably be expected to be let out; or 

-Actual rent received or receivable. 

In other words, Gross Annual Value compares the actual rent received or receivable with the expected rent that the property would fetch. 

If there is loss under the head ‘Income from house property’ from let out property due to interest expenditure on housing loan being higher than NAV less 30% standard deduction, such loss can be set off against income under other heads of income only to the extent of ₹2 lakh and balance can be carried forward up to 8 years for set off against future income from the house.

Also, any repayment of the principal amount against a housing loan taken from eligible lenders for the acquisition of such property is also eligible for deduction under Section 80C (maximum deduction under this section is ₹1.5 lakh). But this deduction is not available if the individual opts for benefit of a lower tax rate under the new tax regime under Section 115BAC. 

If you do not have any other income in India or total taxable income after considering taxable rental income for two months is below ₹2.5 lakh, there will be no tax liability in India. If your total taxable income exceeds ₹2.5 lakh, you will be liable to pay tax in India and file Income Tax Return in India. Further, as you qualify as a ‘Non-Resident’ of India, the NRI tenant may deduct income tax at source at the rate of 30% (plus applicable surcharge and health and education cess) before payment of rent in your account. 

If such rental income is also taxable under domestic tax laws in Australia, you may claim credit for taxes paid in India under the India-Australia Double Tax Avoidance Agreement (DTAA) in the resident country i.e. Australia. 

Sonu Iyer is tax partner and people advisory services leader, at EY India.