Property in India is a dear asset to people. Anyone with the opulence of properties exhibits a show of affluence. The reason behind this significance is the regular financial inflows that can be generated out of renting a property out. In this section, you will find us discussing the taxation rules and the deductions applicable for Indians and NRIs on rental property. Let us head on to it.
What is Rental Income?
Rental income refers to any payment received upon the utilization of property for occupation. The income on a rental property consists of different types of payments including regular rent payment, advance payment and lease cancellation fees. Besides that, a tenant is liable to pay security deposits as well. Renters cannot get the bank the security amount back. While we are pretty alive on the rental income and a decent passive income it makes. It is important to realize the in-depth aspects of this idea which is what we are going to do further in this section.
Rental Property Within the Clutch of Taxation- Tax on Rental Income
Rental income is not a freebie waking up to a taxation-free regime. The Income Tax Act brings about the tax to be applied on the income earned upon the property. Under Section 24, it is implied that the one who rents their property out is liable to pay the taxes as lawful.
It is maintained that the rental income of a property is to be taxed under Section 24 which stays in the hands of the owners. This taxable income is placed under the ‘income from house property’ category. It is to be noted that the rent that is earned on letting out vacant land is not taxable under the ‘income from house property’ category but under the ‘income from other sources. Income from a house is only chargeable on the land that makes up a portion of a building.
The owners are taxed on the rent they receive. Thus, the amount received becomes taxable under the ‘Income from other sources‘ category if the owner sublet any property that has been taken by him on rent. In case the property is gifted by an individual to their spouse, he shall be treated as the owner of the property, except that there is an agreement to live separately. The individual shall be treated as the owner of the property and thus, taxed on the basis of that. This situation applies even if he does not receive the actual rent for that property. It is also implied that the owner shall be taxed if he rents his property out to a minor.
Rental Agreement for NRIs and the Taxation
A Non Resident Indian can rent out a property he has in India. In the case of NRIs, the rental takings can be credited either to the NRE or NRO account. If one does not own an NRE or NRO account then he or she can have the proceeds conveyed abroad. Note that in order to opt for this solution, one needs to have a certificate declaring that all the taxes have been paid. You can consult with a chartered accountant for this process.
A number of NRIs hold possession over premium real estate in India. If they rent out a property in India, then the rental proceeds will be treated as taxable. In this case, the payer of the rent is to deduct the tax at the source. He or she must have a TAN number and then have a TDS of 30 per cent from the amount of rent deducted. The rent payer also has to provide a certificate of TDS to the NRI.
It is the payer who has the liability of deducting tax around his neck. If a payer fails to deduct tax and the NIR does not declare the income and make a tax payment, then the responsibility for such an event will fall upon the payer. So in case, the tenant does not make the deduction of tax at the source, it is sagacious that you file your tax returns and accentuate the tax payment.
How to Calculate Rental Income?
Calculating a rental income is not anything like herding cats. You have to have the payments you received on the rental property. These payments are the ones received within the calendar year for which you are going to file a tax return. For the calculation of rental income, you have to add up all these payments which mean the following-
- Advance Rent- Advance rent or rental advance is the payment made by the lessee to the landlord at the time of the lease agreement. This amount is paid at the beginning of the lease which thereafter is adjusted against the rental payments made by the tenant.
- Rent Payments- Rent payment refers to the total of the apportioning of the payments that have to be made by the tenant.
- Unreturned Security Deposits- Unreturned security deposit is the amount of a security deposit that is held by the landlord after the lessee departs. If the landlord returns the deposit, it needs not to be reported.
- Fees- Fees, here, are the payments received from the landlord. Lease termination fees is an example of that.
- Services- If your tenant agrees to provide any service in the lieu of rent then you will need to put that income is equal to the one month of rent.
You have to total the given payments into your gross rental income. Once you have passed that, you can minus the deduction as well as depreciation to unbag your taxed income.
Rental Income Tax Deductions
Rental income tax deductions entail that you can have the expenses incurred by the rental on tax returns you make as long as they are necessary.
Deductibles in rental income tax are the following-
- Property tax
- Mortgage interest
- Repairs and utilities
- Homeowners insurance
- Cleaning and maintenance
- Advertising
- Homeowners association fees
It must be noted that not all expenses associated with your rental make deductibles. Such costs include expenses such as enhancement, restoration, or adaptation of a place for a different purpose. These expenses cannot be included while you attempt to make deductions for your taxes. However, it is possible to recover the cost of improvements through depreciation. For a comprehensive understanding of the deductibles and if they are deductibles, you can reach out to your tax preparer.
Depreciation and Rental Income Tax Deduction
Depreciation is the type of deduction made over a span of time. In the case of rental properties, depreciation helps you regain both the cost of improvements made to the property and the cost basis of the property itself. As per what the IRS implies, it takes 27.5 years for rental properties to depreciate. You can divide the amount that is paid by you for the purchase of the property excluding the surrounding land by 27.5. Then you have to deduct this amount each from the taxable income. There are many other things that are grouped under the depreciation category including renovations, furniture, flooring, heating and air conditioning and insulation.
Note- You can seek professional advice in order to achieve in-depth knowledge about depreciation deductions on specific improvements.
Rental Income Tax for Indians and NRIs- How Much of Rent is Taxable?
You are allowed to make deductions of the municipal taxes payable from the rent received or receivable. The law enables you to deduct the taxes over the rent that has not yet been ascertained by you, given the taxability of rent is deployed on the basis of amassment. This deduction is subject to the conditions implied as per the law. This finally leaves you with the annual value. You are allowed to have a standard deduction of 30% made from the annual value.
The tax that is deductible from the rent payable for NRIs stands at the rate of 31.2%. This tax rate has to be deducted from the gross rental income. If the NRI landlord holds the certificate maintaining that his income earned from India totals below the exemption limit, then there will be a lower deduction. The deductor is required to make lower TDS deductions as per the certificate stating under Section 197 for a low TDS that is received under Section 197.
How to Deduct Tax?
To start with the tax deduction, the tenants have to get a Tax Account Number (TAN) through the NSDL website. After the number has been fetched, the tenants can make a tax deduction every month. The remaining amount shall be payable to the landlord. Know that the tax that is deductible at source from the rent that has been paid in this calendar month has to be paid by the seventh of the calendar month.
It is important to pay taxes on time or it ends up being troublesome repercussions in the guise of effectuation under Section 276B of the Income Tax Act, 1961. This prosecution may direct you to imprisonment that falls between the span of three months to seven years. It must also be acknowledged that you are held liable to pay a penalty equivalent to the tax that is not deducted. This ramification is maintained under Section 271C of the Income Tax Act upon the failure of tax deduction.
For an Instance- A Glance into Rental Income Tax Deduction
We have brought you an example illustrating how the deduction of rental income payable to NRIs works. Take a look to grasp a better understanding.
Suppose that Mr Sharma is an NRI who owns a residential property in New Delhi. He has rented out his property to Mr and Mrs Lamba with an amount of Rs 15,000 as a monthly rental payment.
Mr Lamba moved into the property with his family in the month of May 2019. He then came to know that Mr Sharma is an NRI. Now that he started making monthly rents, he deducted 31.2% from the rent agreed upon.
He deposited the deducted amount in his TAN. He paid the rent for the month of May 2019 on 1 June 2019. He deducted Rs 4680 from the rent and deposited it to his tax account via online route by 7 July 2019.
The remaining amount from the rent that was a sum of Rs 10, 320 was credited to the account of the landlord online.
Filing Returns- How Is It Done?
Tenants must maintain filing returns within the duration of a month. A tenant has to make sure he files returns for TDS that is paid on went to an NRI during the month from the end of each quarter. For instance, for the TDS on rent that is paid for the month of April, May and June 2020, the returns must be filed by 31 July 2020. Besides that, the tenant must have a TDS certificate as per Form 16A and provide it to the landlord within a span of 15 days starting from the due date of filing the quarterly TDS return.
You must note that filling Form 15CA on the income tax platform is mandatory every time the rent is paid. In case the total rent that is paid goes more than Rs 5 lakh, the tenant must get Form 15CB from a chartered accountant. Make sure that you confirm whether the landlord is an NRI or not. It is your responsibility to keep everything in your knowledge in order to proceed with the taxation regime sincerely. Gathering the necessary information will prove to be helpful to you in deducting TDS on the rent paid and keep up with the Income Tax Act.
Rental Income Taxation and Coronavirus- What Changed?
The upshot of the Coronavirus pandemic highlighted the before and after differences in the rental income taxation. The number of tenants including those who were employed in established companies moved back to their places, all thanks to the work from the home version of offices. The ones who didn’t move back and continued living in their rented places asked for a waiver on a portion of their rent from the landlord. It was because of the economic turbulence caused by the virus. Now that it has impacted the rental income of a large section of landlords, it can be speculated that a new revision will be done on the basis upon which the rental income should be taxed now.
Rental Agreement for Indians and NRIs
The entire idea behind this section was to understand the rental income deduction and taxation rules to keep in mind when heading to the rental agreement for NRIs or Indians. As a property owner, it is crucial to be aware of the regulations and conditions that are established for taxation on rental income. Whether it is a rental agreement for Indians or NRIs, it is advised that the tenants confirm everything about the owner in order to optimize the taxation rules.
