Dubai: If you are a Non-Resident Indian (NRI) who has rented out a property to tenants in India, you may be wondering what the tax is on the rental income you earn.
When it comes to taxation, the government of India seeks taxes on almost all the earnings made by resident Indians as well as non-resident Indians within the country.
According to Indian law, any individual whose income exceeds a specific slab (as per the tax brackets existent during that financial year), irrespective of their citizenship status, is required to file an income tax return in the country.
NRI rental income taxed same as resident
“While income from a property which is located in India is taxable, keep in mind that the tax being calculated is just as much for a resident Indian,” said India-based tax consultant Brijesh Meti.
“If an NRI decides to rent out their India-based property, the rent proceeds of these are credited to the NRE accounts after paying taxes and can easily be repatriated.”
(While the interest on a Non-Resident External Rupee (NRE) account is exempt from tax, the interest on a Non-Resident Ordinary Rupee (NRO) account is subject to normal taxation in India.)
If an NRI decides to rent out their India-based property, the rent proceeds of these are credited to the NRE accounts
How are taxes on rental income calculated?
But before you understand how to calculate taxable rental income, let’s first see how much rent is tax- free? As per law, you will not pay tax on rental income if Gross Annual Value (GAV) of your property is below Rs250,000 (Dh11,097). But if rent is your sole source of income then you might have to pay taxes.
Gross Annual Value (GAV) is the total rent you earn in a year. The tax on rental income is calculated on Gross Annual Value (GAV) after deducting municipal taxes, standard deduction of 30 per cent, and home loan interest, if any.
(A standard deduction of 30 per cent implies that as you qualify as a ‘Non-Resident’ of India, the tenant may deduct income tax at source at the rate of 30 per cent before payment of rent in your account.)
How do you calculate taxable income on rents?
Here’s how you can calculate how much of the rent you earn in a year (GAV) can be taxed. Let’s say as a homeowner you receive Rs30,000 (Dh1,331) per month rental income and you end up paying an approximate municipal tax of Rs30,000 annually, which varies according to property size.
Also, let’s also assume that you have taken a loan on the house, wherein you are paying a home loan interest of Rs80,000 (Dh3,551). Then your taxable income will be calculated as follows:-
Step #1: Gross Annual Value (annual rent) = Rs360,000 (30,000 per month) (Dh15,980)
Step #2: Deduct Municipal Taxes of Rs30,000 (Dh1,331) from Gross Annual Value
Step #3: Net Annual Value [Gross Annual Value (minus) Municipal Taxes] = Rs330,000 (Dh14,648)
Step #4: Subtract ‘Standard Deduction’ of 30 per cent: 30 per cent of Rs330,000 = Rs99,000 (Dh4,394)
Step #5: Total Deductions: Add ‘Standard Deduction’ (Rs99,000) and Home Loan (Rs80,000) = Rs179,000
Step #6: Taxable Property Income: Net Annual Value – Total Deductions [Rs330,000 (minus) Rs179,000] = Rs151,000 (Dh6,702)
However, in this case you have to pay tax on your rented property because the GAV of a property is Rs360,000, which is higher than Rs250,000. If the property rent is Rs15,000 (Dh665) per month, meaning GAV is Rs180,000 (15,000 (multiply by) 12) (Dh7,990) you do not need to pay rental income tax.
What if home loan interest is higher than rental income?
“If your home loan interest is higher than your rental income, then this will result in you declaring a loss or a negative balance under the ‘Income from house property’ section when filing your tax returns,” Meti explained, while also further adding what can be done in such a case.
“Such loss can be set off against income under other heads of income only to the extent of Rs200,000 (Dh8,877) and the 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 tax deduction (maximum of Rs150,000). But this deduction is not available if the individual opts for benefit of a lower tax rate under the new tax regime,” he added.
Here are expert tips to save tax on rental income
According to India-based tax consultant and financial planner Abin Wilson, you can save tax on rental income by following the given tips:
• Exclude maintenance charges from the rent received
“One of the easiest ways to save tax is to exclude maintenance charges from the rent received. Some people include maintenance charges in the rent, which increases the whole rent amount; in a way, it grows tax on the rent income,” said Wilson.
For example, if you are charging a rent of Rs30,000 (Dh1,331) and have included Rs5,000 (Dh221.95) as maintenance charges, you will pay tax on the total Rs30,000. However, you can save tax on Rs5,000 by excluding such costs from maintenance charges.
For this, Wilson suggested maybe writing a one line in a rent agreement stating that the ‘tenant can pay maintenance directly to society association’.
One of the easiest ways to save tax is to exclude maintenance charges from the rent received
• Save on tax on rental income when co-owning property, cutting costs
“If you decide to purchase a property jointly with a family member you trust (husband, wife or parents), you can save on tax on rental income. In such a case, the rental income is divided into two, and you can save tax on rental income proportioned to the other family member,” Wilson said.
“You can deduct also municipal taxes from rental income tax. But remember that all these municipal taxes have to be paid by the owner of a property, not a tenant. Such payments will reduce your rental income and thus reduce your tax liability.”
Wilson suggested a way you can lower rental income and the resultant higher taxes you if you are renting out a ‘furnished’ property by including additional services like internet or cable connection costs in the rent.
“When renting out a ‘furnished’ property, you can ask the tenant to pay the additional charges separately and not include them in rent. This will lower down the rental income, and you will have to pay lower tax on it,” he added.
If you have rented a property to someone, you must go through the Rental Income Tax Laws in India. Having a clear understanding of these laws can help you save tax on rental income.
If you have rented a residential property which has an active home loan, you can claim the tax on rental income deduction against the home loan interest amount that you have paid in the entire year. On the flip side, if you own the property jointly with someone, it can help you reduce your tax on rental income.
As mentioned above, if you do not have any other income in India or total taxable income after considering taxable rental income for two months is below Rs250,000 (Dh11,097), there will be no tax liability in India.
However, if your total taxable income exceeds Rs250,000 (Dh11,097), you will be liable to pay tax in India and file Income Tax Return in India.
“Also, if such rental income is also taxable under tax laws in the country you are residing in abroad, you may claim credit for taxes paid in India under the Double Tax Avoidance Agreement (DTAA) in the resident country,” added Meti. But UAE does not tax any personal income and has a DTAA with India.