NON RESIDENT- TAXABILITY OF RENTAL INCOME EARNED IN INDIA

           NON RESIDENT- TAXABILITY OF RENTAL INCOME EARNED IN INDIA

1. As per the provisions under the Indian Income Tax Act, 1961 any Income that occurs or arises in India is taxable in the hands of both Resident as well as Non-Resident. Thus, as per the Income Tax Act, if a Non-Resident has a property located in India, he is liable to be taxed in India on the rental income from that property as that income occurs or arises in India.
2. The owner of this property who is Non-Resident in India, would obviously be resident in some other country and would therefore, he may be liable to tax in that country on rental income from this property located in India. Thus, this may lead to double taxation. To avoid this double taxation we need to see whether there is any Double Taxation Avoidance Agreement (DTAA) between India and the country of which the other person is a resident.
3. If there is no DTAA between India and the other Country, India has the right to tax this rental income in India in accordance with the provisions under the Indian Income Tax Law. Under this situation, it depends on the local taxation law of the other country, if there are any provisions regarding avoidance of double taxation. To illustrate, in case of Indian Residents there is Section 91 of the Income tax Act, which seeks to avoid double taxation in the cases of india residents on account of income earned in countries with which India does not have any DTAA. This is done through the credit mechanism(that means income will be taxed again but credit will be given to taxes paid in the source country). It is likely that the other country may also have similar provisions. Thus, double taxation would be avoided according to local laws of the other country. If there are no such laws in the other country then double taxation cannot be avoided in respect of rental income earned from property situated in India as the Indian right to tax this income is well established under the Indian Income Tax Law.
4. However, in case there is DTAA between India and the other country, one needs to see the DTAA to first examine whether India has a right to tax this rental income. In all DTAAs that India has signed, the source country (in this example, it is India) has a right to tax income arising from immovable property located in that country. Now the question is whether the right of India (source country) to tax income from immovable property located in India is an exclusive right, or whether this right is also there with the other country in which this Non-Resident is a Resident.
5. Most of the DTAAs that India has with other countries allow both India (source country) as well as the other country (resident country) to tax the rental income from immovable property located in India (source country). However, there are a few exceptions like DTAAs with Bangladesh, Greece and Egypt, whereby only the source country where the immovable property is situated has the right to tax the income arising from such property. So in these cases where DTAA confers the right to tax to only the source country, only India would have the right to tax rental income from immovable property since the property of the Non-Resident  is situated in India. Thus, In these instances double tax is automatically eliminated.
6. For the DTAAs which also give the other country (resident country) the right to tax immovable property located in India, one needs to see the Article on Elimination of Double Taxation in the relevant DTAA, This Article would state how India or the other country would eliminate double taxation for their residents. Since in the case, the Non-Resident is Resident of the other country, we need to examine how the other country has agreed to remove double taxation in the DTAA, some countries would follow the exemption method (that means the other country agrees not to tax that income again) or some countries follow credit mechanism (that means the other country would give credit for the taxes paid in India), Thus, double taxation would be eliminated in accordance with the provisions of the relevant DTAA.
7. Thus, income derived by a Non-Resident from immovable property located in India is to be taxed in India in all cases, in accordance with Indian domestic taxation law. Under the Income tax Act, such income is to be taxed under the head “Income from House Property”.
8. Further, the provision of withholding tax or Tax Deducted at Source (TDS) will also apply on such rental income of Non-Resident. The person paying the rent to the Non Resident is required to withhold tax @30% in accordance with Section 195 of the Income Tax Act.  The tax amount so deducted needs to be deposited in the Government account by the deductor (payer) as per the timelines specified below:

• In Case the rental amount is paid in the month of March then on or before 30th April.
• In any other case, on or before the 7th day of the succeeding month.

The deductee also needs to issue a certificate in form no 16A in each quarter to the Non resident through filing TDS Returns and downloading Form 16A from TDS portal “Traces”.

Further, in case the non-resident deductee considers that TDS at 30% is more than his actual tax liability for the year, he may apply for a lower deduction certificate (LDC) u/s 197 to the assessing officer, No application for LDC can be made by the taxpayer in the absence of PAN.

9. A refund, if required, can be claimed by the non-resident letting out property in India, by filing   a tax return in India for which he needs to have a PAN number.

       OTHER ASPECTS

If there is a loss arising under head House Property, it can be set-off with incomes under other heads upto two Lakh rupee only. If the loss cannot be set-of with incomes under other heads, it can be carried forward for a maximum of 8 years and set-off against house property income arising in future years.

The rent proceeds will have to be deposited in the NRO Account of the Non-Resident owner of the property. It cannot be deposited in an NRE account, unless the person depositing the amount is also an NRI and the rental amount is being transferred from his NRE account.