When renting a property, tenants have specific responsibilities to fulfil. Of these, a tenant’s most important obligation is the payment of rent to their landlords. The process can become complex if the landlord is a non-resident Indian (NRI). More importantly, tenants should be aware of the tax implications. As per the Income Tax Act of 1961, any individual or entity paying rent to an NRI should deduct TDS (tax deducted at source) from the rent. Failure to comply with these tax regulations may lead to legal consequences.
In India, there is a growing trend of NRI investment in real estate. Many NRI looks at purchasing premium residential properties and renting them out to earn substantial rental income. It could pose challenges for tenants renting such properties as the landlord resides outside India. Thus, prospective tenants must understand the legal and financial obligations to avoid hassles when renting a property from an NRI landlord. In this guide, we share some useful taxation-related information and tips for tenants paying rent to NRI landlords.
Who is an NRI landlord in India?
Persons who are of Indian origin or a citizen of India but not a resident of India are called NRIs. An NRI who owns a residential or a commercial property in India are referred are NRI landlords.
Legal obligations
#1. Sign a formal rental agreement
A property owner who decides to rent out the property must sign a contract with the tenant, known as the rent agreement. It is a legally binding document that enatils the terms and conditions that both parties must fulfil. The rent agreement should be registered if the tenancy is more than 11 months. A tenant renting out a property from an NRI landlord should ensure the rent agreement includes key details such as the rent amount and security deposit payable, rate of increase in rent during renewal, payment mode, maintenance charges, conditions of termination of the agreement and notice period for vacating the house.
#2. Check ownership documents
Prospective tenants planning to rent a property should ask for specific documents, such as a title deed and occupancy certificate, to prove the property ownership of the landlord. Further, in the case of NRI documents, tenants should ask for documents such as:
- Copy of valid foreign passport
- Copy of valid Indian Visa (long-term visa, valid for a remaining period of more than 182 days)
- Copy of Foreigners Registration Office (FRO) permit
- Overseas address proof
- Indian address proof
Further, tenants should remember to get the receipts of the security deposit paid to the landlord and previous utility bills paid by the landlord.
Communication
The tenant is liable for the upkeep of the property and undertake necessary repairs. Since the landlord may not be able to visit the property regularly, it is the tenant’s responsibility to report any maintenance issues to their landlord. Otherwise, the tenant may have to pay for any damages to the property. Further, to prevent any disputes or misunderstandings, tenants should ensure they maintain proper records of communication with their NRI landlords. This includes rent agreements, maintenance requests and any other communication with the landlord.
When renting the property owned by an NRI landlord, the tenants should check if the landlord has appointed a representative in India who can coordinate on their behalf for any legal or maintenance issues. Tenants should to maintain regular communication with the landlord via phone, WhatsApp, email, etc.
Financial considerations: Mode of rent payment
The main responsibility of every tenant is the timely payment of rent. Non-payment of rent or delays could become a reason for eviction of the tenant by the landlord. Since the landlord resides outside India, the tenant can opt for digital payment methods. They can make a financial transfer to the NRI’s Non-Resident Ordinary (NRO) account. An NRO account is a bank account available for NRIs to manage their income and deposits earned in India, such as rent, dividends and pensions, while ensuring easy repatriation of funds abroad.
Taxation matters
#1. Deduct TDS on the rent
A tenant paying rent to an NRI landlord in India is required to deduct TDS. According to Section 195 of the Income Tax Act, 1961, a person making a payment by way of interest or any other amount (not under the head ‘Salaries’) to an NRI or a foreign company when making a payment either through cheque, cash or any other mode, must deduct income tax at the applicable rates.
#2. Get a TAN Number
The Tax Deduction Account Number or the Tax Collection Account Number (TAN) is a 10-digit alphanumeric number issued by the Income Tax Department. The TAN is required to deduct TDS on rent payments. One can apply for a TAN number online at the NSDL website.
#3. Determine tax amount to be deducted
The tax must be deducted by the tenant irrespective of the monthly rent amount. That is, if a tenant pays Rs 20,000 per month or Rs 50,000 as rent to the landlord, they must deduct tax at the applicable rate before making the payment.
Rate at which TDS must be deducted
The rate at which the tax must be deducted will be based on the income of the NRI landlord. The basic TDS to be deducted by the tenant is 30%. Considering applicable surcharges and cess, the rate will be 31.2%. This rate is not applicable if the NRI landlord has a certificate stating that their total income in India is below the specified exemption limit. The deductor will need a certificate under Section 197 of the Income Tax Act for lower TDS received under Section 197, as per the order of the Assessing Officer (AO). After the TDS payment, the tenant is required to fill the Form 15CA and submit online to the Income Tax Department.
See also: TDS on rent under Section 194I
#4. Issue a TDS certificate
The tenant must issue a TDS certificate, which is Form 16A, to the NRI landlord within 15 days of the end of every quarter. The landlord will use the TDS certificate to file income tax returns. Tenants should pay TDS to the authorities within seven days from the end of the month when the deduction was made.
What is the penalty for not paying TDS?
The TDS deducted from the rent should be deposited by the seventh of the following calendar month. In case the tenant fails to pay the TDS on time, it can lead to prosecution as per Section 276B of the Income Tax Act, 1961, which means imprisonment ranging from three months up to seven years. If a tenant does not deduct tax from the rent paid to an NRI landlord, a penalty equal to the TDS amount will be applicable under Section 271C of the Income Tax Act.
Housing.com News Viewpoint
Tenants residing in property owned by NRI landlords should be aware of the taxation matters, that is, the deduction of TDS from rent. They also approach a tax expert for better clarity on these aspects. Further, they should adhere to the rent agreement terms and maintain open communication with the landlord to prevent any hassles.
FAQs
Why is TDS applicable on rent paid to NRIs?
TDS is deducted on the rent paid to NRIs as per the applicable tax laws, as it allows the government to collect taxes on income earned by NRIs from sources within India.
Can the TDS rate on rent paid to NRI be reduced?
The TDS rate on rent paid to NRI can be reduced if the NRI landlord obtains a certificate from the Assessing Officer for a lower rate.
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