Income from House property of Non-Resident

Tax on Income from House property of Non-resident:

It is very common for Indian's living abroad to own a house property in It is It is very common for Indian's living abroad to own a house property in India. This is because of the fact that House Property income generates a steady cash flow on a monthly basis with minimum or low maintenance cost. So, NRI living abroad would choose this option for earning a regular income. There arises a complex part on how to tax the above income and where the income would get taxed. So the essay answers some of the basic questions concerning the Income from House Property if it is earned by a Non-resident from a House property located in India. Some of the important aspects such as deduction of TDS by the payer and treatment of the above income in the hands of the Non-resident becomes a topic of debate. Let's look at some of the common doubts in relation to the above transaction.

Fist let us go through the tax aspects with respect to Income from House property in general. Income earned from letting out house property will be taxed under the head "Income from House property" u/s 22 of Income Tax Act. This charging section also applies to Non-Resident who are earning Income from letting out a House property. So, will the income of such house property gets taxed in the hands of non -resident owner...?

Yes, however, the above tax liability is subject to DTAA between the country of residence and India. Let's look at this scenario from an example.

Mr. A (NRI, living in the USA) owns a House property in India. He earns a rental income of Rs. 60,000 per month which gets credited into his NRO (Non-resident Ordinary rupee) account. This income will be subject to tax in India as per the DTAA between India and USA. According to Article 6 of the above DTAA, it read as follows, " Income derived by a resident of a Contracting State (Mr. A will be a resident of USA ) from immovable property (real property), including income from agriculture or forestry, situated in the other Contracting State (in this case, India) may be taxed in that other State". So, from the plain reading of the above provision, it can be clearly understood that income derived from Immovable property situated in India will be subject to tax in India. Hence Mr. A being a non-resident in India need to pay tax on rental income of Rs. 60,000 p.m. earned by him in India. Since the basic slab limit of Rs. 2,50,000 will be applicable to Mr. A, he will be subject to tax after exhausting the basic slab limit.

Applicability of TDS 195:

Any payment made to a Non-resident will be subject to deduction of tax at source based on the nature of income. Since, payment of rent to non -resident is not covered under the particular section, TDS will be deducted u/s 195 @31.2% (including cess) on such payment made to non-resident.

Will tax need to be deducted irrespective the amount of Rental expenses…?

According to sec 195(2), in a case where the rent payable to non-resident is not chargeable to tax or chargeable to tax at a lower rate than 31.2%, assessee should mandatorily make an application to the concerned ITO(TDS) for deduction of tax at a lower rate or NIL deduction. However, application u/s 195(2) can be made by the payer, whereas sec 195(3) allows the payee (non-resident) to make an application to ITO(TDS), for the purpose of avoiding any future hassle. It is important to note that the deduction of tax @31.2% was only prescribed u/s 195 in order to safeguard the revenue from the loss of a non-collection of tax. Due consideration should be given to sec 90 which deals with whether income of such non-resident will be taxable in India or not and the beneficial provision attached along with it. Hence, it becomes a priority to determine whether the income of such non-resident is taxable in the first place according to DTAA between the country of residence and India.

In our given example Mr.A' s income is fairly on the higher side considering the rental income per month, however it practical to make an application u/s 195(2) or sec 195(3) to determine the exact amount of TDS to be deducted u/s 195. This will bring clarity in determining the tax liability of the non-resident and to avoid an unnecessary claim of a higher amount of refund by such non-resident in the future. The important point to be noted in here that order passed u/s 195(2) or sec 195(3) will not be equated with assessing order or any order of higher authority, it is will be treated as a mere order to the help in determining the tax liability of the assessee. The above transaction, if necessary, will be subject to scrutiny by the AO.

Conclusion:

The income of Non -resident from House property will be taxable in India subject to DTAA between the contracting state and India. If it is subject to tax, Payer is required to deduct TDS u/s 195 @31.2 % or at a lower rate prescribed by the department based on the tax liability of such Non -resident as per the DTAA or IT act whichever is more beneficial to the assessee.