A brief about the topic:
It’s very normal for Indian’s living out of the country to have a house property in India. There are a few reasons before having a house property; the first one is generation of steady cash inflow on a monthly basis and second is very low maintenance cost. Thus, Non Resident Indians living outside India would have a house property for a regular income.
Now the question arises that how to tax the income and where the income would get taxed – in India or outside India?
In this article we will try to answer some of the fundamental queries about the Income from House Property in case of a Non-Resident Individual from a House property located in India. Some of the key aspects such as deduction of TDS by the payer and treatment of the HP income in the hands of the Non-resident Individual become a subject of discussion.
Let’s look at some of the common doubts in relation to the above transaction.
First of all we will understand the taxation aspects with respect to Income from House property. Income earned from letting out house property will be taxed under the head “Income from House property” u/s 22 of Income Tax Act, 1961.
Section 22 of Income Tax Act, 1961, is also applies to Non-Resident Individual who is earning Income from letting out a House property. So, will the income of such house property taxed in the hands of non-resident? Yes, though, the above tax liability is subject to DTAA (Double Taxation Avoidance Agreement) between the country of residence of NRI and India.
Mr. Pulkit (NRI, living in the USA) is owner of a House property in India. He earns a rental income of Rs. 65,000 p.m. which is credited to his NRO (Non-resident Ordinary rupee) account. This income will be taxable in India as per the DTAA between India and USA. (Deptt., 2019)
After reading the provision of Article 6 of the Agreement for avoidance of double taxation of income with USA, it is clear that income arose from House property situated in India will be taxable in India. Hence Mr. Pulkit being a non-resident individual need to pay tax on rental income of Rs. 60,000 p.m. earned by him in India. As the basic taxation rules will be applicable to Mr. Pulkit.
Deduction of Tax at Sources u/s 195 of Income Tax Act, 1961:
Any payment made to a Non-resident by a Indian resident is subject to TDS based upon the nature of income. Since, there is no separate section in Income Tax Act, 1961, TDS on payment made to non –resident for rent 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 nonresident 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.
The income of Non-Resident Individual from House property will be taxable in India subject to DTAA between the contracting state and India. If it is taxable, Rent payer is required to deduct tax at sources (TDS) u/s 195, lower of @31.2 % or whatever the rate prescribed by the ITO based upon the tax liability of that NRI as per DTAA or Income Tax Act, 1961 whichever is more beneficial to the assessee.
Deptt., I. T. (2019, 07 13). Income Tax India. Retrieved July 13, 2019, from Income Tax India: https://www.incometaxindia.gov.in/DTAA/Comprehensive%20Agreements/108690000000000099.htm