3. Taxation on Rental Income from Property Held by NRI
3.1 Chargeability and Head of Income
Rental income earned by an NRI from immovable property situated in India is taxable in India under the head "Income from House Property". The charging section under ITA 2025 is Section 20 (old Section 22 of ITA 1961). The computation follows the standard annual value mechanism — Gross Annual Value (GAV) minus Municipal Taxes paid equals Net Annual Value (NAV), and the standard deduction of 30% plus interest on housing loan is allowed. Important for NRIs: Even for let-out property, the GAV is determined as the higher of actual rent received and the expected rent (fair market rent or municipal valuation). NRIs who let out property at below-market rent — to relatives, or informally — risk the AO substituting fair market rent as GAV under Section 20(2) [old Section 23(1)(b)]. This is a common audit trigger in NRI property assessments.
For an NRI, rental income is taxable at slab rates under the applicable tax regime. Under ITA 2025, the New Tax Regime is the default for all individuals including NRIs. An NRI can opt for the Old Tax Regime (which allows deductions such as Section 22(1)(b) interest without the 30% standard deduction restriction, and Chapter VI-A deductions) by making a specific election in their ITR — but only if they do not have business income. Key practical note: The 30% standard deduction under Section 22(1)(a) [old Section 24(a)] is allowed under BOTH old and new tax regimes — it is a computation provision for arriving at Income from House Property, not a Chapter VI-A deduction. What is disallowed under the New Tax Regime is the interest deduction under Section 22(1)(b) [old Section 24(b)] for self-occupied property — this is not available under the New Regime. However, for let-out property, interest deduction is allowed without any cap under both regimes. NRIs with let-out property in India can claim the full interest deduction regardless of which regime they choose. NRIs should compute tax under both regimes if they have self-occupied property with housing loan interest.
3.2 TDS on Rent Paid to NRI
When a tenant pays rent to an NRI landlord, TDS is mandatory under Section 393(2). Unlike the resident-to-resident rental TDS under Section 393(1) [old Section 194-IB] which is threshold-based and allows individual tenants to use PAN instead of TAN, TDS on rent to an NRI has no minimum threshold and historically required the tenant to have a TAN.
A tenant paying rent to an NRI must have a TAN (Tax Deduction Account Number) and file Form 144 [old Form 27Q] quarterly — unlike the simpler PAN-based challan (old Form 26QC) that individual tenants use for resident NRI landlords under Section 393(1) [Table 2(ii).D(b)]. This is highly burdensome for individual residential tenants who have never dealt with TDS compliance. From 1 October 2026, Section 397(1)(c)(iii) (as amended by Finance Act 2026) may also extend the PAN-based exemption from TAN to resident individual / HUF tenants for rent payments to NRIs — but this is currently being examined in light of the provision's specific reference to "transfer of immovable property." Until confirmed, tenants should obtain TAN and comply fully. NRI landlords should proactively assist their tenants with TAN registration to ensure TDS compliance and avoid the TDS being treated as not deducted.
| Tenant Type | Monthly Rent | TDS Rate (ITA 2025) | Old Provision | Remarks |
|---|---|---|---|---|
| Any tenant paying rent to NRI landlord | Any amount | 30% on gross rent | Section 195 @ 30% | TDS on entire rent, not just income portion. LDC recommended. |
| With valid Form 128 [old Form 13] (LDC) | Any amount | Rate as per certificate + 4% H&E Cess | Section 395, ITA 2025 (old Section 197) | Effective rate can be 5%–15% depending on actual tax liability. |
A tenant paying ₹50,000 per month rent to an NRI must deduct ₹15,600 as TDS (30% × ₹50,000 = ₹15,000 + 4% cess ₹600), leaving only ₹34,400 for the NRI. The actual tax on the NRI's net rental income (after 30% standard deduction and interest) would be far lower. This makes a Form 128 [old Form 13] / Lower Deduction Certificate practically essential for NRI landlords to receive reasonable cash flows from their tenants.
3.3 Computation of Rental Income — Worked Example
NRI owns one flat in Pune, rented at ₹40,000 per month. Municipal tax paid: ₹12,000 per year. Housing loan interest: ₹1,20,000 per year.
| Computation Step | Amount (₹) |
|---|---|
| Gross Annual Value (₹40,000 × 12) | 4,80,000 |
| Less: Municipal taxes paid | (12,000) |
| Net Annual Value (NAV) | 4,68,000 |
| Less: Standard Deduction 30% of NAV [Sec. 22(1)(a), ITA 2025 / Old Sec. 24(a)] | (1,40,400) |
| Less: Interest on housing loan [Sec. 22(1)(b), ITA 2025 / Old Sec. 24(b)] | (1,20,000) |
| Income from House Property | 2,07,600 |
| Tax at slab — income ₹2,07,600 is below basic exemption limit of ₹3 lakh (New Regime) — Nil tax. Note: Section 87A rebate (₹7 lakh threshold) is NOT available to NRIs — it applies only to resident individuals. The Nil tax here is because income is below the exemption limit, not because of any rebate. | Nil |
| Tax payable (assuming no other income) | Nil |
| TDS deducted by tenant @ 30% + 4% cess on gross rent (₹4,80,000 × 31.2%) | 1,49,760 |
| Refund due on filing ITR | ₹1,49,760 |
This illustrates the core problem — the tenant deducts ₹1,49,760 as TDS on rent (30% + 4% cess on ₹4,80,000 gross rent), yet the NRI's actual tax liability is Nil (income below basic exemption limit — note: Section 87A rebate does not apply to NRIs). The NRI must file an ITR in India to claim the full refund. This is why obtaining a Form 128 [old Form 13] / LDC before rent payments begin is strongly advisable.
6. ITR Filing Obligations for NRI
An NRI is required to file an Income Tax Return in India if their Indian income (before allowing deductions) exceeds the basic exemption limit. There is no special threshold for NRIs — the same ₹2.5 lakh basic exemption applies (₹3 lakh under the New Regime if income-based computation applies).
NRIs file ITR-2 (the ITR form number is retained under ITA 2025 for non-business individual income) (where income is from salary, house property, capital gains, and/or other sources — no business income). Where business income is also involved, ITR-3 applies. The due date is 31 July following the end of the Tax Year (e.g., 31 July 2027 for Tax Year 2026-27) (extended as notified). Filing is mandatory even if the entire tax is covered by TDS, to claim refunds which frequently arise given the high TDS rates on NRI transactions.
NRIs are exempt from mandatory PAN-Aadhaar linkage under CBDT Circular No. 6/2024 if they hold a valid NRI status. However, this exemption requires the NRI to update their residential status as NRI in the PAN database (via NSDL / UTI portal or by updating KYC with their bank). If an NRI's PAN is incorrectly auto-flagged as inoperative (because the system could not match it to an Aadhaar), the NRI faces: (a) TDS deducted at double the normal rate on property sale proceeds; (b) inability to file ITR; (c) refunds blocked. NRIs must proactively verify their PAN status on the income tax portal before any property transaction and obtain rectification well in advance if the PAN shows as inoperative.
Where TDS deducted by the buyer does not fully cover the NRI's tax liability, advance tax must be paid during the Tax Year in which the sale occurs. Under ITA 2025, advance tax liability and interest for deferment are governed by separate provisions: advance tax liability (corresponding to old Sections 208–211 of ITA 1961) requires payment in four instalments (15% by 15 June, 45% by 15 September, 75% by 15 December, 100% by 15 March). Interest for failure to pay advance tax or for shortfall is levied under provisions corresponding to old Sections 234B and 234C of ITA 1961. (The exact ITA 2025 section numbers for these provisions should be verified — they are renumbered under the new Act.) In practice: if the NRI obtains a Form 128 [old Form 13] LDC and the buyer deducts TDS at the LDC rate, the TDS typically covers the entire liability — no advance tax due. But if no LDC is obtained and TDS is at full rate, a refund arises — not an advance tax situation. The advance tax issue most commonly arises when the NRI has multiple income sources in India (rental + capital gains) and TDS on one stream does not cover the aggregate liability. NRIs should compute total Indian income and advance tax position before each instalment due date (15 June, 15 September, 15 December, 15 March).
NRIs filing ITR must link their PAN with Aadhaar only if they have an Aadhaar number. Foreign-passport holding NRIs not holding Aadhaar are exempt from the mandatory PAN-Aadhaar linkage. However, if PAN becomes inoperative due to non-linkage, higher TDS rates apply — NRIs should apply for an exemption from the PAN-Aadhaar linkage requirement where applicable.
Frequently Asked Questions — Rental Income & ITR Filing
NRI Rental Income? Reduce TDS and File ITR Correctly.
Tenants deduct 31.2% TDS on rent paid to NRIs. A Form 128 (LDC) can reduce this significantly. We handle House Property computation, ITR-2 filing, and refund claims.
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