NRI Rental Income Tax: What the Tenant and Landlord Both Need to Know

Rental income from Indian property is one of the most common income types for NRIs, and one of the most consistently mis-handled. Tenants assume the same 10% TDS that applies to resident landlords works here. It does not. NRI rental income falls under Section 393(2) (earlier Section 195 under the 1961 Act), not Section 194-I, and the compliance requirements are entirely different. Here is what both sides need to know.

How Rental Income Is Taxed for NRIs

Rental income from an Indian property is taxable in India regardless of where the NRI resides. It is computed under "Income from House Property" in the same way as for residents:

1. Gross Annual Value (GAV): The actual rent received or receivable (or fair market rent if higher, per Section 23).
2. Less: Municipal taxes actually paid by the owner during the year.
3. = Net Annual Value (NAV)
4. Less: Standard deduction of 30% of NAV (this is a flat deduction, no receipts needed).
5. Less: Interest on home loan under Section 24(b) (no cap for rented property, unlike the Rs 2 lakh cap for self-occupied).
6. = Taxable income from house property

The taxable income is then taxed at the NRI's applicable slab rates. For most NRIs, rental income alone pushes them into the 30% bracket.

TDS: The Tenant's Obligation

When the landlord is an NRI, every rent payment triggers Section 195 compliance for the tenant:

• Rate: 30% plus applicable surcharge and 4% cess on the gross rent (before any deductions). Effective rate is typically ~31.2%.
• TAN: The tenant must obtain a TAN via Form 49B before the first rent payment. See our TAN application guide.
• Deposit: TDS must be deposited via Challan ITNS-281 by the 7th of the following month.
• Return: File Form 144 (earlier Form 27Q) quarterly.
• Certificate: Issue Form 131 (earlier Form 16A) to the NRI landlord within 15 days of the Form 144 due date.

If the tenant does not deduct TDS, they become personally liable for the amount plus interest at 1% per month. Many individual tenants are unaware of this obligation, especially when they do not know their landlord is an NRI.

The Over-Deduction Problem

TDS at 30% on gross rent almost always exceeds the NRI's actual tax liability. Consider an NRI with:

• Monthly rent: Rs 50,000 (annual: Rs 6,00,000)
• Municipal taxes: Rs 20,000
• Home loan interest: Rs 3,00,000

TDS deducted by tenant: Rs 6,00,000 x 31.2% = Rs 1,87,200

Actual taxable income: Rs 6,00,000 - 20,000 (municipal) - 1,74,000 (30% standard deduction) - 3,00,000 (loan interest) = Rs 1,06,000

Tax on Rs 1,06,000 at the new regime rates: approximately Rs 5,300 (within the basic exemption limit for most NRIs).

The NRI has Rs 1,87,200 deducted as TDS but owes only Rs 5,300 in actual tax. The gap of Rs 1,81,900 is recoverable only by filing an ITR or by obtaining a Form 13 lower deduction certificate in advance.

Two Remedies for Over-Deduction

Option 1: Form 128 (Proactive)

Apply for a Form 128 (earlier Form 13) lower deduction certificate under Section 395 (earlier Section 197) before the rental year begins or at the start of the tenancy. The Assessing Officer reviews the actual income computation and authorises the tenant to deduct at a specified lower rate (sometimes nil). This avoids the cash flow problem of TDS lock-up entirely.

Option 2: ITR Refund (Reactive)

File an ITR claiming the TDS refund for the financial year. The ITR reports the actual house property income after all deductions and claims credit for TDS. The excess is refunded, typically in 3-6 months. The NRI also earns statutory interest under Section 244A on the refund for the period of delay.

Property Managed by an Agent or Family Member

Many NRI landlords have a property manager (often a family member) who collects rent on their behalf. The TDS obligation does not shift to the agent. It remains with the tenant. The tenant must deduct TDS even if they pay rent to the NRI's representative in India. The NRI should inform the tenant of their non-resident status and ensure TDS compliance from the start of the tenancy.

Repatriating Rental Income

Rental income credited to the NRI's NRO account can be repatriated abroad within the USD 1 million annual limit, subject to Form 145/146 compliance. Rental income is classified as "current income" for repatriation purposes and is generally straightforward once TDS certificates are in order.