It’s better for NRIs staying abroad for a long time to let out their residential flat in India. For one, it takes care of its maintenance and other local expenses and secondly, a steady income is generated which could help with specific financial goals.
As an NRI, there are two aspects to make the most of your rental earnings. One is pertaining to the laws governing the rental income (including its tax consequences). The second relates to the investment process to channelize such income towards meeting a definite financial goal.
A) LAWS GOVERNING THE RENT
First of all, let’s understand the rules and regulations governing the rentals.
How can NRIs receive their rent?
Money can be transferred by the tenant to a Non-Resident Ordinary (NRO) account of the NRI. As per regulations, up to $1 million of NRO funds can be repatriated in a financial year.
Alternatively, it can also be remitted directly to the foreign bank account of the NRI landlord. So, for instance, a Canada-based NRI can ask for rent of his Bengaluru flat to be credited to his Canadian bank account.
Before repatriating the money, however, his tenant must submit Form 15CA online to the Income Tax Department. In some cases, Form 15CB might have to be submitted beforehand, in which a Chartered Accountant certifies details of the payment including the TDS rate, applicable DTAA (if any) and other details regarding nature and purpose of the remittance.
Once a signed printout of Form 15CA and 15CB is submitted to the authorized banks, remittance is allowed.
What’s the tax rate?
Since the rental income is earned in India, tax is payable in India as per the marginal income tax rate applicable for NRI. Once you compute income from house property as per tax laws, add it to your income from various heads - salary, capital gains and other sources - to arrive at the total income and the applicable tax slab rate.
If the total income of NRI including the rental income is less than Rs 2.5 lakh, no taxes are applicable (see table). Furthermore, there is a 4% education cess and surcharge applicable (if any) on the base tax rates.
It is important to note that rental income is taxed on an accrual basis and not a receipt basis.
What about TDS rates?
There is a compulsory TDS of 31.2% that needs to be deducted by the tenant from the rent every month. The tenant has to obtain a TAN (Tax Deduction and Collection Account Number) and later deposit the TDS amount while also providing a TDS certificate to the landlord.
If TDS amount is more than your actual tax liability, you will get a tax refund after filing your returns. However, if you want to avoid the refund process altogether, you can apply for a certificate for deducting TDS at a lower rate with the Jurisdictional Assessing Officer of the Income Tax department. After this certificate is received by the NRI, the tenant can deduct TDS at the agreed rates and deposit it against the NRI’s PAN.
How to compute income from house property that is let out throughout the year?
The first step is to determine the gross annual value of the property. It is higher of the actual rent or standard rent the property might be expected to fetch in the locality. Any municipal taxes (eg property tax) during the year are allowed as a deduction to arrive at Net Annual Value (NAV) of the property.
From the NAV, 30% can be deducted straight-away as a standard deduction for expenses towards repairs and maintenance. In addition, interest repayments on home-related loans up to Rs 2 lakh in a financial year can be deducted to ultimately determine the income from house property for tax purposes.
Can you set-off losses?
NRIs can report losses from house property if their interest payments are more than their rental income in a given year. As per tax provisions of the existing tax regime, NRIs can set-off losses of up to Rs 2 lakh from house property against income from other heads in the first financial year. The remaining loss can be carried forward for up to eight succeeding years and set-off only against income from house property.
For instance, if the annual rental income of an NRI is Rs 4 lakh, while interest payment on the loan is Rs 7 lakh, he will report a loss of Rs 3 lakh (7 minus 4) ignoring other deductions. In the first year, only Rs 2 lakh of loss could be set-off against income from other heads including that of salary. However, the remaining Rs 1 lakh of loss can be carried-forward for set-off against property income in the future years. However, consult your Chartered Accountant to decipher the impact of choosing the new tax regime without exemptions.
What is a deemed rent?
If an NRI owns more than one residential property, one will be supposed to be self-occupied, while the other deemed to be rented out. While there will be no tax on the self-occupied property, fair rent will be estimated for the property deemed to be let out and taxed accordingly.
In other words,
If you have one residential house in India and it is not given on rent, it will be deemed to be self-occupied and there will be no tax liability for you.
If you have a house in India and have given it on rent, then the rental income will be taxed for the year.
If you have two houses and have given one of it on rent, then the other will be deemed to be self-occupied. You will have to pay tax only on the rental income of a single property.
If you have two houses and have given neither on rent, then one will be deemed to be self-occupied, while the other deemed to be let out and taxed based on the valuation of rent. However, you will have the choice to choose any of the properties as self-occupied for the purpose of taxes.
Will there be a double-tax?
Not if your country of residence has a DTAA (Double Tax Avoidance Agreement) with India. There are about 90 countries with which India has a DTAA including the US, UK, Canada, Australia, Singapore, Germany and the UAE. Generally, as per these agreements, the country where the property is situated gets the taxation rights on rental income.
B) INVESTING RENTAL EARNINGS
How to get started on investing?
You can invest in units of mutual fund schemes on a fully repatriable basis or a non-repatriable basis. In case of the latter, the principal is non-repatriable but the income distributions are repatriable.
To invest on a repatriable basis, you need to have an NRE, while a NRO account is required for investing on a non-repatriable basis.
For investing in India, ensure you make a rental agreement to have the rent credited to your NRO account. This in turn will facilitate investments into India.
You also need to complete the KYC process to invest.
How much to invest?
There are many house-related expenses in India which you might have to deal with. For instance, house maintenance charges and repairs. You need to arrive at a fair annual estimate of such expenses and deduct it from your annual rental receipts.
Furthermore, thanks to 31.2% TDS, you might not get the entire amount. So, work out your actual tax liability and post-tax rental income that could effectively be invested.
Where to invest?
First of all, you need to have an investment plan for all your financial goals. So, if you want to invest for your retirement, then figure out the target retirement corpus. Accordingly, you can arrive at an asset allocation and the extent of monthly investments required in mutual funds to achieve the goal.
You can either divert the rental income in India as part of your greater investment plan or use it to chase separate financial goals.
How to invest?
Having the money parked in a bank account earns you a trifle - about 3% annually. Alternatively, if you invest in an equity fund via a SIP, you can potentially earn about 10-12% per annum over the long-term. A rental income of Rs 40,000 investing in equities (SIP) over a period of seven years could grow to Rs 52 lakh as against Rs 37 lakh, if it were lying in your bank account.
Also, one of the biggest advantages of investing your rental income via SIP is that it makes you a disciplined investor. SIP payments are completely automated thereby making it convenient too.
Typically, there is a 5-10% escalation in rentals every year. So, you can opt for a top-up SIP whereby you get to increase your SIP at regular intervals. Also, fix a date for SIP which is at least a week away from the last payment date of the tenant.
Furthermore, have a balance buffer in case of undue delay in payments. If there are no tenants for a few months, you can ‘pause’ it. Any lump sum received as a tax refund can be invested into an ultra-short term debt fund. From there, you could opt for a STP (Systematic Transfer Plan) into the targeted equity or debt fund.