Income Tax Redemption possible for an NRI?

If your total income in India, including rental income is below the basic exemption limit of Rs 1.6 lakh, you can get a TDS exemption. But the process can be complicated. You would need to apply to the tax authorities for a tax exemption certificate and submit the certificate to the tenant. The issue of the certificate is at the discretion of the tax officer and he needs to be convinced about your case.

Alternately, an easier way would be to file your returns and claim refund of the TDS paid.

In such cases however, the rental income may be taxed fully in the country of your residence (based on the tax laws in that country.) So if you are a resident of the US, even though your income is below the basic exemption limit in India and you pay no taxes in India, this income will be added to your income in the US and taxed according to US laws.

Is deemed income from house property taxed in foreign country?

You would need to look at the tax code in your country of residence. In the case of NRIs in the United States, the US tax code does not tax deemed income. However, you would still have to show the property if it is an investment property in your tax return in the US (even though you do not have any rental income ). If you do not show this investment property, the problem will arise at the time of sale of property. Suppose you sell a property on which you had no rental income for US tax purposes but had deemed income as per India Tax code, then the amount spent on the maintenance, repairs and renovations and depreciation on this property which may be eligible for deduction or addition to your cost basis while calculating capital gains would become difficult to establish. However, if you have not declared the property in your tax returns, the US tax code may challenge the cost basis (purchase + improvements + suspended losses)to claim a tax deduction at the time of sale.

Of course, any investment properties with rental income and related expenses must be reported on Form Schedule E in the US tax returns and rental activities by nature are always treated as ‘passive’ investments with restrictions on deductibility of the net rental losses. Always consult a tax expert as passive activity rules are quite cumbersome.

What is deemed Income Tax and how does it affect an NRI?

According to the Indian Income Tax Act, if a person (resident or NRI) owns more than one house property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. The other one, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property (based on certain valuations prescribed by the income tax rules) and pay the tax thereof.

Now, the Income Tax Act does not specify if either or both these properties must be situated only in India. At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of ‘more than one property’ will apply to global properties.

What this means is that if you are an NRI and own only one property globally and that property is in India, you would not have to pay any income tax on the ‘deemed rental income’ in India.

However, let us say you are an NRI resident in USA. You own and live in a house in USA. You also own a house property in India. Even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.

Remember that even if you have inherited a property in India and that is not your only property, you would have to pay tax on deemed income.

Does an NRI pay tax on the rental income in the country of residence?

When you are an NRI, you are obviously a resident of another country for tax purposes. And in most cases, countries levy tax on residents on their global income. So it may happen that as per provisions of the Indian Income Tax laws, tax will be deducted at source on income earned in India, as is in the case of rent. But at the same time, that income will be subject to tax in your country of residence. In such cases, we need to refer to the Double Taxation Avoidance Agreements that India has entered into with various countries.

The India-US DTAA for instance provides that rent from immovable property will be taxed in the country in which the property is situated. So NRIs who are residents of US would have to pay tax on rental income in India. While they would still have to declare that income while filing their tax returns in the US, they would get a credit for taxes paid in India.

It is prudent to check the tax laws of the country that you are resident of or consult an expert in that country.

Will the NRIs be taxed on their rental income?

Yes, since this income is earned in India, tax will be payable by the NRI in India. In fact, tax will be deducted at source by the payer of the rent, a.k.a tenant. The tenant must obtain a TAN number and deduct TDS of 30 per cent from the rent amount. He must also provide a TDS certificate to the NRI.

The duty of deducting tax is on the payer. So in case the payer does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible.

Having said that, if the tenant does not deduct tax at source, it is obligatory for the NRI to file tax returns and pay the taxes thereof.

Can NRIs earn rental income from renting properties in India?

An NRI is legally allowed to rent out the property he owns in India. The rent income can be received in two ways:

1. The rental income can be deposited to the NRE or NRO account with an Indian bank. Rent proceeds received in these accounts can be freely repatriated.
2. If one does not have an NRE or NRO account, the proceeds can also be directly remitted abroad but one would need an appropriate certificate from a chartered accountant certifying that all taxes on the rental income have been duly paid.

What is Rent Control Act?

Rent Control Act was an attempt by the Government of India to eliminate the exploitation of tenants by landlords. Rent legislation tends to providing payment of fair rent to landlords and protection of tenants against eviction. But the allowances have been very generous and hence tenants residing in rental properties in India since 1947 continue to pay rents fixed then, irrespective of inflation and the realty boom.

The Rent Control Act has led to several adverse situations like languishing investment in rental housing, withdrawing of existing housing stock from the rental market, stagnating municipal property tax revenue. The rent control along with security of tenure has not given any encouragement to house owners to renovation their houses and most houses as a result have a worn out look.

Repeal of the Rent Control Act would lead to construction boom and meet the growing need for housing and aid employment generation. There will be more rational use of prime locations and will set off a continuous process of urban renewal.

In 1992, the Central Government proposed a model rent control legislation, which was meant for and circulated to all states. The model Act proposed modification of some of the existing provisions on inheritance of tenancy and also prescribed a rent level beyond which rent control could not apply. The New Delhi Rent Control Act that was passed in 1997 was based on this but failed to be notified due to resistance from traders who are sitting tenants. Very few states have introduced the model Act.

The new Maharashtra Rent Control Act, Delhi Rent Control Act, Tamil Nadu Rent Control Act, Karnataka Rent Control Act all has provisions for the dispute among the landlords and tenants. Each of the State Rent Act provides for fixation of Standard Rent as well decree for possession and provisions that lay down the satisfaction of the Court.

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Rental Agreement Format in India

Rental Agreement is a legal document, which settles down the rules and regulations to follow by both the landowner and tenant party. It is very important for both the parties, as it contains essential business details. If any of the point is not observed by any of the parties, the opponent can apply for a lawsuit for violating the legal system. Irrespective of the size of the lease document, it should cover the most important aspects to strengthen the landowner and tenant relationship. Rental Agreements in India could be vary from state to state but here are a few important guidelines that are followed through out the country.

Here is a list of items which you should include in your lease agreement:

1. The full and legal name of the tenant should be present in Indian rental agreements. One or more people can be the part of the lease and all of them are equally responsible for all terms and conditions of leasing. For example, if you are group of guys and girls and want to rent an apartment, everyone living in the property should add their name to the rental agreement. However, if you are sharing the house with just your family, not everyone living in the property is required to be listed on the agreement. Only the head of the family will be sufficient.

2. Your rental agreement must depict the term or period of lease. A normal agreement in India is normally for 11 months. It will depend on your plan for how long the property is going to be rented. If you want the rental agreement longer than 11 months, then you have to get the agreement registered with the government, which is a hassle.

3. All rental agreements in India must specify the amount of rent, due date and the way of payment. It is better to clarify the details like suitable payment methods as cash, personal checks, online bank transfer or if there is any penalty for not paying rent within the due date or any fine for bounced checks etc. If it is not specified in the agreement, you can not penalize tenant out of your own.

4. Security Deposits in India varies from state to state and in fact, sometimes from person to person in the same city. To keep things clear, kindly specify in the rental agreement the amount of security deposit, how you are going to use the deposit like for repairing works or something else. Also mention that the tenant can never use the money for paying the rent. If you accept any legal non refundable fee for cleaning or pets, mention that too clearly. The rental agreement must state how and when the deposit is going to be returned, with or without interest and in which condition the deduction will be applicable.

5. Given the tropical climate of the country, the maintenance of the properties in India is slightly high. The agreement must clearly specify the responsibility for repairing and maintenance for you and your tenant. It must be mentioned that the tenant is fully responsible for any kind of damages caused by his negligence.

6. If you are very particular about your personal space and would like to live a non-intruding lifestyle, it is better to clarify the legal right of the landlord to enter into the premises, by specifying the number of days notice will be given in advance for accessing your property.

7. You should explicitly mention in the rental agreement that the tenant should not be involved in any illegal activities within your premises.

8. Also, the tenant should not indulge in any unruly behavior which could disturb the neighborhood like excessive noise etc.

9. Mention in your agreement whether or not you allow pets with the tenants. In case you allow pets, then specify any restrictions for pets which you want to apply, like the number of pets or type of pets etc.

10. In India, some people tend to religious and don’t like non-vegetarian food to be cooked in their property. It is a good idea to mention this in the agreement what kind of food will be allowed in the property.

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Can I setup an office at home?

Home Office 300x195 Can I setup an office at home?Given the rent of properties have sky-rocketed recently, it is very tempting to start an office at home within one room of the apartment. Is it allowed by law to do that? Let’s check.

Who can setup a home office?

According to Mr. Om Ahuja, CEO, Jones Lang La Salle India, certain percentage or a fixed area is generally marked for office use. This percentage generally varies from city to city and in some cases, different within the city as well. One might have to check with the local or state residential authority to get an exact area.

For example, within Mumbai Metro Area, one can use 220 square feet of area for commercial use, valid for both apartments and independent houses. However, it is confined to certain professions such as doctors, lawyers and chartered accountant. A residential space can also be used to teach certain forms of art, like dancing, yoga, tuitions etc.

In Karnataka state, similar rules apply where professions like chartered accountants and doctors can run their offices from home. According to the Karnataka Shops and Commercial Establishments Act, 1961, these professions require more intellectual work than physical.

Do I need permission to setup a home office?

Even if you fall under the above mention profession, one is required to take permission from the local municipal authorities. Once approved, your office area will be considered as a commercial property and you will be required to pay commercial charges on the water, electricity, taxes, etc.

Disclaimer: This article is written as an informational purposes only. Please check with the local municipal authority before starting an office at home.

This article was inspired by the article in Economic Times.

What to check in a property before renting?

Before you sign the rental agreement on a property, check for the following things:

Damp Walls and Doors - Check for any damp walls and doors in the house/apartment. It could be a sign of major leakage in the house or the building.

Pipes – be it gas, water or anything else, check for leaks.

Sink faucets, shower heads and water – make sure water (both cold and hot) really comes out of the faucets and the shower head and it’s with a decent pressure. Also the toilet has to flush properly and thoroughly.

Electricity and appliances should all be working. Check if all the lights or other electric devices are operational.

Walls and windows. Check the windows to see if they open close and lock properly. Also inspect the walls. The more walls in common (shared with adjoining apartments), the greater the chance of noise from next door.

Noise. If it’s a highly trafficked area you may have problems concentrating and even sleeping.

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