I am an Indian citizen and work in Mumbai. I own a house in Dubai and will be renting it out for three years. How will tax be calculated on the rent?
Taxability of income: Taxability of income in India depends upon your tax residential status during a financial year (FY). Residential status is in turn determined by the physical presence of an individual in India during an FY and immediately preceding seven FYs. It is important to determine your residential status on year-on-year basis to ascertain the taxability of income in India. There are three categories of residential status in India: non-resident (NR), not ordinarily resident (NOR) and ordinarily resident (OR).
Assuming that you have been staying in India for a substantial time and hence are likely to qualify as OR of India during each of the FYs, your global income shall be taxable in India, irrespective of source or place of receipt of such income. Accordingly, the rental income received in Dubai shall be taxable in India as “income from house property”. You could claim a deduction towards actual local taxes paid in Dubai during each of the FYs and further a flat deduction of 30% against the said rental income. If any housing loan has been availed against the said house property, you could further claim the entire interest payable during the FY against the rental income to arrive at the net taxable rental income.
In case the said income is also taxable in Dubai, benefits, if any, available under the Double Tax Avoidance Agreement between India and Dubai may have to be examined separately.
Disclosure of foreign assets: As per recent amendment in the Income-tax Act, effective from FY12, an individual who qualifies as OR of India and who has assets located outside India (including financial interest in any entity) or is a signing authority in any bank account located outside India is required to:
• Furnish tax return, irrespective of amount of income; and
• Furnish details of assets located outside India such as foreign bank accounts, immovable property, in the return.
If you qualify as OR of India in any of the FYs, you would be required to comply with these disclosure requirements. Accordingly, you would be required to disclose the details such as country code, address of the house property and total investment cost in your India income-tax return.
In case you qualify as NR or NOR during any of the FYs, only your India sourced shall be taxable in India and you would not be required to offer the rental income received in Dubai to tax in India. Also, the foreign asset disclosure requirement would not be applicable.
Note that in case you own more than one residential property, apart from one residential property treated as self-occupied, the other properties lying vacant or rented out for less than 300 days in a FY shall be subject to wealth tax.
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Parizad Sirwalla is partner (tax), KPMG