An NRI’s domestic income from rental is liable to tax in India
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While I live in South Africa, my mother used to live in India. I have inherited a house from her, which I want to rent out. What taxes will apply to this income?
Rental income from house property situated in India is liable to income-tax in India. The method of computing taxable rental income is prescribed under the income-tax law as follows:
Gross annual value less municipal taxes give the net annual value (NAV). Reduce standard deduction of 30% of NAV and interest on housing loan from this, which will then be the taxable rental income.
Gross annual value is higher of the following:
(a) Amount at which the property might reasonably be expected to be let out; or
(b) Actual rent received or receivable.
In other words, gross annual value compares the actual rent received or receivable with expected rent that the property would fetch.
Also, any repayment of principal amount against housing loan taken for such property is also eligible for deduction under section 80C (maximum deduction under this section is Rs1.5 lakh).
In your case, rental income from house property situated in India will be taxable in India. The taxable rental income will be calculated as discussed above. However, assuming you qualify as non resident in India, if your total taxable income in India (including rental income or any other source of income) does not exceed the maximum amount not chargeable to tax (Rs2.5 lakh), you are not liable to pay tax and file income-tax return in India.
Will repatriating funds from sale of a house in New Zealand attract taxes in India?
An individual qualifying as an ordinary resident (ROR) is taxable on the global income in India. However, an individual qualifying as non resident (NR or NOR) is taxable only on India-source income.
In case you qualify as an ROR in India, capital gain on sale of a house in New Zealand will be taxable in India, irrespective of whether the funds are repatriated to India or not. Applicable benefit under the Double Taxation Avoidance Agreement between India and New Zealand may be claimed in case of double taxation.
If you qualify as NOR in India, capital gain on sale of a house in New Zealand will not be taxable in India if the sale consideration is directly received outside India. Subsequent transfer of sale consideration to a bank account in India will not be taxable in India. If the sale consideration is directly received in a bank account in India, it will be taxable in India even if you qualify as NR/NOR in India.
I was an NRI from 2004. I want to come back and settle in India. I was an NRI for the 2017-18 fiscal and will get RNOR status for 2018-19 and 2019-20 financial years. Does this mean after my return to India, while I am an RNOR for 2 years, I can still get tax benefits like I was getting as an NRI? Presently, my interest earnings from NRE fixed deposits are tax free.
Residential status under the income-tax law is different from the exchange control law. Under the income-tax law, residential status is determined based on your physical presence in India in the current financial year (FY) (1 April to 31 March) and preceding 10 FYs. Thus, for financial years 2017-18, 2018-19 and 2019-20, you will be taxable only on your India-sourced income, as a non-resident or resident not ordinarily resident (RNOR). However, the taxability of interest income from non-resident (external) (NRE) account earned in India is dependent on residential status under exchange control law.
Once you return to India, you may qualify as ‘person resident in India’ under the exchange control law. Accordingly, you have to notify the bank of change in residential status, to designate the NRE account to resident account or transfer the funds to resident foreign currency (RFC) account, at your discretion.
Interest on NRE deposit accounts is exempt till the individual qualifies as ‘person resident outside India’ as per exchange control law. Once the individual qualifies as ‘person resident in India’ on return to India, interest income from NRE deposit account is taxable in India. Interest income from resident account or RFC account is considered India-sourced income and taxable in India. However, interest earned on the deposits in foreign currency (RFC) account are exempt from tax in India if the individual qualifies to be a non-resident or RNOR in India.
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Sonu Iyer is tax partner and people advisory services leader, EY India