Residential status does not change taxability rules for rental income

My wife and I are co-owners of a flat that we are leasing out. My wife is an NRI, while I am an Indian resident. The rental income will go into my wife’s non-resident (ordinary) or NRO account. How will this income be taxed?

—Sujal Shah

Rental income from house property situated in India is liable to income-tax in India. The method of computing taxable value of rental income is as follows: Gross annual value less municipal taxes gives the net annual value (NAV). Reduce standard deduction of 30% of NAV and interest on housing loan from this to get 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 the expected rent the property would fetch.

Taxability of rental income would remain the same, irrespective of your residential status.

In your case, since the house is jointly owned by you and your wife, the rental income will be liable to tax in the proportion of your respective share of ownership. The share in ownership is usually determined by the contribution/investment made by each of the owners. But you will also need to consider whether clubbing provisions can apply in your case. Clubbing can apply if an individual transfers to his or her spouse any house property or asset otherwise than for adequate consideration (except in connection with agreement to live apart) in which case the individual is deemed to be owner of house property so transferred or income arising from the asset so transferred is clubbed in the hands of the individual.

While there may be no difference in taxation of house property income in your and your wife’s hands on account of difference in residential status, if the tenant is liable to deduct tax at source (TDS) from rent, he will need to apply different rates of TDS on respective share of rent.

Under the Income-tax law, the tenant is required to deduct TDS at the rate of 10% on rent paid to the ‘Resident’ landlord except where: (a) The tenant is an individual or HUF but not liable for tax audit under Section 44AB in the preceding financial year; or (b) The rent paid/payable during the financial year does not exceed Rs180,000 per financial year

However, even in case of a tenant being an individual or HUF (not liable for tax audit under Section 44AB in preceding financial year), TDS at the rate of 5% is required to be deducted by the tenant where the rent amount exceeds Rs50,000 per month.

Under Section 44AB, the books of accounts of an individual are required to be audited by a chartered accountant if the total sales, turnover or gross receipts exceeds prescribed monetary limits depending whether it is a business or profession.

In case where the landlord is ‘non-resident’, the tenant would be required to deduct TDS at 30% (plus applicable surcharge and cess), irrespective of the amount paid.

In your case, the taxability of rental income will be the same, irrespective of your residential status. However, the TDS deduction may vary depending on the residential status of you and your wife.

I have a joint bank account with my mother, but I am an NRI now. As the first co-holder, will the interest be taxed in my hands or my mother’s?

—Apurva

Interest income from a bank account in India will be taxable in India. In case of joint bank account, it is important to determine who is the real owner of the funds and tax accordingly. Also, under the India Income-tax law, clubbing provisions may apply and shift the taxation to the other person. The first holder may need to give declaration to the bank, if the withholding tax (TDS) is to be made in the name of the second holder. Banks normally tend to withhold tax in the name of the first holder.

An aggregate deduction of up to Rs10,000 may be claimed for interest earned from all savings account while filing the tax return in India.

Further, under the exchange control law, when a person leaves India for another country for the purpose of employment, his existing resident bank accounts should be designated as an NRO account. Accordingly, you may inform your bank to designate your existing resident savings bank account to an NRO account. On return to India permanently, you may re-designate your NRO account to resident account.

Sonu Iyer is tax partner and people advisory services leader, EY India

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