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Photo: iStock
Photo: iStock

An ROR must file income tax return in India if he or she holds any foreign asset

Under the Indian Income-tax law, if agricultural income is the only source of income, then it is exempt from tax.

I am a 64-year-old US citizen. I spend some time in the US and some in India. Before moving out from India, l had bought insurance, stocks and properties here. I also have ancestral agricultural properties, which I plan to sell soon. I have not filed income tax returns (ITR) in India after 1989 as my income from rent was very small and agricultural income was non-taxable. Very soon, my rental income in India will become taxable. How do I file ITR while being a US citizen?

—Name withheld on request

Under the Indian Income-tax law, an individual is required to file ITR if the gross taxable income exceeds the maximum amount not chargeable to income tax. For the financial year 2020-21, the maximum amount not chargeable to income tax is 2.5 lakh. However, for the purposes of determining the threshold limit of 2.50 lakh, the gross taxable income should be computed before giving effect to the deductions under Chapter VI-A (such as under Section 80C, 80D and so on) or capital gains rollover exemptions (like section 54, 54EC and 54F).

Even if the gross taxable income is below 2.50 lakh, the income-tax law has been recently amended for mandatory furnishing of ITR, in case an individual (amongst others):

Has deposited an amount exceeding 1 crore in one or more current accounts maintained with a banking company or a co-operative bank during the financial year;

Has incurred expenditure of an amount exceeding 2 lakh for himself or any other person for travel to a foreign country during the financial year;

Has incurred expenditure of an amount exceeding 1 lakh towards the consumption of electricity during the financial year.

Further, an individual who qualifies as resident and ordinarily resident (ROR) in India is mandatorily required to file ITR if he or she holds any foreign asset or has a signing authority in any account located outside the country, even if his or her taxable income does not exceed the threshold limit of 2.50 lakh.

As you have rental income and agricultural income in India, you will need to do the following: determine your residential status in India; calculate the taxable value of rental income in India and compute total tax liability in India after considering agricultural income.

The method of computing taxable rental income is 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 the higher of the following: amount at which the property might reasonably be expected to be let out; or 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 get. Also, any repayment of the principal against any home loan taken for such property is also eligible for deduction under Section 80C (up to 1.50 lakh).

Further, under the Indian Income-tax law, if agricultural income is the only source of income, then it is exempt from tax. However, if it exceeds 5,000, there is a method to calculate total tax liability as per the following steps: compute total income including agricultural income; compute income tax (A) on the above total income as per the applicable tax rates for the financial year; compute total income by adding agricultural income to the applicable basic exemption limit for the financial year (i.e. 2.50 lakh); compute income tax (B) on the above aggregate income as per the applicable tax rates for the financial year. Income tax liability will be: C = (A-B).

Thus, exempt agricultural income is added for the limited purposes of determining the applicable tax rate on the other taxable income.

In your case, the obligation to file ITR and pay taxes will depend on the quantum of taxable income in India and the residential status. You can file your India ITR and pay India income tax online. Given your sources of income, you may file India ITR in ITR-1 if you have rental income from one house property and agricultural income is up to 5,000, subject to other conditions such as whether or not you qualify as ROR, your total income is up to 50 lakh, you are not a director in a company, you have not invested in unlisted equity shares, you don’t have foreign asset or income. If you have rental income from more than one house property or agricultural income exceeds 5,000, you may use ITR-2.

Sonu Iyer is tax partner and people advisory services leader, EY India. Queries and views at mintmoney@livemint.com

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