How is foreign rental income taxed in India?

I have been living in Australia and bought a new house in 2023 through a mortgage. I plan to return to India permanently by December 2025. After relocating, I intend to rent out the Australian property and continue servicing the mortgage using the rental income. Will this rental income be taxed in India? Can I claim a deduction for the mortgage interest?

—Name withheld on request

Depending on your stay in India over the preceding years, you may qualify as a Resident but Not Ordinarily Resident (RNOR) under Indian tax law. Individuals with RNOR status are not liable to pay tax in India on foreign income, unless it is derived from a business controlled or a profession set up in India. In your case, the rental income from the Australian property qualifies as foreign-sourced, since it originates from an immovable asset located outside India. Therefore, for the financial years in which you qualify as RNOR, this income will not be taxable in India.

Read this | NRI taxation: How to claim special tax concessions

However, once your status changes to Resident and Ordinarily Resident (ROR), your global income becomes taxable in India. At that point, the rental income from your Australian property will be taxed under the head "Income from House Property" in your Indian income tax return. You will be eligible to claim a deduction on the mortgage interest paid against this rental income.

Read this | Golden tax window for NRIs: What RNOR means and how to use it

Indian tax regulations do not prohibit claiming a deduction for interest on foreign loans unless the interest itself is taxable in India on which no tax has been withheld at source and where the interest payer is a non-resident.

Interest is considered to be taxable in India if it is received or deemed to be received in India, or if it is seen as accruing/arising or deemed to accrue/arise in India. ‘Accrual’ denotes a legal right to receive income. 

In your situation, since the mortgage was availed outside India for a property located abroad, and the interest is neither received in India nor deemed to accrue/arise in India, it will not trigger taxability in India. Therefore, the interest can be safely deducted from your rental income under Indian tax law once you become a ROR.

Also read | Do NRIs have to pay tax on mutual fund gains in India?

From a foreign exchange management (FEMA) standpoint as well, there is no requirement to repatriate rental income earned from overseas property to India. Using this rental income to service your mortgage abroad is permissible under current FEMA guidelines.

Harshal Bhuta is partner at P. R. Bhuta & Co. CAs