NRI Rental Income Tax in India: TDS, Deductions, and US Reporting

You own a flat in Bangalore. Your tenant pays Rs 35,000 per month. But you do not receive Rs 35,000. Under Section 195 of the Income Tax Act, the tenant is legally required to deduct Tax Deducted at Source (TDS) at 31.2% (30% base rate + 4% health and education cess) on rent paid to an NRI landlord. Your Rs 35,000 becomes Rs 24,080 after TDS. Over a year, that is Rs 1,31,040 deducted before you touch the money.

For a resident landlord, TDS under Section 194-IB is only 5% on rent exceeding Rs 50,000 per month. The NRI rate is six times higher. This is the single biggest frustration NRI landlords face.

**Why is the NRI TDS rate so high?** The Income Tax Act treats NRI rental income as income "deemed to accrue or arise in India" under Section 9(1)(i). Since the NRI is not physically present to file returns, the government collects tax upfront at the maximum marginal rate. The assumption is that you will file a return and claim a refund if your actual tax liability is lower.

**The DTAA does not help here.** Unlike interest income where Article 11 of the India-US DTAA caps withholding at 15%, there is no reduced rate for rental income. Article 6 of the DTAA states that income from immovable property "may be taxed in the Contracting State in which such property is situated." India retains full taxing rights on rental income, and the domestic TDS rate applies.

**The practical problem:** Your actual tax liability on Rs 4,20,000 annual rent (Rs 35,000 x 12) is likely far less than Rs 1,31,040 in TDS. After the 30% standard deduction under Section 24(a), your taxable rental income is Rs 2,94,000. If this is your only Indian income, it falls below the basic exemption limit of Rs 3,00,000 (FY 2025-26). Your actual tax: Rs 0. But the tenant already deducted Rs 1,31,040. You must file an Indian tax return to get it back.

**Section 24(a): Standard deduction of 30% on gross rental income.**

This is automatic. You do not need receipts or proof of expenses. On Rs 4,20,000 annual rent, the standard deduction is Rs 1,26,000. Taxable rental income becomes Rs 2,94,000.

**Section 24(b): Deduction for home loan interest.**

If you have an outstanding home loan on the rented property, interest paid during the financial year is deductible from rental income under Section 24(b). There is no upper limit on interest deduction for a let-out property (unlike the Rs 2,00,000 cap for self-occupied property).

Example: Rs 4,20,000 annual rent minus Rs 1,26,000 standard deduction minus Rs 3,50,000 home loan interest = negative Rs 56,000 (loss from house property). This loss can be set off against other Indian income up to Rs 2,00,000 per year under Section 71(3A). Remaining loss carries forward for 8 years.

**Section 197: Lower TDS certificate.**

This is the most underused tool by NRI landlords. Under Section 197, you can apply to the Assessing Officer for a certificate directing the tenant to deduct TDS at a lower rate (or zero) based on your actual estimated tax liability.

**How to apply:** 1. Submit Form 13 online on the TRACES portal 2. Attach: rental agreement, PAN, last 3 years ITR acknowledgments, computation of estimated income, home loan interest certificate (if applicable) 3. The AO issues the certificate within 30 days, specifying the TDS rate (could be 5%, 10%, or nil) 4. Provide the certificate to your tenant, who then deducts TDS at the lower rate

**Example:** Your only Indian income is Rs 4,20,000 rent. After Section 24(a) deduction: Rs 2,94,000. Below the Rs 3,00,000 exemption limit. The AO issues a nil TDS certificate. Your tenant pays you the full Rs 35,000 per month. You file an Indian return showing zero tax. No refund to chase.

**Without Section 197:** You lose Rs 1,31,040 to TDS, file a return, and wait 6-18 months for a refund. With Section 197, you keep the money from day one.

Beyond Section 24, several deductions reduce your taxable rental income. Most NRI landlords miss at least one of these.

**Municipal taxes (property tax):** The annual property tax paid to the municipal corporation is deducted from Gross Annual Value before computing Net Annual Value. If you pay Rs 15,000 per year in property tax to BBMP (Bangalore) or BMC (Mumbai), this reduces your taxable rental income before the 30% standard deduction even applies.

Calculation order: Gross Annual Value minus municipal taxes = Net Annual Value. Then apply the 30% standard deduction under Section 24(a) to Net Annual Value.

Example: Gross rent Rs 4,20,000 minus municipal tax Rs 15,000 = Rs 4,05,000 Net Annual Value. Standard deduction (30%) = Rs 1,21,500. Taxable income = Rs 2,83,500.

**What you cannot deduct:** Maintenance charges paid to the housing society, repair costs, painting, brokerage fees, and insurance premiums are all absorbed by the 30% standard deduction. You cannot claim these separately. The 30% is a flat deduction regardless of actual expenses.

**Vacancy allowance:** If the property was vacant for part of the year, the actual rent received (not the expected annual rent) is your Gross Annual Value. If your flat was vacant from April to June and rented from July at Rs 35,000 per month, your annual rental income is Rs 3,15,000 (9 months), not Rs 4,20,000.

**Unrealized rent:** If your tenant did not pay rent for certain months and you took reasonable steps to recover it (legal notice, court proceedings), the unrealized rent is excluded from taxable income under Rule 4 of the Income Tax Rules.

**Co-ownership deduction:** If the property is jointly owned (common for inherited property), each co-owner reports their share of rental income separately. A 50-50 co-ownership on Rs 4,20,000 rent means each owner reports Rs 2,10,000. Combined with the Section 24(a) deduction, each owner's taxable rental income is Rs 1,47,000, well below the exemption limit.

If you are a US tax resident (citizen, green card holder, or substantial presence test), your worldwide income is taxable in the US. Indian rental income is no exception. Here is how to report it correctly and avoid double taxation.

**Step 1: Convert to USD.** Report the rental income in US dollars. Use the average exchange rate for the tax year (IRS accepts the yearly average from the Treasury or a consistent reasonable method). For 2025, the average rate was approximately 84.50 INR per USD. Rs 4,20,000 annual rent = approximately $4,970.

**Step 2: Report on Schedule E (Form 1040).** Indian rental income goes on Schedule E, Part I, as foreign rental property. List the property address (Indian address), rental days, and personal use days.

**Step 3: Claim US-side deductions.** Unlike the Indian flat 30% standard deduction, US tax rules allow you to deduct actual expenses: depreciation (over 30 years for residential foreign property, 40 years for ADS which is required for foreign property under IRC Section 168(g)(1)(A)), repairs, property management fees, insurance, municipal taxes, and travel to the property for management purposes.

**Important:** You must use the Alternative Depreciation System (ADS) for foreign real property. The recovery period is 30 years for residential property placed in service after December 31, 2017 (Tax Cuts and Jobs Act change). Depreciation is calculated on the USD cost basis (purchase price converted at the exchange rate on the date of purchase).

**Step 4: Claim Foreign Tax Credit (Form 1116).** The TDS deducted in India (or the actual tax paid per your Indian return, whichever is lower) is creditable against your US tax on the same rental income. File Form 1116, General Category Income. Under Article 6 and Article 23 of the India-US DTAA, India has primary taxing rights on rental income, and the US provides relief via FTC.

**Example:** Rs 4,20,000 rent ($4,970). Indian TDS paid: $1,550 (31.2%). US tax on $4,970 at 24% bracket: $1,193. FTC claimed: $1,193 (limited to US tax on the income). Net US tax: $0. Excess Indian tax of $357 carries forward for 10 years under IRC Section 904(c).

**Common mistake:** Claiming the Indian standard deduction (30%) on your US return. The US does not recognize the Indian Section 24(a) deduction. You claim actual US-allowable expenses instead. This often results in higher deductions on the US side (depreciation alone can exceed the 30% Indian deduction).

Managing a rental property from 8,000 miles away requires the right setup. Here is the operational side.

**Power of Attorney (PoA):** Appoint a trusted person in India (parent, sibling, friend) as your Power of Attorney for property management. The PoA can sign rental agreements, collect rent, interact with the society, and handle maintenance issues. Register the PoA at the local sub-registrar office. An unregistered PoA has limited legal standing for property transactions.

**Bank account for rent collection:** Rent from Indian property is Indian-sourced income and must go to your NRO account. Do not route it through NRE. The tenant or your PoA deposits rent into your NRO savings account. The bank deducts TDS on interest earned in NRO (separate from the TDS your tenant deducts on rent).

**Tenant TDS compliance:** Your tenant must: 1. Obtain a TAN (Tax Deduction Account Number) from the Income Tax Department 2. Deduct TDS at 31.2% (or the rate specified in your Section 197 certificate) 3. Deposit the TDS with the government using Form 26QC within 30 days of the end of the month 4. Issue you Form 16A (TDS certificate) quarterly

**What if the tenant refuses to deduct TDS?** Many individual tenants, especially for lower rents, are unaware of Section 195 obligations. If TDS is not deducted, the tenant becomes liable for the tax plus interest under Section 201. More practically, you are still liable for the tax in your Indian return. It is in your interest to educate the tenant and ensure compliance, as non-deduction can trigger scrutiny of both parties.

**Rental agreement essentials for NRIs:** - Clearly state that the tenant will deduct TDS under Section 195 - Include the landlord's PAN (required for TDS filing) - Specify whether rent is inclusive or exclusive of maintenance charges - Register the agreement (mandatory in many states for terms exceeding 11 months) - Include a clause for annual rent escalation (typically 5-10%)

**Society NOC:** Many housing societies require a No Objection Certificate before allowing an NRI owner to rent out the flat. Apply through your PoA. Some societies charge a refundable deposit for tenant occupation.

**Mistake 1: Not applying for a Section 197 lower TDS certificate.** Cost: Rs 1,31,040 per year tied up in refund claims on Rs 35,000/month rent. The certificate is free to apply for and takes 30 days. There is no reason not to do it.

**Mistake 2: Not filing an Indian tax return because "TDS was already deducted."** TDS is not your final tax. It is an advance payment. Without filing a return, you cannot claim the Section 24(a) deduction, home loan interest deduction, or any refund. If your actual tax is lower than TDS deducted (it almost always is), you leave money on the table. The refund only comes after you file ITR.

**Mistake 3: Depositing rent into NRE instead of NRO.** Rental income is Indian-sourced income. It must go to NRO under FEMA regulations. Depositing Indian-sourced income into NRE is a FEMA violation. If discovered during a bank audit or tax assessment, you face penalties and the bank may freeze the NRE account for investigation.

**Mistake 4: Not reporting Indian rental income on the US tax return.** The US taxes your worldwide income. Indian rental income must appear on Schedule E even if you paid tax in India. Omitting it is underreporting foreign income, which extends the statute of limitations to 6 years (IRC Section 6501(e)) and can trigger FATCA penalties. Claim the FTC on Form 1116 to avoid double taxation.

**Mistake 5: Ignoring depreciation on the US return.** US tax rules allow depreciation on foreign rental property over 30 years (ADS method, IRC Section 168(g)). On a property purchased for Rs 50,00,000 ($59,000 at purchase date rate), annual depreciation is approximately $1,967. Over 10 years, that is $19,670 in deductions you would miss entirely if you only claimed the Indian 30% standard deduction on your US return. The US and India have separate deduction rules. Use both.

Use our NRI Property Tax Calculator to compute your exact tax liability, TDS refund, and FTC credit for your rental property.