Rental Income Taxation of NRIs Post-Budget 2020
Feb 24, 2020 Real Estate News
Budget 2020 made it clear for the NRIs incurring rental income in India will now have to pay taxes for the same proposing the stricter norms for the IT Act to stop the abuse of existing norms.
Finance Minister, Nirmala Sitharaman, presented the Budget 2020 on February 1, 2020. The budget proposes to amend Section 6 of the IT Act to stop the people from taking advantage of the existing one. The FM mentioned in her speech about the instances where the NRIs earning the rental income in India reported that the income in the country of their current residence and evaded in paying taxes altogether.
The Finance Minister stated that, if you have a property in India and earn rent out of it, we have a sovereign right to tax that income. You may be an NRI, but you are generating revenue here.
According to the Budget 2020 document, “Notwithstanding anything contained in clause (1) (of section 6), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he isn’t liable to tax in any other country or territory because of his domicile or residence or any other criteria of similar nature.”
According to the statement released by the Central Board of Direct Taxes (CBDT), “Indian citizen shall be deemed to be resident in India if he isn’t liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it’s noticed that some Indian citizens shift their stay in low or no tax jurisdictions to avoid payment of tax in India.”
The Revenue Secretary, Ajay Bhushan Pandey said, “In many cases, we have found that some people are residents of no country in the world. They may be staying a certain number of days in different parts of the world. Now, any Indian citizen, if he isn’t a resident of any country in the world, would be deemed to be resident in India and then his worldwide income will be taxed.”
Before we begin explaining the changes, let us first discuss the NRIs
What will be the new taxation?
The income NRIs earn in India will be taxed. Income earned outside the country will not be included in the new taxation regime unless it is derived from an Indian business or profession.
Who will not be taxed under the new regime?
The income of NRIs in India is taxed under the same slab as the resident Indians. However, it is essential to note that the NRIs will be taxed even if their property is lying vacant by estimating the annual rent.
Standard Deduction: A standard deduction at the rate of 30% is allowed on NRIs rental income in India.
Deduction on property taxes: while calculating the income earned, the NRI taxpayer will have to deduct the payment made towards the property tax.
Deduction under Section 80C: NRIs are allowed deduction on the principal repayment of the home loan under Section 80C apart from stamp duty and registration charges. Deductions under this Section are limited to Rs 1.5 lac in a year.
Deduction under Section 24: NRIs can claim the deduction up to Rs 2 lacs for the interest paid under Section 24 if the property is vacant. If the property is rented out, then they can claim the entire interest payable for exemption.
Deduction under Section 80EE: if an NRI is buying their first home in India then an additional deduction of Rs 50,000 is available for the home loan interest repayment. This is over and above the Rs 2 lacs deduction allowed under Section 24.
Income tax Exemptions NRIs can avail in India
Being an NRI, you are eligible for certain exemptions from the income generated from sources in India, including immovable property.
They are eligible for specific tax sops under IT Act over and above the exemptions already laid out under Section 80C.
Section 54
One can claim tax exemptions under Section 54 if they invest their long-term capital gain by selling a property in India to investing in another property in India. The exemption is limited to investment in only one property. The amount invested in buying a new property may be higher than the capital gains, but the exemption is available only for the long-term capital gains. The NRI can also use the exemption if the property has been bought a year back before selling the old property.
Section 54F
The exemption under Section 54F is available for the sale of property other than residential property. To enjoy the exemption under this, the NRI taxpayer will have to buy the residential property that use the long-term capital gains to finance the purchase. The new property that you use to enjoy the exemption must be sold within three years of purchase.
Section 54 EC
As an NRI, besides investing long term capital gains in buying another residential property, one can also invest in specific bonds issued by the government. This includes the bonds issued by the Rural Electrification Corporation (REC) and National Highway Authority of India (NHAI). These bonds can be redeemed after three years of purchase. To avail the exemption, the NRI taxpayer will have to invest in the bonds within six months of selling the property. It is important to note that the maximum amount of investment on both the bonds is limited to Rs 50 lacs.
Finance Minister, Nirmala Sitharaman, presented the Budget 2020 on February 1, 2020. The budget proposes to amend Section 6 of the IT Act to stop the people from taking advantage of the existing one. The FM mentioned in her speech about the instances where the NRIs earning the rental income in India reported that the income in the country of their current residence and evaded in paying taxes altogether.
The Finance Minister stated that, if you have a property in India and earn rent out of it, we have a sovereign right to tax that income. You may be an NRI, but you are generating revenue here.
According to the Budget 2020 document, “Notwithstanding anything contained in clause (1) (of section 6), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he isn’t liable to tax in any other country or territory because of his domicile or residence or any other criteria of similar nature.”
According to the statement released by the Central Board of Direct Taxes (CBDT), “Indian citizen shall be deemed to be resident in India if he isn’t liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it’s noticed that some Indian citizens shift their stay in low or no tax jurisdictions to avoid payment of tax in India.”
The Revenue Secretary, Ajay Bhushan Pandey said, “In many cases, we have found that some people are residents of no country in the world. They may be staying a certain number of days in different parts of the world. Now, any Indian citizen, if he isn’t a resident of any country in the world, would be deemed to be resident in India and then his worldwide income will be taxed.”
Before we begin explaining the changes, let us first discuss the NRIs
- NRIs: NRIs are classified as the Indian who stays out of the country for 183 days in a year (about six months. The limit has now been increased to 240 days in a year in a row.
- PIO: Person of Origin are categorized as non- residents who have to restrict their stay in India for 120 in a row. The limit has been decreased from 182 days earlier.
- Not Ordinary Citizen: Not ordinary citizens are those who have been NRIs for seven out of 20 years preceding that year.
What will be the new taxation?
The income NRIs earn in India will be taxed. Income earned outside the country will not be included in the new taxation regime unless it is derived from an Indian business or profession.
Who will not be taxed under the new regime?
- Bonafide workers in another country
- People working in Merchant Navy
- Indians working in the Middle East
The income of NRIs in India is taxed under the same slab as the resident Indians. However, it is essential to note that the NRIs will be taxed even if their property is lying vacant by estimating the annual rent.
Standard Deduction: A standard deduction at the rate of 30% is allowed on NRIs rental income in India.
Deduction on property taxes: while calculating the income earned, the NRI taxpayer will have to deduct the payment made towards the property tax.
Deduction under Section 80C: NRIs are allowed deduction on the principal repayment of the home loan under Section 80C apart from stamp duty and registration charges. Deductions under this Section are limited to Rs 1.5 lac in a year.
Deduction under Section 24: NRIs can claim the deduction up to Rs 2 lacs for the interest paid under Section 24 if the property is vacant. If the property is rented out, then they can claim the entire interest payable for exemption.
Deduction under Section 80EE: if an NRI is buying their first home in India then an additional deduction of Rs 50,000 is available for the home loan interest repayment. This is over and above the Rs 2 lacs deduction allowed under Section 24.
Income tax Exemptions NRIs can avail in India
Being an NRI, you are eligible for certain exemptions from the income generated from sources in India, including immovable property.
They are eligible for specific tax sops under IT Act over and above the exemptions already laid out under Section 80C.
Section 54
One can claim tax exemptions under Section 54 if they invest their long-term capital gain by selling a property in India to investing in another property in India. The exemption is limited to investment in only one property. The amount invested in buying a new property may be higher than the capital gains, but the exemption is available only for the long-term capital gains. The NRI can also use the exemption if the property has been bought a year back before selling the old property.
Section 54F
The exemption under Section 54F is available for the sale of property other than residential property. To enjoy the exemption under this, the NRI taxpayer will have to buy the residential property that use the long-term capital gains to finance the purchase. The new property that you use to enjoy the exemption must be sold within three years of purchase.
Section 54 EC
As an NRI, besides investing long term capital gains in buying another residential property, one can also invest in specific bonds issued by the government. This includes the bonds issued by the Rural Electrification Corporation (REC) and National Highway Authority of India (NHAI). These bonds can be redeemed after three years of purchase. To avail the exemption, the NRI taxpayer will have to invest in the bonds within six months of selling the property. It is important to note that the maximum amount of investment on both the bonds is limited to Rs 50 lacs.
