"My tenant pays me in dollars, so it's not Indian income": What ITA 2025 actually says about NRI rental income

"My tenant pays me in dollars, so it's not Indian income": What ITA 2025 actually says about NRI rental income

A surprising number of NRIs believe that if a tenant deposits rent into their overseas account, or routes it through a foreign currency transfer, the rent stops being "Indian income" and escapes Indian tax. Others assume that because they already pay tax on the property in their country of residence, India has no further claim. Both beliefs are wrong, and both can trigger TDS shortfalls, interest, and notices that are entirely avoidable.

Rental income from a property physically located in India is taxed in India, full stop. The currency you receive it in, the country your tenant wires it from, and the bank account it lands in change nothing. What does matter is how the income is computed, who is responsible for deducting tax at source, and which returns you are legally required to file. Here is exactly how it works under the Income-tax Act, 1961 and the new Income-tax Act, 2025.

What the law actually says

Rental income falls under the head "Income from House Property." Under the Income-tax Act, 1961 this is governed by Sections 22 to 27; the Income-tax Act, 2025 carries the identical scheme forward under its own house-property provisions, retaining the standard deduction and interest treatment unchanged in substance.

The foundational rule is Section 9 of the ITA 1961 (income deemed to accrue or arise in India) — and its equivalent in the ITA 2025. Income from any asset situated in India is deemed to arise in India regardless of the residential status of the owner or where payment is made. A flat in Pune is an Indian asset; its rent is Indian-source income whether your tenant pays you in INR, AED, USD, or GBP.

Three computational rules govern how much of that rent is actually taxed:

• Gross Annual Value (GAV) is the higher of the actual rent received or the reasonable expected rent. Municipal taxes actually paid by the owner during the year are then deducted to arrive at Net Annual Value.
• Standard deduction of 30% of Net Annual Value under Section 24(a) — a flat, no-questions-asked deduction meant to cover repairs and maintenance. You get it even if you spent nothing.
• Interest on a home loan for that property is deductible under Section 24(b), with the ITA 2025 preserving the same treatment.

Now the part most NRIs miss entirely — TDS under Section 195 of the ITA 1961. When a tenant pays rent to a non-resident landlord, the tenant is legally obliged to deduct tax at source under Section 195, not under the 5% Section 194-IB rule that applies when the landlord is a resident. The Section 194-IB route simply does not apply to NRI landlords. The ITA 2025 re-enacts the non-resident withholding obligation under its corresponding section; the substance is unchanged.

This means the compliance burden starts with your tenant, who must obtain a TAN, deduct tax on the rent, deposit it, and file a TDS return — and, for cross-border remittance, file Form 15CA (now Form 145 under ITA 2025), with Form 15CB (now Form 146 under ITA 2025) certification from a chartered accountant where required.

Practical implications for NRIs

The headline number alarms people: Section 195 TDS on NRI rent is deducted at 30% plus applicable surcharge and 4% cess on the gross rent, not on your net taxable figure. That is because the tenant cannot compute your standard deduction or loan interest — so the law makes them withhold on the gross amount and leaves you to reconcile it when you file.

A concrete example. Suppose you let out a Bengaluru apartment for ₹50,000 per month, i.e. ₹6,00,000 a year. Municipal tax you paid: ₹12,000.

• Net Annual Value = ₹6,00,000 − ₹12,000 = ₹5,88,000
• Less 30% standard deduction (₹1,76,400) = ₹4,11,600
• Less home-loan interest, say ₹2,00,000 = ₹2,11,600 taxable income from this property.

But your tenant, under Section 195, was deducting roughly ₹15,000+ per month (30% + cess on ₹50,000) — about ₹1,87,200 for the year. Your actual tax on ₹2,11,600, after the basic exemption and slab rates, may be far lower or even nil. The gap is your refund, and the only way to claim it is by filing an Indian income-tax return. NRIs who never file simply gift this money to the exchequer.

There is a powerful tool to stop the over-deduction at source: a Lower/Nil TDS certificate under Section 197 (ITA 1961), carried forward in the ITA 2025. You apply in Form 13, show the assessing officer your real expected tax liability, and the officer authorises the tenant to deduct at a lower rate — sometimes close to zero. For a salaried NRI whose only Indian income is one rented flat, this often eliminates the cash-flow drag entirely.

One more reality check: the rent lands in your NRO account, and the bank may apply its own TDS layer on the interest that NRO balance earns. NRO interest is fully taxable in India; that is separate from the rent itself. Keep the two mentally distinct.

Step-by-step: what to do

• Confirm the property is let and document the rent. Have a written lease showing monthly rent, tenant details, and the period. This is your evidence base for GAV.
• Tell your tenant they must deduct under Section 195, not 194-IB. Ask them to obtain a TAN and deduct TDS on the gross rent. Many individual tenants do not know this; an NRI landlord who stays silent is the one who later faces the mismatch.
• Apply for a Section 197 Lower-TDS certificate (Form 13) early — ideally before the tenancy year begins. This is the single biggest lever to avoid 30% being locked up all year.
• Track your Form 26AS (now Form 168 under ITA 2025) to confirm the tenant actually deposited the TDS they deducted. If it is missing from your Form 168, the credit will not flow to you at filing.
• Ensure cross-border remittances carry Form 15CA / Form 15CB (Form 145 / Form 146 under ITA 2025) when rent is repatriated abroad through your NRO/NRE route.
• Compute house-property income properly — GAV, less municipal tax, less 30% standard deduction, less loan interest.
• File ITR-2 (the correct form for an NRI with house-property and no business income) before the due date for the Tax Year, claim the TDS credit, and recover any excess as a refund.

FAQ

Q: My tenant pays rent directly into my UK account. Do I still owe Indian tax?
Yes. The property is in India, so the rent is Indian-source income under Section 9. Where the money is paid or received is irrelevant. Your tenant should still be deducting TDS under Section 195.

Q: I already pay tax on this rent in my country of residence. Isn't that double taxation?
India taxes it as the source country; your resident country may also tax your worldwide income. You relieve the overlap through the Double Taxation Avoidance Agreement (DTAA) between India and your country — typically by claiming a foreign tax credit for the Indian tax paid. You do not get to skip Indian tax; you offset it.

Q: Can my tenant just deduct 5% like they would for a resident landlord?
No. The 5% Section 194-IB rate is only for resident landlords. For an NRI landlord the tenant must use Section 195, which means TDS on gross rent at 30% plus surcharge and cess unless you hold a Section 197 lower-deduction certificate.

Q: I rent out the flat informally and no TDS is deducted. Is that fine?
No. The income is still taxable and reportable, and the tenant carries a withholding default. If you under-report, the mismatch surfaces against your Form 168 (Form 26AS) data, and a notice typically follows. File the return, declare the rent, and pay or reconcile the tax — it is far cheaper than a notice.

Closing CTA

NRI rental income is one of the most over-withheld and under-filed income streams in India — most NRIs lose refunds simply because no one told them to file. The Section 197 certificate alone can change your annual cash flow materially. For your specific situation, book a consultation at harunraaj.com.

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