NRI income tax return: deemed rent

NRIs (Non Resident Indians) investing in real estate in India get excited about high returns on property, but don’t consider the NRI Income Tax rules.

Filing tax returns are a priority now that the due date for the year 2011-12 is close. NRI Income Tax rules has some strange provisions that beat common sense, but still need to be followed by locals as well as expats.

Deemed rent

If you own two or more properties in India, only one will be considered as self-occupied. This rule of the Indian Income Tax Act applies to NRIs as well as residents.

This means, you don’t have to pay income tax on owner-occupied property. All other properties, whether rented or not, will be considered an investment property or rental property.  Yes, it doesn’t matte whether you have rented the other property or not. That’s the weird part of the NRI income tax rules when it comes to expats property tax.

So what do you do in such a situation?

You calculate estimated rent for your other properties, and pay tax on that. Essentially, you will be paying tax on income (rent) that you have never received. Unfair as it may sound, that’s the law.

So how do you calculate the deemed rent? There are some provisions given in the Indian Income Tax rules that you can use to calculate the deemed rent on your investment properties in India.

In short:

If you own only one house in India in which you live, you don’t have to pay tax on it. If you own only one house and you don’t live in it or rent it out, it will still be considered self-occupied and there is no tax to be paid

If you are an NRI and given out the only house you own on rent, then you pay income tax on the rent you receive.

If you own two houses, and given both out on rent, you will have to pay tax on the rental income of both properties.

If you own two houses, and neither is given out on rent, then one will be considered self-occupied and the other will be deemed to be receiving rent, and you will pay tax on the deemed rent. The good news? You can decide which of the two houses to consider for deemed rent.

What constitutes property under Indian Income Tax Act?

Property is not limited to houses alone. It also includes offices, factories and warehouses. The strict definition of property under Indian Income Tax Act is Property is defined as ‘building and any land appurtenant’. It does not include only land holding.

However, if you own even one commercial property, you will have to pay tax on on its rent – whether it is rented or not.

So where does this ridiculous law come from? That’s anybody’s guess, but wait till you hear the really bad news.

I live in my own home in the US, but have one house in India. What’s the tax I need to pay?

Indian Income Tax Act says that when you own two or more properties, only one will be considered self-occupied. All other properties will be deemed to be receiving rent, even if they are lying vacant. The irony is, the law was written at a time when not many NRIs owned houses in India and abroad at the same time. So the law does not specify whether the law applies to houses owned in India alone.

Say you are an NRI who lives in New York and you own the house in which you live there. You also own a house in Delhi, which is lying vacant. For the purposes of the Indian Income Tax Act, you own two houses – irrespective of the fact that one house is outside India. You will have to pay deemed rent on your house in India.

I live in a rented house in Singapore but own a house in Mumbai. Will I pay tax in India?

If you own only one house, which is in India, that house will be deemed to be self occupied. No tax for you, madam!

But I have inherited my house in India

You are the owner of the inherited property and the same rules apply.

So how much tax do I have to pay on deemed rent?

The Indian Income Tax Act has some valuation prescription that needs to be used to calculate deemed rent. This valuation is based on municipal value of your house, its construction cost, the rent as per the Rent Control Act, and the rent of similar houses in the neighbourhood. The highest of these factors is considered annual value of your house.

You can deduct 30% towards expenses, whether are not you have incurred any expenses. You pay tax on the balance amount.

For more details, visit the official Indian Income Tax Department website.

Also see the tax calculator by the Indian Income Tax department.

(This article is for guidance only. The Global Indian accepts no responsibility for its accuracy. Please consult your financial advisor or chartered accountant.)