Is Your Landlord an NRI? Let’s Understand If You Are on the Right Side of Tax Law Compliance

Indian tax laws are perceived to be the second most complex in the Asia-Pacific region, becoming even less predictable over the last three years, a Deloitte survey has said. Source: The Hindu Business Line

A good number of Indians settled abroad own property(ies) in India and a good number of such Indians have given them on rent. With the increase in mobility of human capital, especially in metro cities, the rental market has been on the boom. Many of such properties for rent are owned by non-resident Indians (“NRI“).

Section 195 of [Indian] Income tax act, 1961

There is a small piece of code within Income Tax Act, 1961, known as section 195, which provides:

“195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force” (Source: Income Tax Portal)

Basically, this provision entrusts all persons (Eg., individuals, HUFs, companies, LLPs, trusts, partnership firms etc.) to withheld or deduct tax at source, whenever such person makes payment of any tax chargeable income to any non-resident. This may include rent, interest, professional fee etc. The rate of TDS is notified separately for various kinds of incomes. In this article, our focus would be on taxability of such rent paid by residents to a non-resident (including NRIs) within the purview of section 195, with emphasis on rental payments made by individuals earning income from salary.

I am a salaried person, TDS is for businessman, why should I deduct TDS?

Traditionally withholding taxes (TDS in India) on the source of income at the time of payment or credit is perceived to be a business tax function, which is a myth. Section 195 does not differentiate between a businessman or pensioner, company or HUF. So even if you are a salaried person and have paid rent during the year to a non-resident, you are duty bound to deduct tax in accordance with the provisions of section 195, before making any payment of rent to your non-resident or NRI landlord.

OK, Got it! But how much to deduct?

Rates of TDS for rent paid to non-residents are specified in Part II of Schedule I in Finance Acts of each year. As per Finance Act, 2018, the base rate of TDS is 30% for rent, if payee (or landlord) is a non-resident (including NRIs). On top of the base rate, a surcharge of 10% of base rate is levied, where the rent or the aggregate of such rent paid or likely to be paid and subject to the deduction, is between 0.50 cr to 1 cr and 15% if it exceeds 1 cr. Tax rate so arrived shall be further increased by an additional surcharge of 4% called as “Health and Education Cess on Income Tax”.

So, effective rates would be:

a. 31.2% – where annual rent is up to 50 lakhs

b. 34.32% – where annual rent is between 50 lakhs & 1 crore

c. 35.88% – where annual rent exceeds or likely to exceed 1 crore

Above rates are subject however to benefits under any double taxation avoidance agreement (“DTAA”) or tax treaties, India may have with certain countries.

Wasn’t it 5%? I heard that TDS rate is 5% if rent is more than 50K!

That is section 194-IB, which is applicable only when you make payment to a resident. But we are dealing here with non-resident (including NRIs). Do not make mistake, else non-compliance may land you in soup.

Please also tell me how, when and where to deposit it? Any other compliances?

This is the trickiest part. Before you can deposit TDS, you need to obtain Tax Deduction and Account Number (TAN), which can be applied online. After you have obtained this number, you need to deposit tax in income tax challan ITNS-281 with a bank, preferably online. You need to deposit this tax within 7 days of the end of each month (exception: March month for which due date is 30th April), else you shall be liable to pay interest for late payment. Further, you are also supposed to file quarterly TDS return in form 27Q and also to issue TDS certificates in form 16A. Not only this, you are even required to comply with section 195(6) i.e. form 15CA / 15CB compliances under rule 37BB of the Income Tax Rules, 1962. All these compliances can be easily taken care by a Chartered Accountant on your behalf.

Can NRI provide form 15H / 15G so that TDS is not deducted?

No. Form 15G or 15H are not applicable to an NRI.

However, a non-resident can obtain a certificate of lower or no deduction from tax authorities under section 197, if on an application made by such non-resident income tax authorities are satisfied that tax needs to be deducted at the lower rate or nil rate, as they deem fit. In such a situation, however, the payer may deduct tax according to the certificate issued by tax authorities. He may also approach tax authorities under section 195(3) and obtain a certificate of non-deduction. Further, under the provisions of section 195(2), the payer may also approach his tax officer to allow him to remit money to non-resident (including NRIs) with the lower rate of tax deduction or without any deduction.

Any penal consequences?

Law becomes toothless in absence of penal provision, but at the same time, penal provisions become tools of harassment in the hands of tax authorities. It’s a two-sided sword. Section 27I-I has prescribed the penalty of Rs. 1 lac for non-compliance of section 195(6) related to Form 15CA/CB. Section 234W prescribes late fees @ Rs. 200 per day (subject to conditions) for late filing of TDS return. Section 272A(2) prescribes penalty for non-issuance of TDS certificate @ Rs. 100/- per day. However, penalty (not late fees) cannot be levied unless an opportunity of being heard is given to present your facts/reasons for such non-compliances.

OMG, I paid rent to NRI landlord without TDS, what to do now?

Immediately get in touch with a Chartered Accountant and take his professional help. He will understand your case and will suggest you best possible course of action and how to mitigate tax risks in such a situation. Section 195 (along with other connected pieces of law) is one the complex provisions of Income Tax Act and it’s best that it may be handled by an expert.

Conclusion

As demonstrated above, even if you are person earning income from salary, it is your statutory duty to not only deduct TDS before making payment to non-resident landlord (including NRI, but also to deposit it with government treasury, file TDS returns on time and do all other compliances by taking expert’s help, else wait for date with tax officials.

Ignorance of the law is no excuse!!