Bespoke Tax Planning

NRI (Sowmya garu) is the landlord (for a residential property situated in India). Tax treatment for rental income of NRI from the house located in India is as below, assuming the NRI has no other income from India.

🧾 GST Treatment:

🏠 Landlord's position:

If the rented house is a residential property, then GST is exempted.
According to S.23(1) of the CGST Act 2017, any person making exempted supplies (and nothing else) need not take any Registration.
Hence, the NRI has relief in GST compliance like Registration, Returns, etc.
This relief can be cited from another section as well.

Another Perspective:

For the Tenant, this renting will be an importation of service (Location of recipient in India, Location of Supplier is outside India, Place of supply as per S.13(4) of IGST Act 2017, is in India).
GST is, generally, to be paid in RCM (Reverse Charge Mechanism) (i.e., Tenant must pay the GST directly to the government instead of the NRI collecting from the tenant and paying to the government) for the importation of services.
So, as per S.23(2) of the CGST Act 2017 read with Notification number 05/2017-Central Tax, dated 19-06-2017, the NRI need not take any registration. Hence, the NRI has no GST compliance burden here as well.

❓ Tenant's position

If the import is not for business purposes, then it is exempted, so the Tenant is also relieved from GST compliance burden.

Therefore, we can say - since the rented property is a residential property, both the landlord and the tenant have no GST compliance burden.

💡 For the Curious Mind: Commercial Property & NRO Interest

However, if the rented property is not a residential property, and since this is importation of service, the tenant must pay GST to the government under RCM (except if the tenant is a composition taxpayer). As per section 24(iii) of CGST Act 2017, persons making RCM supplies must be registered under GST. Thus, the tenant must get registration under GST. If the property is indeed not a residential property, it is to be noted that the NRI (landlord) has no GST compliance burden, but the rent receipts are subject to GST payment, not by the landlord but by the tenant.

PS: Interest accumulated in NRO account of the NRI - Interest on a bank account is exempted, and hence there is no GST on it. Even if there was GST, it is not the responsibility of the NRI to collect and pay since the NRI in this case is a recipient of supply from the bank.

💰 Income-tax Treatment:

🌐 International Taxation & DTAA:

House property is in India, but the person who earns it (NRI) is in the USA. Which country should collect the taxes on the rental income? Well, logically, India should tax it since the property is in India, but the USA would want to tax it because the earner is in its country.
To address such cascading of taxes, countries enter into DTAA (Double Taxation Avoidance Agreement) with other countries.
Article-6 of the DTAA between India and USA specifically mentions that the tax on the rental income should be collected by that country in which the house property is located. Hence, we in India tax the rental receipts received by the NRI from their Indian tenants. 🇮🇳
But what if the rental incomes have already been taxed in the USA? No issue, Article-25 of the above-mentioned DTAA mentions that once the income is taxed in the USA, the NRI will get Tax-Credit in India while filing ITR for the same income. 🤝

🏦 TDS Compliance by the Tenant:

Since the landlord is an NRI, the tenant must deposit the rent amount into the NRO account of the NRI.
Since the Indian Tenant is making payments to an NRI, section 195 of the Income-tax Act, 1961 gets attracted (Form 15CA and 15CB are also needed).
Hence, for monthly rental payment by the tenant into the NRO account of the NRI, the tenant must deduct TDS @31.2% from the rent amount and pay the remaining amount into the NRO account of the NRI.
And the NRI must file an Income-tax return for the rental receipts from the Indian tenant and the interest accumulated in the NRO account thereof. 📊

⚠️ What if the tenant did not deduct tax?

Non-compliance of TDS on the part of the tenant may lead to (one or a combination of):

Interest @ 1% p.m. (for non-deduction) or 1.5% p.m. (for short-deduction/late deposit) u/s 201(1A).
Penalty u/s 271C (equal to amount of TDS not deducted/short deducted).
Rendering the tenant as an "assessee in default" u/s 201 thereby levying a penalty of up to the amount of TDS.
Prosecution u/s 276B may be initiated in extreme cases. 🚨

💡 Workarounds to Tenant's TDS Compliance:

To escape from the TDS compliance for the tenant, the NRI should legally transfer the income from the house to a person resident in India, without transferring the asset itself. This is made possible by:

Having a written agreement with the tenant that the rental income, in further periods, must be transferred to the account of the Indian relative (mention name).
With this workaround, the tenant will be making payment of rent to a resident (which attracts 194-IB).
The NRI can file ITR showing the income in her (NRI's) name (as per clubbing provisions, mentioned in S.60 of the Income-tax Act, 1961).
194-IB says: "Any person, being an individual or a Hindu undivided family (other than those referred to in the second proviso to section 194-I), responsible for paying to a resident any income by way of rent exceeding fifty thousand rupees for a month or part of a month during the previous year, shall deduct an amount equal to five per cent of such income as income-tax thereon."
Here, the Indian resident to whom the NRI transfers the income, will be the person who will be receiving the rent from the Indian tenant and hence a limit of ₹50k will be seen for attraction of 194-IB. Generally, the rental income from one tenant will be way lower than the ₹50k limit, so TDS is not needed to be deducted by the tenant. ✅

⚖️ GAAR Applicability:

Since we are taking undue advantage of the loopholes and drafting mistakes for reducing tax liability and thus avoiding payment of tax (TDS in this case) which is lawfully payable, it will be considered as Tax-Avoidance.
This may lead to applicability of GAAR (General Anti-Avoidance Rule).
But if the aggregate tax benefit does not exceed ₹3 crores, GAAR will not apply. So, we are safe with the workaround. 👍

📜 Addressing Past Rental Income:

But what about the rental income already received from the tenants all these years? Here we have a workaround:

The NRI must transfer all the money received till date as rental income to the tenant.
The NRI should inform her Indian relatives (to whom the asset's income will be transferred) to execute a promissory note with the tenant mentioning that we (Indian resident) are in need of a monthly income for personal purposes.
But an important note - the NRI should file ITR for an amount greater than what is transferred back to the tenant, just to make it look like it is not round-tripping but a legitimate transaction.
Finally, upon accumulating all the incomes (rent) from the tenants, the Indian resident to whom the NRI transferred the Income from the asset without transferring the asset itself (I strongly suggest it to be father, mother, brother, or sister of the NRI), Mother of the NRI in our case, transfers a lumpsum (any amount) to the NRO account of the NRI - 195 does not apply as the amount is not chargeable to tax (Section 56(2)(x) of the Income Tax Act 1961). 💰

Bespoke Tax Planning for Sowmya garu