NRI Rental Income Tax: How Let-Out Indian Property Is Taxed in FY 2025-26

A Bengaluru flat let to a multinational at Rs 1,20,000 a month often sounds like fuss-free passive income for the non-resident owner. Sit with the actuals and the picture turns: Section 195 of the Income-tax Act, 1961 obliges the tenant to deduct tax at slab rates before remitting rent abroad, while the property loss you set off in your London or New Jersey return is governed by an entirely different rulebook. This NRI Corner walks through the FY 2025-26 mechanics end-to-end, with worked numbers, repatriation rules and a tenant-side compliance check.

Rental income from Indian immovable property is one of the few NRI receipts where India retains primary taxing rights under almost every Double Taxation Avoidance Agreement (DTAA) — not a treaty-rate withholding event like dividends or interest. As the residency country (United States, United Kingdom, UAE, Canada, Singapore or Australia) you only get foreign-tax-credit relief, never an outright exemption. The cost of getting the Indian computation wrong therefore lands in two jurisdictions at once.

FEMA / DTAA Position

Under Section 6 of the Foreign Exchange Management Act, 1999, a non-resident may continue to hold and earn from Indian immovable property acquired while resident, and may also acquire residential or commercial property by inward remittance — only agricultural land, plantations and farmhouses are barred (RBI Master Direction on Acquisition and Transfer of Immovable Property, dated 1 January 2016, as amended). FEMA rarely blocks the rent flow itself; what it controls is repatriation back to the country of residence.

Every Indian DTAA allocates the right to tax "income from immovable property" to the situs state — the country where the property sits — and the residence country must give relief. Article 6 of the India-USA DTAA (effective 12 September 1991) is typical: rental income is taxable in India "without limit", and the United States, as the residence state under Article 4, gives credit under Article 25 (the elimination-of-double-taxation article). The same architecture applies under India-UK Article 6, India-Canada Article 6, India-Singapore Article 6, India-Australia Article 6 and India-UAE Article 6.

The corollary: the DTAA reduced rates available for portfolio dividends (15% under India-USA Article 10) or interest (15% under Article 11) do not extend to rent. India can — and does — tax let-out property at full slab rates, with TDS by the tenant under Section 195 acting as the collection mechanism rather than a final tax. India also retains a 12.5% taxing right on long-term capital gains, so neither rent nor sale proceeds escape the Indian net.

Tax Treatment in India

The computation works in five mechanical steps that every NRI landlord should run before quoting a rent figure.

Step 1 — Gross Annual Value (GAV). Section 23(1) deems GAV to be the higher of expected rent (municipal value or fair rent, capped at standard rent) and actual rent received.

Step 2 — Less municipal taxes paid by the owner. Only taxes actually paid in the financial year qualify (Section 23 second proviso). The result is the Net Annual Value (NAV).

Step 3 — Less Section 24(a) standard deduction at a flat 30% of NAV. A notional allowance for repairs and collection charges; no bills are required.

Step 4 — Less Section 24(b) interest on borrowed capital. For a let-out property the interest deduction is uncapped — entirely different from the Rs 2,00,000 ceiling that applies to a self-occupied property. Pre-construction interest is allowed in five equal annual instalments from the year of completion.

Step 5 — Apply the Section 71(3A) cap on set-off. Where the steps above produce a loss, the Finance Act, 2017 inserted Section 71(3A) (effective Assessment Year 2018-19) limits set-off of "house property" loss against other heads to Rs 2,00,000 per financial year. Any unabsorbed loss is carried forward for up to eight assessment years to be set off only against future house-property income.

Take a Bengaluru 2-BHK earning gross rent of Rs 14,40,000 in FY 2025-26 (Rs 1,20,000 a month), with Rs 40,000 of municipal tax paid, and home-loan interest of Rs 6,50,000 at 9% on a residual Rs 72,00,000 principal. NAV is Rs 14,00,000; the 30% standard deduction is Rs 4,20,000; net taxable house-property income is Rs 14,00,000 less Rs 4,20,000 less Rs 6,50,000, equal to Rs 3,30,000. Sanity-check the figures with the Oquilia Rental Income Tax Calculator before filing.

The new regime under Section 115BAC is the default from FY 2024-25 — no Section 80C, no PPF deduction, and Section 80CCD(1B) (the Rs 50,000 NPS top-up) is NOT allowed in the new regime; this NPS deduction survives only in the old regime. Income from house property still flows through unchanged because Section 24 deductions sit before the gross-total-income line. Apply the FY 2025-26 new-regime slabs (zero up to Rs 4,00,000; 5% to Rs 8,00,000; 10% to Rs 12,00,000; 15% to Rs 16,00,000; 20% to Rs 20,00,000; 25% to Rs 24,00,000; 30% above) plus 4% health-and-education cess. Surcharge in the new regime is capped at 25% — the 37% slab continues only in the old regime.

A critical wrinkle: NRIs do not get the Section 87A rebate. The rebate (Rs 60,000 in the new regime up to Rs 12,00,000 of total income for FY 2025-26) is statutorily restricted to "resident individuals" by the proviso to Section 87A. Once an NRI's income crosses Rs 4,00,000 the slab rate bites without any rebate cushion.

TDS under Section 195. The tenant is the deductor, not the bank. Where the landlord is non-resident the chain falls outside the Section 194-IB Rs 50,000-per-month threshold and the Section 194-I Rs 2,40,000-per-year threshold; instead Section 195 governs every rupee. The tenant must deduct TDS at "the rates in force" — slab rate plus 4% cess on gross rent — and remit it monthly using a TAN-linked challan, with quarterly Form 27Q reporting non-resident payments. Where the NRI furnishes a lower-deduction certificate under Section 197, the tenant can withhold at that lower rate. Without it the tenant defaults to a 30% withholding plus surcharge and cess — refundable only by filing the Indian return. Reference texts of the Act and circulars sit at incometax.gov.in and the consolidated bare act at indiacode.nic.in.

Tax Treatment Abroad

Take the same Bengaluru 2-BHK held by a US-resident NRI. The property is reported on Schedule E of Form 1040. Under IRC Section 168 the residential building depreciates straight-line over 30 years for foreign-situs property held by a US person (the 27.5-year domestic life applies only to property within the United States; see IRC Section 168(g)(1)(A)). Mortgage interest is allowable in full as an investment-property deduction, municipal tax is an above-the-line expense, and the 30% Indian standard deduction is not recognised because it is a notional Indian-law allowance.

Under Article 25(2)(a) of the India-USA DTAA (the "method of credit" article), the United States grants its resident a credit against US tax for Indian tax paid on the same rental income. The credit is computed under IRC Section 901 with the per-country / per-category limitation of IRC Section 904; rental income falls into the "passive category" basket. If the Indian effective tax on Rs 3,30,000 of rental income is roughly 5% to 10% and the US passive-basket marginal rate is 24%, the foreign tax credit absorbs the Indian tax fully but the United States still collects the residual — there is no "exemption" anywhere in the chain.

UAE residents are the cleanest case: Article 25 of the India-UAE DTAA uses the exemption-with-progression method, and because the UAE imposes no personal income tax on rental receipts (Federal Decree-Law No. 47 of 2022 levies the 9% corporate tax only on business profits above AED 3,75,000), the Indian tax becomes the final tax. Net pickup for a Dubai-based NRI is therefore identical to the Indian tax — the FEMA repatriation cap, not a residency-state tax, becomes the binding constraint.

Repatriation Mechanics

Rental income in INR must first land in an NRO (Non-Resident Ordinary) account because rent is "current income" earned in India (RBI Master Direction on Deposits and Accounts, dated 1 January 2016 as updated). It cannot be received directly into an NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) account.

Repatriation out of NRO is governed by Schedule III of the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 read with FEMA Notification No. 13(R)/2016-RB dated 1 April 2016. The annual cap is USD 1,000,000 per financial year (1 April to 31 March) for the aggregate of capital and current income drawn down from NRO balances and from sale proceeds of immovable property. RBI references are accessible at rbi.org.in.

Mechanical checklist before initiating the wire:

1. Obtain Form 15CB from a chartered accountant verifying that all Indian tax liabilities on the remittance amount have been discharged — required for any single remittance above Rs 5,00,000.
2. File Form 15CA Part C electronically on the Income-tax e-filing portal, quoting the Form 15CB UDIN.
3. Submit FEMA declaration in Form A2 to the authorised dealer bank.
4. Provide the bank with proof of source — Section 195 TDS certificate (Form 16A), the rental agreement and a copy of the Income-tax return for the relevant year.

Authorised dealer banks aggregate the USD 1,000,000 cap on a customer-ID basis across branches; splitting between two banks does not reset the limit. Where the NRI has both rental income and sale proceeds in the same financial year, the aggregate of NRO drawdowns must fit within the same USD 1,000,000 envelope (the RBI press release dated 13 May 2014 confirmed this aggregation rule). Use the Oquilia NRO Repatriation Calculator to map a multi-stream year.

The post-credit tax computation is best modelled on the NRI Tax Calculator. Glossary entries on DTAA and TDS cover the underlying definitions; the Foreign Tax Credit Calculator helps with Form 67 disclosures.

FAQ

Does the Section 71(3A) Rs 2 lakh loss cap apply to NRIs the same way as residents?

Yes. The Rs 2,00,000 cap on house-property loss set-off against other heads under Section 71(3A) applies uniformly to both resident and non-resident assessees. The Finance Act, 2017 inserted Section 71(3A) effective Assessment Year 2018-19, and the section is silent on residency. Carry-forward of unabsorbed loss to eight subsequent assessment years (Section 71B) is also available to NRIs.

Can the tenant deduct Section 195 TDS at the DTAA rate instead of Indian slab rate?

No, not for rental income. Article 6 of every Indian DTAA we surveyed (USA, UK, UAE, Canada, Singapore, Australia) allocates "income from immovable property" to the situs state without a treaty-cap. The "rates in force" under Section 195 default to Indian slab rates plus 4% cess. The DTAA reduced rates of 15% (interest, dividends, royalties) under, say, India-USA Articles 10 to 12 do not apply to Section 6 rent.

Is the 30% Section 24(a) standard deduction available on top of actual repair expenses?

The two are mutually exclusive. Section 24(a) is a flat 30% notional allowance and cannot be combined with itemised repair claims; the IT Act treats it as exhaustive for repairs and collection. Actual repair receipts are not separately deductible.

How is municipal tax on the let-out property treated for an NRI?

Municipal tax actually paid by the owner during the financial year is deductible from Gross Annual Value to arrive at NAV (Section 23 second proviso). Tax paid by the tenant directly to the municipal corporation is not deductible to the owner. NRI landlords should pay municipal tax through their NRO account so bank statements support the deduction at scrutiny.

What happens if the tenant fails to deduct TDS under Section 195?

The tenant becomes an "assessee in default" under Section 201(1) and is personally liable for the unpaid tax plus interest at 1% per month from the date the tax was due to the date of actual deduction (Section 201(1A)(i)) and 1.5% per month thereafter until deposit (Section 201(1A)(ii)). Disallowance of 30% of the rent expense under Section 40(a)(i) applies if the tenant is a business claiming the rent.

Can I claim depreciation on the building under Indian rules to reduce rental income?

No. Depreciation under Section 32 is allowed only on commercial assets used for business or profession; it is not available on a residential let-out property reported under "Income from House Property". For most NRI individual landlords the 30% Section 24(a) standard deduction is the substitute.

How does the Section 197 lower-deduction certificate help, and how long does it take?

Form 13 application for a Section 197 certificate, filed online on TRACES, allows the NRI to compute expected net rental income and request a tailored lower-TDS rate. The certificate is valid for the financial year in which it is issued. Processing time at Indian field offices typically runs 30 to 45 days, so apply by April for an FY-long certificate.