NRI Rental Income Tax Planning: From 30% TDS to Actual 10% Tax (Legal Strategies)
How to structure rental income to minimize tax through proper deductions (standard 30% + municipal taxes + interest), ensuring tenant deducts correct TDS, filing ITR to claim refunds, and investment planning for offsetting rental income
Written by
CA Ashama Rajawat
The NRI Rental Income Tax Challenge
NRIs earning rental income from Indian properties face a unique tax situation: 30% TDS is deducted upfront by tenants, but your actual tax liability might be much lower—sometimes as low as 10-15%—after claiming all eligible deductions.
Example: The Tax Gap
What Tenant Deducts (TDS)
- • Monthly rent: ₹50,000
- • Annual rent: ₹6,00,000
- • TDS @ 30%: ₹1,80,000
Actual Tax After Deductions
- • Rent: ₹6,00,000
- • Less: Standard 30%: (₹1,80,000)
- • Less: Municipal taxes: (₹15,000)
- • Less: Interest: (₹2,50,000)
- • Net: ₹1,55,000
- • Tax @ 20%: ₹31,000
Refund: ₹1,49,000!
By filing ITR and claiming all deductions, you get back 83% of the TDS deducted!
Step-by-Step: Computing Taxable Rental Income
The Complete Formula
Net Annual Value (NAV)
= Gross Annual Rent
- Municipal Taxes Paid by Owner
Income from House Property
= NAV
- 30% Standard Deduction (on NAV)
- Interest on Home Loan
Detailed Example:
| Gross Annual Rent | ₹6,00,000 |
| Less: Municipal Property Tax paid | (₹15,000) |
| Net Annual Value (NAV) | ₹5,85,000 |
| Less: Standard Deduction @ 30% of NAV | (₹1,75,500) |
| Less: Interest on Home Loan | (₹2,50,000) |
| Income from House Property | ₹1,59,500 |
Tax Calculation:
- • If this is your only Indian income and you're in 20% slab:
- • Tax: ₹1,59,500 × 20% = ₹31,900
- • TDS deducted: ₹1,80,000
- • Refund due: ₹1,48,100
Maximizing Deductions: The 7 Strategies
Claim Full 30% Standard Deduction
What: Automatic 30% deduction from Net Annual Value (after municipal taxes)
Eligibility: Available to ALL landlords, no documentation needed
Purpose: Covers repairs, maintenance, depreciation
Pro Tip:
This is calculated automatically—you don't need to prove actual expenses. Whether you spent ₹0 or ₹1 lakh on repairs, you still get 30% deduction.
Deduct Municipal Property Taxes
What: Property tax paid to local municipal corporation
Condition: Must be paid by YOU (not tenant), during the financial year
Documentation: Keep property tax receipts
Common Mistake:
Many NRIs forget to pay property tax regularly. Pay annually and keep receipts—it's fully deductible!
Maximize Interest Deduction
What: Interest paid on home loan taken to purchase/construct/repair the property
Limit: UNLIMITED for rented property (vs ₹2L for self-occupied)
Documentation: Interest certificate from bank
Big Benefit:
If you have ₹4L interest on loan, full amount is deductible for let-out property. This can often reduce taxable income to near zero!
Set Off Rental Loss Against Other Income
What: If deductions exceed rental income, you can set off loss against salary/other income
Limit: Max ₹2 lakh loss can be set off per year
Carry Forward: Remaining loss carried forward for 8 years
Example:
Rent: ₹3L, After deductions: Loss of ₹50K. If you have ₹10L other Indian income, taxable becomes ₹9.5L (₹10L - ₹50K loss).
Ensure Tenant Deducts Correct TDS
Rule: If monthly rent > ₹50,000, tenant must deduct TDS @ 30%
Your Action: Provide PAN to tenant to ensure correct TDS rate (else 35%)
Documentation: Collect Form 16C/16A from tenant quarterly
Alternative:
Apply for Lower TDS Certificate (Section 197) if your actual tax is much lower. Tenant can then deduct at lower rate (e.g., 10% instead of 30%).
File ITR to Claim TDS Refund
Mandatory: Even if your income is below taxable limit, you MUST file if TDS was deducted
Form: ITR-2 for NRIs
Timeline: July 31st of next year (extended to November sometimes)
Critical:
No ITR = No Refund. The ₹1.5L refund you're owed will NOT come automatically. You must file ITR and claim it.
Use NRO Account Properly
Rule: Rental income MUST be credited to NRO account only (NOT NRE)
Why: NRE account cannot accept Indian-sourced income
Repatriation: Can repatriate up to $1M per FY from NRO after taxes
Setup:
Give tenant your NRO account details for rent credit. After ITR filing and refund receipt, you can repatriate net amount abroad.
Advanced Tax Planning Strategies
Strategy 1: Timing Property Purchase with Home Loan
If you're planning to buy rental property, structure it strategically:
Option A: Cash Purchase
- • Rent: ₹6L, After 30% deduction: ₹4.2L taxable
- • Tax @ 30%: ₹1.26L per year
Option B: 50% Home Loan
- • Rent: ₹6L, After deductions: ₹4.2L
- • Less: Loan interest ₹3.5L
- • Net: ₹70K taxable
- • Tax @ 30%: ₹21K per year (saves ₹1.05L annually!)
Note: Run numbers carefully—loan interest cost vs tax savings + investment returns on saved capital.
Strategy 2: Multiple Properties - Loss Set-Off
If you own multiple rental properties, aggregate them for tax purposes:
Example:
| Property 1 (High rent, no loan) | Income: +₹3L |
| Property 2 (Low rent, high loan interest) | Loss: -₹2L |
| Net Taxable | ₹1L |
Tax only on ₹1L instead of ₹3L—significant savings!
Strategy 3: Joint Ownership for Income Splitting
If property is jointly owned (with spouse/family), rental income is split proportionally:
Example:
- • Total rent: ₹10L per year
- • Jointly owned 50-50 with spouse
- • Each reports ₹5L in their ITR
- • If both in 20% bracket: ₹2L tax total
- • If sole owner in 30% bracket: ₹3L tax
- • Savings: ₹1L per year!
Important:
Joint ownership must be genuine (reflected in property documents). Cannot claim joint ownership retroactively for tax purposes only.
ITR Filing Process for Rental Income
Step 1: Collect Documents
- • Form 16C/16A from tenant (TDS certificate)
- • Bank statements showing rent credit
- • Property tax payment receipts
- • Home loan interest certificate from bank
- • Form 26AS (shows TDS deducted on your PAN)
Step 2: Login to Income Tax Portal
Visit incometax.gov.in → Login with PAN → e-File → Income Tax Return → Select ITR-2 (for NRIs)
Step 3: Fill House Property Schedule
Property Details: Address, co-owner details (if any)
Rental Income:
- • Gross rent received
- • Municipal taxes paid
- • System auto-calculates 30% deduction
- • Enter home loan interest
Step 4: Claim TDS Credit
In TDS section, verify TDS shown in Form 26AS. System auto-populates. Ensure tenant deposited TDS correctly.
Step 5: Verify and Submit
Review computation, verify tax/refund amount, submit ITR, e-verify using Aadhaar OTP or net banking. Refund processed in 4-8 weeks.
Common Mistakes to Avoid
- ✗Not filing ITR thinking "TDS already deducted, I'm done" - you lose refund!
- ✗Crediting rental income to NRE account instead of NRO - FEMA violation
- ✗Not providing PAN to tenant - TDS deducted at 35% instead of 30%
- ✗Forgetting to pay and claim municipal property tax deduction
- ✗Not maintaining home loan interest certificates annually
- ✗Missing July 31st ITR deadline - refund gets delayed significantly
Conclusion
NRI rental income taxation may seem daunting with 30% TDS, but with proper planning and utilization of all deductions—30% standard deduction, municipal taxes, unlimited interest deduction—your effective tax rate can drop to 10-15% or even generate losses to offset other income. The key is disciplined documentation, ensuring correct TDS by tenant, and mandatory ITR filing to claim refunds. With the right strategy, rental property can be a highly tax-efficient income source for NRIs.