Taxation of rental income from an Indian resident in the US: what to pay attention to

Question: Should an Indian resident and earning rental income in the US benefit from depreciation and other allowances allowed in the US and offer tax on net residential income in India?

— Name withheld upon request

No, a resident Indian who earns rental income from a property located in the US cannot directly claim depreciation or other deductions allowed under US tax laws to calculate net rental income by offering it for tax purposes in India. Taxation of such income in India falls under the heading ‘Income from Household Property’ and specific rules of the Indian Income Tax Act have to be followed.

Taxation in India:

Under Indian tax rules, income from rental property, regardless of its location, is taxed at a gross rate, allowing for limited deductions. Only city taxes paid and a standard deduction of 30% of the annual net worth (gross rental income less city taxes) are allowed. Depreciation and other expenses allowed under US tax law (maintenance, insurance or utilities) are not recognized under Indian tax rules. Therefore, rental income computed in the US for US tax purposes cannot be directly used for tax purposes in India.

India has signed a Double Taxation Avoidance Agreement (DTAA) with the United States to prevent double taxation of the same income. Although rental income may be taxed in the US under US law, taxes paid there can be claimed as a foreign tax credit in India. This reduces the overall tax burden but does not exempt the income from taxation in India. It is essential to calculate FTC in accordance with Indian tax laws and maintain appropriate documentation, including US tax returns.

Compliance obligations:

Indian residents are required to report all foreign assets, including U.S. real estate and related income, on their Indian tax return in accordance with the Schedule of Foreign Assets and Income. Maintain appropriate records of expenses, receipts and U.S. tax returns for audit and compliance purposes. Any discrepancies or failure to report may result in penalties under Indian tax laws.

While the US tax system allows deductions such as depreciation, they are not applicable for tax purposes in India. The income must be taxed in India on the basis of gross rental income with limited deductions. To avoid double taxation, you can avail benefits under the DTAA. NRIs and resident Indians with foreign income are advised to scrupulously follow compliance rules and consult a tax expert for proper calculation and reporting. Providing proper documentation and disclosures is crucial to avoid compliance issues with tax authorities.

Ajay R. Vaswani – Founder – ARAS AND COMPANY, Chartered Accountants