How can tenants of NRIs apply for TDS reduction?

Under what circumstances a tenant whose landlord is a non-resident Indian (NRI) can apply for a reduction in tax deducted at source (TDS) on rent and what are the documents needed to support the application? 

Tax must be deducted at the rate of 30% (plus applicable surcharge and cess) on the rent payable to an NRI landlord. However, the landlord’s actual tax liability will generally be lower due to deductions available against the rent income (interest on housing loan, municipal taxes, and standard deduction of 30%) or lower tax slabs.

Unlike dividends, interest or other income, tax treaties generally do not exempt rental income from an immovable property situated in India and also do not provide any lower tax rate on the rent. Therefore, the tax payable on the rental income would be in accordance with the Income Tax Act.

However, regardless of the landlord’s actual tax liability, the tenant is legally obliged to deduct tax at the rate of 30% (plus applicable surcharge and cess) on rent payments to non-residents. The landlord would then have to file a claim for a refund on his tax return.

The only option for a lower tax deduction is that either the landlord or the tenant consider applying to the respective assessing officer for a certificate for a lower rate of tax deduction on the gross rent. The application for a lower deduction of tax can be made by the tenant under Section 195 or by the landlord under Section 197.

While filing for the certificate for lower TDS, one must also submit supporting documents to substantiate the lower amount of tax payable by the landlord, such as computation of estimated income and tax of the landlord, rental agreement and a copy of interest schedule on the housing loan. Since most of these documents and workings are normally available only with the landlord, who may not want to share these with the tenant, it is preferable that the application for lower tax deduction certificate be made by the landlord.

Mahesh Nayak is a chartered accountant at CNK & Associates.