Taxing resident Indian’s US rental income: What to watch for

Q – Should a resident Indian having rental income from the US, take the benefit of depreciation and other reliefs allowed in the US and offer for tax on house property income on a net basis in India? 

—Name withheld on request

No, a resident Indian earning rental income from a property located in the US cannot directly claim depreciation and other deductions allowed under US tax laws to compute the net rental income when offering it for tax in India. The taxation of such income in India falls under the head “Income from House Property,” and specific rules under the Indian Income Tax Act must be followed.

Taxation in India:

Under Indian tax laws, rental income from a property, irrespective of its location, is taxable on a gross basis, which allows limited deductions. Only municipal taxes paid and a standard deduction of 30% on the net annual value (gross rental income minus municipal taxes) are permitted. Depreciation and other expenses allowed under US tax laws (maintenance, insurance or utilities) are not recognized under Indian tax provisions. Thus, the rental income calculated in the US for US tax purposes cannot be directly used for Indian tax filings.

India has signed a Double Taxation Avoidance Agreement (DTAA) with the US to prevent double taxation of the same income. While the rental income may be taxed in the US under US laws, the 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 being taxed in India. It is essential to compute the FTC in accordance with Indian tax rules and maintain appropriate documentation, including tax filings in the US.

Compliance Obligations:

Resident Indians are required to report all foreign assets, including property in the US, and associated income in their Indian income tax return under the Foreign Asset and Income Schedule. Proper records of expenses, receipts and US tax filings must be maintained for audit and compliance purposes. Any discrepancy or non-reporting can result in penalties under Indian tax laws.

While the US tax system allows deductions like depreciation, these are not valid for Indian tax purposes. The income must be taxed in India based on gross rental income with limited deductions. To mitigate double taxation, the benefits under the DTAA can be availed. NRIs and resident Indians earning foreign income are advised to follow compliance rules meticulously and consult a tax expert for proper computation and reporting. Ensuring proper documentation and disclosures is crucial to avoid any compliance issues with tax authorities.

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