As the global economy evolves, many resident Indians are investing in real estate abroad, particularly in the United States. However, navigating the complexities of taxation on foreign rental income can be challenging. This press release aims to shed light on the critical aspects of taxing US rental income for resident Indians and the compliance obligations that come with it.
Under the Indian Income Tax Act, rental income from properties located anywhere in the world is subject to taxation in India on a gross basis. This means that while residents can claim limited deductions, they cannot deduct expenses typically recognized under US tax laws, such as maintenance, insurance, or utilities. The only permissible deductions include:
A standard deduction of 30% on the net annual value (calculated as gross rental income minus municipal taxes)
It is crucial to note that the rental income calculated for US tax purposes cannot be directly applied to Indian tax filings.
Double Taxation Avoidance Agreement (DTAA)
To alleviate the burden of double taxation, India has established a Double Taxation Avoidance Agreement (DTAA) with the United States. This agreement allows resident Indians to claim a foreign tax credit (FTC) for taxes paid in the US. While this credit helps reduce overall tax liability in India, it does not exempt the rental income from taxation. Therefore, it is vital for taxpayers to compute their FTC according to Indian regulations and maintain comprehensive documentation of their US tax filings.
All resident Indians must report foreign assets, including US properties and their associated rental income, in their Indian income tax returns under the Foreign Asset and Income Schedule. To ensure compliance and avoid penalties, individuals should keep detailed records of:
Expenses related to the property
Receipts
US tax filings
Failure to report accurately can lead to significant penalties under Indian tax laws.
For resident Indians earning rental income from properties in the US, understanding and adhering to these tax regulations is essential. While the US tax system permits various deductions, Indian tax laws impose stricter rules that must be followed. To effectively manage potential double taxation and ensure compliance, it is advisable for individuals to consult with a tax expert who can provide guidance on proper computation and reporting.
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