Many high net worth individuals who own houses abroad have in recent times been questioned by income tax officials for not having paid tax on the “deemed rental income” from those properties. It, therefore, becomes important for owners of foreign properties to understand the concept of deemed rental income and their tax liability on it.
For tax purposes, one house (in India or abroad) is treated as self-occupied. The owner has to pay tax on rental income on the other house (or houses). If the other house is not rented out, he has to arrive at a deemed or notional rental income and pay tax on it. “A person resident in India is liable to pay tax in India on his global income. Hence, rental income from house property — let out or on deemed basis — situated abroad is taxable in India. The income tax law does not make any distinction between house properties situated in India or abroad for computing income from house property,” says Suresh Surana, founder, RSM Astute Consulting Group.
In case of the taxpayers owning more than one house (all used for own purpose) and where one or more of them is situated outside India, they will have to do some calculation and arrive at the taxable value of each property by considering it first as selfoccupied and then as let out (see table). "The taxpayer can then choose a combination which results in the lowest taxable income from house property," says Chetan Chandak, head of tax research, H&R Block India.
To calculate the deemed rental, the person needs to use the standard rent or let-able value of the property. "Obtain quotes from property brokers in the area or browse on websites that provide rental rates for that overseas location. Estate tax bills can also provide some indication in this regard," says Nidhi Seksaria, partner and leader–real estate and construction, BDO India.
The rent you receive or the deemed rent is the gross annual value, from which you can reduce the municipal taxes paid during the year to arrive at the net asset value (NAV). From this, you can avail of two deductions under Section 24 of the I-T Act. One is the standard deduction under Section 24(A), wherein you can deduct 30 per cent of the NAV. Next, under Section 24 (B) you can deduct the interest paid on home loan. You will then arrive at the income from house property, which is added to your other sources of income and taxed according to the slab rate applicable to you. "You also need to check your eligibility for availing foreign tax credit related to taxes paid abroad on a house situated abroad under the relevant tax treaty provisions. If available, this will reduce your net tax outgo in India," says Seksaria.
In countries such as the US, the property is usually managed by a real estate management agency, which charges a commission and a property management charge. This is over and above the property tax, mortgage amount, etc. paid by it on behalf of the client. The property management fee is assumed to be included in the standard deduction (30 per cent of NAV) which one gets under Indian tax laws. But there are differing views regarding the deductibility of the commission charged as percentage of rent collected from the tenant. "Some consider it as deductible from the amount of gross rent as it is in the nature of diversion of income. Others opine that this should be part of the 30 per cent standard deduction and no separate deduction is admissible for it. This needs to be evaluated in the light of the facts of each case based on the terms of agreement with the agency," says Chandak.