Applicability of TDS When Paying Rent to an NRI: A Practical Guide

Paying rent to a Non-Resident Indian (NRI) isn’t the same as paying rent to an Indian resident. The Income Tax Department treats these two situations very differently, and missing the compliance steps, even by accident, can put the tenant at risk of penalties, interest, and even being marked as a “defaulting deductor.” Surprisingly, most tenants don’t even know that they are responsible for deducting TDS when the landlord is an NRI, even if the rent agreement doesn’t explicitly mention it.

This article breaks down the law in simple language—backed by logic, examples, and common mistakes—so that you understand exactly what TDS rules apply when paying rent to an NRI.

Why Is TDS Required When Paying Rent to an NRI?

The Income Tax Act (Section 195) makes it compulsory to deduct tax at source when making any payment (including rent) to a non-resident, irrespective of the amount.
This section works on a simple principle:

If a payment to an NRI may be taxable in India, tax must be withheld before transferring money.

Since rental income from property located in India is always taxable in India, TDS becomes unavoidable.

What Is the Applicable TDS Rate for Rent Paid to an NRI?

This is where many people make wrong assumptions.

Unlike resident landlords (where 5% TDS applies only above ₹ 50,000 per month under Section 194-IB), TDS to an NRI landlord is deducted at 30% + surcharge + cess, regardless of the rent amount.

Effective Rate Example

1. Base TDS rate → 30%
2. Health & Education Cess → 4%
3. Surcharge → depends on the NRI’s total income (not the rent alone)

For most cases, the effective TDS becomes 31.2%.

Even if rent is just ₹20,000 per month, the tenant has to deduct 31.2%.

Is TAN Mandatory for Tenants Paying Rent to NRI?

Yes.
Unlike resident TDS provisions, Section 195 requires the tenant to obtain a TAN (Tax Deduction Account Number).

Without a TAN, you cannot:

1. Deposit TDS,
2. File TDS returns (Form 27Q), and
3. Issue TDS certificates (Form 16A).

When Should the TDS Be Deducted and Paid?

Whichever occurs first: payment or credit.

That means:

1. If you pay rent monthly → deduct monthly.
2. If you pay advance rent → deduct TDS on the entire advance.

TDS deposited before the 7th of the next month (except March → 30 April).

How Do Tenants Actually Deposit TDS for NRI Rent?

The workflow is very different from a normal rent payment:

1. Obtain TAN: Apply through the NSDL (now Protean) portal – usually issued in 1–2 weeks.

2. Deduct the Correct TDS: Use the applicable rate (usually 31.2%).

3. Deposit TDS Using Challan No. 281: Paid online via the income-tax portal or net banking.

4. File TDS Return (Form 27Q): Filed quarterly, even if you have only one NRI landlord.

5. Issue Form 16A to the Landlord: This is proof that tax has been deducted and deposited.

Can the NRI Reduce the TDS Rate?

Yes. NRIs can apply for:

Lower Deduction Certificate (LDC) under Section 197

If the Assessing Officer approves, TDS may be:

1. Reduced to a lower rate, or
2. Reduced to zero (rare but possible when rental income is below the taxable limit).

Without this certificate, the tenant must deduct at the full rate—no exceptions.

Consequences of a Tenant’s Failure to Deduct TDS

This is where penalties become painful.

If the tenant doesn’t deduct or deposit TDS:

1. They become an assessee-in-default
2. Interest applies at the rate of 1% to 1.5% per month.
3. A penalty under Section 271C may apply.
4. The NRI won’t get credit against their tax return.

The tax department will recover dues from the tenant, not the landlord.

Key Documents/Details Tenant Must Collect from the NRI

1. NRIs’ PAN
2. NRIs’ Indian bank account or NRE/NRO account details
3. Copy of the rent agreement
4. Lower Deduction Certificate (if obtained)
5. NRI’s residential status confirmation

Never pay rent to an NRI’s foreign account without deducting TDS—this triggers bigger scrutiny.

Common Mistakes Tenants Make (That You Should Avoid)

Mistake 1: Assuming TDS applies only above ₹50,000 per month

Wrong—this threshold is only for resident landlords.

Mistake 2: Paying rent first and adjusting TDS later

Illegal—TDS must be deducted before payment.

Mistake 3: Not getting TAN

Without TAN, all further compliance becomes impossible.

Mistake 4: Using 5% TDS rule of Section 194-IB

That section does not apply to NRIs.

Mistake 5: Believing that “small rent” doesn’t require compliance

Even ₹1,000 rent requires TDS if the landlord is an NRI.

Practical Example

1. Monthly Rent: ₹40,000
2. Landlord: NRI
3. Applicable TDS Rate:2%
4. TDS Amount: ₹12,480
5. Net Payment to Landlord: ₹27,520

Tenant must:

1. Pay ₹12,480 as TDS to the Government
2. Pay ₹27,520 to the landlord
3. File Form 27Q every quarter
4. Issue Form 16A

Conclusion

Paying rent to an NRI comes with a very specific set of tax responsibilities for the tenant.
TDS under Section 195 must be deducted irrespective of the rent amount, and the tenant must comply with TAN, TDS deposit timelines, quarterly filings, and issuing certificates.

If you follow the steps correctly, the process becomes straightforward.
If you ignore them, the penalties can be severe.

For any clarifications or queries, please feel free to reach out to us at:
admin@fintracadvisors.com

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