Renting out your Indian property as an NRI — setting your tenant up for the right TDS

When a resident landlord lets a property, the tenant's TDS duty is minimal — and for many tenants, non-existent. But the moment the landlord is a non-resident, the rent becomes a payment to an NRI, and the law treats it like any other such payment: the tenant has to deduct tax at source under Section 195 before sending you the money.

This is a genuine obligation, not a formality. The tenant must take a TAN, deduct at the Section 195 rate each month, deposit the tax with the government, file a quarterly Form 27Q, and hand you a Form 16A showing what was deducted. None of that applies to a tenant of a resident landlord in the same way. The catch is that almost no tenant knows this when they sign the lease, and the consequences of skipping it land on the tenant as the deductor — which is exactly why a landlord who sets it up properly protects the tenant too.

There is a separate, simpler rule — Section 194-IB — under which a tenant deducts 5% on high-value rent. It is easy to deduct, needs no TAN, and is the one most people have heard of. But it applies only when the landlord is a resident. It has nothing to do with an NRI landlord.

Using 194-IB for an NRI landlord is the classic mistake. It under-deducts, it routes the tax through the wrong return, and it leaves both sides exposed: your tax credit doesn't line up, and the tenant has filed under a section that didn't apply to your tenancy.

So the first thing to fix when you let property as an NRI is to make sure the tenant knows which side of this line you fall on — and sets up under Section 195, not 194-IB.

Section 195 TDS on rent is deducted on the gross rent, so it tends to be more than the tax you ultimately owe. The reason is that your actual taxable rental income is much smaller than the rent received. When you file your return, you compute house-property income properly: a flat 30% standard deduction comes off the annual value under Section 24(a) — meant to cover repairs and upkeep, no receipts needed — and interest on a home loan, if any, comes off as well.

So the tenant deducts on the full rent, but you are taxed only on the rent minus the 30% and minus loan interest. That gap is usually a refund. You claim it by filing your income tax return, where the TDS the tenant deposited (visible in your Form 26AS / AIS, and on the Form 16A you were given) is set against your real liability and the excess is refunded.

The whole system only works if the tenant's Form 27Q correctly reports the TDS against your PAN. If it doesn't, the credit won't show in your 26AS and you can't claim the refund — which is the other reason setting the tenant up correctly from the start matters.

Priya, an NRI in Dubai, rents out a flat in Mumbai for ₹80,000 a month. Her new tenant, a salaried professional, has rented before and assumes he simply pays the rent — at most deducts 5% under the rule he vaguely remembers.

Because Priya is a non-resident landlord, that rule (Section 194-IB) does not apply. Her CA helps the tenant set up correctly: the tenant applies for a TAN, deducts TDS under Section 195 each month before paying Priya, deposits it, and at the end of each quarter files Form 27Q reporting the deduction against Priya's PAN. The tenant then gives Priya a Form 16A.

The TDS deducted across the year is more than Priya's actual tax, because when she files her return she takes the 30% standard deduction under Section 24(a) off the rent before tax is computed. Her real liability on the net rental income is lower than what was deducted, so the difference comes back as a refund once her return is processed. Had the tenant used Section 194-IB by mistake, the deduction would have been wrong, the credit would not have matched her PAN cleanly, and both of them would have had a correction to make later.