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.

If your tenant is a company. A business renting your flat as a guest house, a serviced-apartment operator, an employer taking it for staff. The section is exactly the same. Rent paid to an NRI landlord is a payment to a non-resident, so a company tenant deducts under Section 195 just as an individual would. What changes is how smoothly it runs.

A company almost always already holds a TAN and runs a payroll-style TDS process every month, so the parts that intimidate an individual tenant, getting a tax-deduction account number, depositing by the 7th, filing the quarterly Form 27Q, generating your Form 16A from the TRACES portal, are routine for them. In practice the paperwork tends to be cleaner and the credit lands against your PAN more reliably than with a first-time individual deductor.

One clause is worth reading before you sign. If the lease says the rent is paid "net of tax", meaning the company bears the TDS on top of what it pays you. The law requires the rent to be grossed up under Section 195A before tax is computed, which raises the figure the deduction is calculated on. A normal lease, where TDS comes out of the agreed rent, doesn't trigger this. It only matters where the company has agreed to absorb the tax, so it's worth knowing which kind of clause you're signing.

A common slip is a tenant who didn't know you were an NRI and deducted 5% under Section 194-IB. The simple resident-landlord rule, instead of Section 195. The deduction was made under a provision that never applied to your tenancy, and it usually under-deducts as well, so the credit doesn't sit cleanly against your PAN as foreign-landlord TDS.

It is fixable. The deduction is re-characterised onto Section 195: the tenant takes a TAN, any shortfall is deposited with interest, the TDS is reported under the right section in Form 27Q against your PAN, and the original 194-IB entry is corrected on the TRACES portal. Once that posts, the credit shows correctly in your Form 26AS and you can claim it on your return.

This correction has enough moving parts that it has its own walkthrough, see the dedicated page on fixing a 194-IB deduction on NRI rent for the full step-by-step. The short version: don't ignore it, because the tenant's exposure as deductor grows with interest until it's set right, and your refund stays stuck until the credit is on the correct section.

There's a worse case than the wrong section: the tenant deducted the TDS from your rent but never actually paid it to the government. The rent reached you short, yet nothing shows in your Form 26AS, because the tax the tenant cut never made it to the department.

The law splits the two failures cleanly. Once the tenant has deducted the tax, depositing it is the tenant's job, and the tenant alone is on the hook for the gap. Under Section 201 the tenant becomes an assessee-in-default for the tax deducted but not deposited, with interest running on it. You, as the landlord, are protected by Section 205: the law says where tax has been deducted at source you cannot be asked to pay that same tax again, courts have upheld this even when the deductor never remitted it. What you do need is evidence that the deduction genuinely happened. The Form 16A the tenant gave you, the lease, and bank entries showing the rent arrived net of tax.

The practical snag is timing. Until the tenant deposits and reports the TDS, it won't appear in your Form 26AS, so the credit you're entitled to can't be claimed smoothly and your refund stalls. The recourse is to pin the default on the tenant as deductor and push for the deposit and correct Form 27Q reporting, and meanwhile keep the proof of deduction so a credit denied on a 26AS mismatch can be contested rather than swallowed.

Watching a big slice of your rent disappear each month and only getting it back a year later, after you file, is the real frustration of Section 195. There's a way to cut the monthly deduction at source instead of waiting for the refund.

You. The landlord, can apply for a lower-deduction certificate under Section 395, formerly Section 197, the application known as Form 13, filed online through the TRACES portal to your assessing officer. You show your projected rent for the year and the deductions that bring the real tax down, chiefly the 30% standard deduction under Section 24(a) and any home-loan interest, and ask for TDS to be set at a rate that matches your actual liability rather than on the gross rent. Because the genuine tax on net rental income is usually well below the default deduction, the certificate often brings the monthly withholding down substantially.

Once the certificate is issued, you give it to your tenant, who is then bound to deduct at the certified rate for the period it covers, not the full Section 195 rate. The effect is that far less rent is held back each month, so your cash flow improves and there's little or no excess left to reclaim at year end. It's the landlord's step, not the tenant's, and it has to be obtained before the deductions are made to bite for that year, so it's worth applying early in the financial year rather than after months of full deduction have already gone.