Tax Implications and Reporting for Indian Residents with US Rentals

(INDIA) Indian taxpayers who hold rental homes in the United States 🇺🇸 are facing another filing season with rules that pull them in two directions: report the same US rental income in both countries while using treaty relief to avoid being taxed twice.

For an Indian tax resident with Resident and Ordinarily Resident status, the law is blunt — worldwide income is taxable in India, and that includes rent from a property in the US. At the same time, the US taxes rental income from US property even when the owner lives overseas and is not a US person. The result is a two‑country filing path that requires care, timing, and clean paperwork.

VisaVerge.com reports that many owners only focus on one system and then struggle later when they try to claim credit in India for US taxes paid or when a US withholding agent has already withheld 30% on gross rent.

Core legal interplay: India and the US

• India: An Indian tax resident must include rent from the US property as part of “Income from House Property” under Sections 22–27 of the Income Tax Act. That income is part of the global tax base and is taxed at your Indian slab rates.
• US: The US taxes rental income from property located in the United States regardless of the owner’s residence. Non‑US owners face a default 30% withholding on gross rents unless they elect to treat the activity as effectively connected with a US trade or business and file a return to be taxed on net income.

The election to be taxed on net income in the US allows deductions under US rules, but it does not change India’s requirement to disclose and tax the same income.

Preventing double taxation: Foreign Tax Credit (FTC) in India

India’s treaty with the US allows a Foreign Tax Credit (FTC) in India to avoid taxing the same rupee twice. To use it, Indian residents must:

• Follow India’s reporting steps and timing (including filing Form 67).
• Keep US tax proofs (withholding statements, US return results).
• Use the correct exchange rates for each country.

These compliance steps are administrative but mandatory. Missing or late filing (e.g., skipping Form 67) can cause the FTC to be disallowed for that year even if US tax was paid.

Key takeaway: Clean paperwork and aligned reporting dates are the backbone of claiming treaty relief successfully.

How India taxes US rental income

India taxes global income for an Indian tax resident under Income from House Property, which includes US rental income. Practical rules include:

• Convert the US rental income to Indian Rupees using the Reserve Bank of India (RBI) rate on the last day of the previous financial year.
• Include that converted amount under Income from House Property.
• Tax is charged at your Indian slab rates.

India’s rules on deductions:

• India does not allow US‑specific deductions (for example: US depreciation, maintenance, insurance, utilities) to reduce the Income from House Property amount.
• Those items may be allowed for US tax purposes, but India will not accept them in computing the taxable base under this head.

FTC mechanics and limits:

• Under the India‑US DTAA, an Indian resident may claim FTC in India for US tax paid on the same income, subject to Indian rules and caps.
• The credit cannot exceed the Indian tax charged on that same slice of income.
• If the US tax is higher than the Indian tax on that rent, the excess US tax does not produce a refund from India; it only reduces Indian tax to zero for that income.

Required Indian disclosures and reporting (must be completed before claiming the credit):

• Declare the foreign rent in the Indian return in Schedule FSI.
• Disclose the US property in Schedule FA.
• Claim the Foreign Tax Credit using Form 67.
• Report the foreign asset and related income in the Foreign Asset and Income Schedule.
• Keep detailed records of US rental receipts, expenses, and US tax filings for audit support.

These steps show that the taxpayer has traced the same US rental income across both systems and properly connected the US tax paid to the same income declared in India.

What the United States requires from non‑resident owners

The US treats rental income from US properties as US‑source income and generally requires:

• Default 30% withholding on gross rents for non‑resident owners unless the owner elects otherwise.
• The non‑resident may elect to treat the rental activity as effectively connected with a US trade or business and file a US non‑resident return to be taxed on net income (allowing deductions).

Key US filing and withholding points:

1. A non‑resident who wants to be taxed on net rent files Form 1040‑NR and reports the rental income there.
   • Official link: About Form 1040‑NR
2. If the owner does not file a US return or does not make the election, the default 30% withholding on gross rents applies.
3. The duty to withhold typically falls on the tenant, property manager, or other withholding agent. If they fail to withhold and remit, the IRS can seek penalties and place a lien on the property.
4. US persons (citizens or green card holders) living in India must report worldwide rental income on a US return, generally on Schedule E with Form 1040.
   • Official link: About Schedule E (Form 1040)

Currency conversion:

• The IRS exchange rates apply for US reporting, while RBI exchange rates apply for Indian reporting.
• The same rental stream may be converted differently for each country — this is normal and required by each jurisdiction’s rules.

Important US rule: If a withholding agent is required to withhold 30% and fails to do so, the IRS can pursue the agent and assert liens. That is why many property managers strictly withhold until the owner provides documentation and files the appropriate US return.

Coordinating filings in both countries — Practical checklist

Filing in two countries is less about tax tricks and more about lining up documentation and timing. Practical steps:

1. Report US rental income in India under Income from House Property; convert using the RBI exchange rate as of the last day of the previous financial year.
2. Complete India’s foreign disclosure:
   • Report the rent in Schedule FSI.
   • List the US property in Schedule FA.
   • Include details in the Foreign Asset and Income Schedule.
3. Claim the Foreign Tax Credit in India by filing Form 67.
   • Official link: Form 67
4. Keep full records of rent, expenses, and US tax filings to support the FTC claim.
5. On the US side, decide whether to accept the 30% withholding or file Form 1040‑NR to be taxed on net income with deductions.
6. Preserve exchange rate calculations used for both returns and document conversions in work papers.

FTC practicalities:

• The credit is limited to the Indian tax on that income. If US tax < Indian tax, the taxpayer pays the difference in India.
• If US tax > Indian tax, India’s FTC reduces Indian tax on that income to zero but does not refund the excess US tax.

Reporting alignment and matching:

• Ensure the same income period, property identity, and gross receipts are consistent across US and Indian filings.
• Mismatches (periods, amounts, or tax bases) can trigger queries and complicate FTC claims.

Cash flow and withholding consequences:

• If a property manager withholds 30%, monthly cash flow is reduced. That withheld tax can be credited on the US return if the owner files Form 1040‑NR.
• From India’s perspective, the withheld US tax reduces Indian tax only if Form 67 is filed and the FTC claimed correctly.
• Failure by a US withholding agent to withhold can expose the property to IRS action (penalties, liens).

Why India disallows US‑style deductions for Income from House Property

• Indian law prescribes how Income from House Property is computed and does not permit US‑style deductions (depreciation, maintenance, etc.) under this head.
• Trying to import US deductions into the Indian computation creates mismatches and can complicate FTC claims, since the Indian income base will differ from the US base used to compute US tax.

Practical recommendations and closing guidance

• Keep detailed records of rent received, expenses, and US tax filings.
• File the Indian return with full disclosure of foreign income and assets (Schedule FSI, Schedule FA, Foreign Asset schedule).
• Claim the Foreign Tax Credit in India for US taxes paid — file Form 67 timely.
• Follow US withholding rules to avoid penalties or liens; consider filing Form 1040‑NR if deductions make the net tax lower.
• Work with a tax professional experienced in India‑US cross‑border filings.

Official form links for quick access:

• Form 1040‑NR: About Form 1040‑NR
• Schedule E (Form 1040): About Schedule E (Form 1040)
• Form 67 (India): Form 67
• US withholding overview for foreign persons: Foreign Person’s U.S. Source Income Subject to Withholding

When owners align their filings — report the US rental income in India under Income from House Property, respect the US withholding or file the US non‑resident return, and connect the two with Form 67 and the treaty credit — the two systems can operate side by side without taking the same money twice.

Rent supports families, pays mortgages, and funds plans. Filing well — on time, with the right disclosures, and with supporting proofs — protects cash flow and the asset. The rules are straightforward when treated as a coordination exercise: match the income in both countries, claim credits where allowed, and document everything.