By CA Surekha
Introduction
Indian residents are taxed on global income under Section 5(1) of the Income Tax Act, 1961, including rental income from foreign properties (UK, Canada, UAE).
Key considerations:
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Residential status (Resident, RNOR, Non-Resident)
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Source country taxation and DTAA relief
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Loan interest deduction (Section 24(b))
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LOB rules (for treaty compliance)
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Disclosure and reporting obligations in ITR
This guidance note provides a complete procedural and analytical roadmap for handling foreign property income.
Residential Status and Tax Scope
| Status | Definition | Tax Scope for Foreign Property Rental |
|---|---|---|
| Resident (R) | Lives in India ≥182 days in previous year or satisfies other conditions | Taxed on global income, including UK/Canada/UAE |
| RNOR | Resident but not ordinarily resident | Taxed only on income received in India or accrued/arisen in India. Passive foreign rental income outside India may not be taxable |
| Non-Resident (NRI) | Lives in India <182 days and fails RNOR tests | Taxed only on Indian-sourced income. Foreign property outside India generally not taxable |
Determination of residential status is critical to establish taxability, deductions, DTAA credit eligibility, and disclosure obligations.
Country-Specific Treatment
| Feature | UK | Canada | UAE |
|---|---|---|---|
| Source Country Tax | Yes | Yes | No |
| DTAA Article | Article 6 – Income from Immovable Property | Article 6 – Income from Immovable Property | Article 6 / India–UAE DTAA |
| Foreign Tax Credit | Section 90 allowed, limited to Indian tax on same income | Section 90 allowed, limited to Indian tax on same income | Not applicable (no tax paid) |
| Loan Interest Deduction | Section 24(b) allowed | Section 24(b) allowed | Section 24(b) allowed |
| LOB Applicability | Not applicable for direct ownership | Not applicable for direct ownership | Not applicable |
| Reporting in India | Schedule FSI + FA | Schedule FSI + FA | Schedule FSI + FA |
| Bank Location | Irrelevant | Irrelevant | Irrelevant |
| Notes | UK taxes rental income; India provides credit | Canada taxes rental income; India provides credit | UAE rental income fully taxable in India |
Indian Law Provisions
| Section | Applicability |
|---|---|
| Section 5(1) | Resident: Global income; RNOR: Only taxable foreign income; NRI: Indian-sourced income |
| Section 22 | Rental income from house property (gross annual value – municipal taxes) |
| Section 24(a) | Standard deduction 30% of NAV |
| Section 24(b) | Deduction for interest on borrowed capital for property purchase/repair/construction. Applicable to taxable foreign property income. |
| Section 90 | Relief from double taxation for foreign taxes actually paid under DTAA |
| Schedule FSI / FA | Disclosure of foreign income, assets, loans, and bank accounts |
Loan Interest Deduction (Section 24(b))
| Status | Deduction Applicability |
|---|---|
| Resident | Allowed against foreign property income |
| RNOR | Allowed only if income taxed in India |
| Non-Resident | Not allowed (foreign income outside India not taxable) |
Documentation: Loan agreement, interest certificate, proof of payment, foreign property details.
Step-by-Step Procedure for Handling Foreign Property Income
Step 1: Determine Residential Status
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Confirm Resident, RNOR, or NRI to establish taxability.
Step 2: Compute Gross Rental Income
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Rent received abroad (UK/Canada/UAE).
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Deduct local allowable expenses (municipal taxes, insurance).
Step 3: Convert to INR
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Use prevailing RBI / prescribed ITR exchange rate on 31st March.
Step 4: Deduct Indian Allowable Expenses
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Standard deduction 30% (Section 24(a))
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Interest on loan paid for purchase/repair/construction (Section 24(b))
Step 5: Compute Indian Tax Liability
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Apply Income Tax slab rates for AY 2025–26.
Step 6: Claim DTAA Relief (Section 90)
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Applicable only if foreign tax is paid (UK/Canada).
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Credit = lower of foreign tax paid or Indian tax payable on same income
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Not applicable for UAE.
Step 7: Filing in ITR
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ITR-2 for residents/RNORs
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Schedule FSI: Foreign income
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Schedule FA: Foreign assets, loans, and bank accounts
Step 8: Maintain Documentation
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Rental agreements, bank statements, loan documents, foreign tax certificates (if applicable)
Comparative Summary Table
| Feature | Resident | RNOR | Non-Resident |
|---|---|---|---|
| Taxable Income | Global (UK/Canada/UAE) | Only income received/controlled in India | Only Indian-sourced income |
| Loan Interest Deduction | Allowed | Allowed if income taxed in India | Not allowed |
| Foreign Tax Credit (Section 90) | Allowed if tax paid abroad | Only on taxable portion | Not applicable |
| Reporting in ITR-2 | Schedule FSI + FA | Only taxable foreign income | Only Indian assets/income if any |
| UK Rental Income | Fully taxable, credit allowed | Only taxable if received/controlled in India | Not taxable |
| Canada Rental Income | Fully taxable, credit allowed | Only taxable if received/controlled in India | Not taxable |
| UAE Rental Income | Fully taxable | Only taxable if received/controlled in India | Not taxable |
Analytical Insights
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Global income principle: All foreign rental income is taxable for residents.
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Foreign tax credit: Reduces Indian tax liability only for UK/Canada, not for tax-free jurisdictions like UAE.
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Loan interest deduction: Applies to taxable foreign income across all countries.
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LOB rules: Irrelevant for direct property ownership; only matter for treaty-abuse structures.
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Residential status determines:
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Taxable portion of foreign income
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Eligibility for foreign tax credit
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Disclosure obligations
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Accurate determination of residential status and country-specific tax treatment is essential for compliance and tax planning.
Practical Example
| Component | UK | Canada | UAE |
|---|---|---|---|
| Rental Income | 50,000 GBP | 40,000 CAD | 1,000,000 AED |
| Loan Interest | 5,000 GBP | 5,000 CAD | 200,000 AED |
| Foreign Tax Paid | 10,000 GBP | 8,000 CAD | 0 |
| Indian Tax Before Credit | 6,00,000 INR | 6,00,000 INR | 6,00,000 INR |
| Foreign Tax Credit | 6,00,000 INR | 6,00,000 INR | 0 |
| Net Tax in India | 0 | 0 | 6,00,000 INR |
Notes:
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Resident: Full tax inclusion and credit eligibility.
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RNOR: Only taxable portion if received/controlled in India.
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NRI: Foreign property income outside India not taxed.
Key Compliance Checklist
| Task | Action |
|---|---|
| Residential Status | Confirm for correct taxability |
| Rental Income | Compute gross rent minus local expenses |
| Currency Conversion | Convert at prescribed rate |
| Indian Deductions | Standard 30% + loan interest (Section 24) |
| Foreign Tax Paid | Obtain certificate for DTAA claim (if applicable) |
| DTAA Credit | Claim Section 90 credit where applicable |
| Reporting | Schedule FSI + FA in ITR-2 |
| Documentation | Rental agreement, bank statements, loan docs, foreign tax certificate |
| Compliance | Avoid penalties under FA disclosure rules and Section 271(1)(c) |
Conclusion
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Residents: Taxed on all foreign rental income; DTAA credit reduces Indian tax liability (UK/Canada); loan interest deductible.
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RNORs: Only taxable if income received/controlled in India; DTAA credit limited to taxable portion.
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NRIs: Only Indian-sourced property income is taxable; foreign property outside India not taxed; no deductions or DTAA relief.
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LOB rules: Not relevant for direct property rental; only matter for shell entities.
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Compliance: Full documentation and disclosure in ITR-2 is mandatory to claim deductions/credits and avoid scrutiny.
