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The below content is purely for informational purposes and is not intended to constitute advisory of any kind. Please note, these are in-depth articles which are best viewed on large screen devices like laptops, desktops and tablets. The position reflected in this article has been updated as of July 15, 2024.

Many Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs) or Persons of Indian Origin (PIOs) lease out their immovable property in India to generate rental income. This article provides legal aspects that NRIs/OCIs/PIOs must consider while renting out their Indian property.

 

Renting of property in India

As per the Transfer of Property Act, 1882, lease of an immovable property involves transfer of a right to enjoy such property, made for a certain time, express or implied, in consideration of a rent amount to be paid periodically or on specified occasions. The person who transfers the right to enjoy the immovable property is called the ‘lessor’ and the person in whose favour such right is granted is called the ‘lessee’. Mostly, lease agreements are executed for leasing an immovable property in India.

Another arrangement is that of a leave and license which provides the licensee a right to use an immovable property for a particular purpose. The concept comes from the Indian Easements Act, 1882, where a license is defined to mean a right that a person grants to another person to do in or upon an immovable property, something which would, in absence of such right be unlawful. The person who grants the right with respect to an immovable property is called the ‘licensor’ and the person in whose favour such right is granted is called the ‘licensee’.

Depending on the purpose, duration, nature of transaction and circumstances, you may consider executing a lease agreement or a leave and license agreement.

 

Key considerations for leasing immovable property in India

Under the Transfer of Property Act, 1882, and the prevalent Foreign Exchange Management Act (FEMA), 1999 regulations, NRIs can lease their commercial and residential immovable property to Indian residents as well as other NRIs or PIOs.

Below are the key considerations that you should be aware of before drafting a lease agreement in India.

1. Type of property

As an NRI or OCI, you are allowed to lease out immovable property (commercial and residential) in India in the manner permitted under FEMA and regulations thereunder. You could consider leasing such property for rent to any person or an entity in India or to an NRI as well. In case you have inherited any plantation property, agricultural land or farmhouse in India then, subject to applicable laws and requisite approvals, if any, you may also consider leasing such property to an Indian resident. To know more on the type of properties NRIs/OCIs can hold, click here

Please note, tables are best viewed on desktops or in landscape mode on mobile phones.

Immovable property type Permissibility for occupying on lease*

Residential

NRI, OCI and person resident in India

Commercial

NRI, OCI and person resident in India

Inherited agriculture/plantation

Subject to Foreign Direct Investment (FDI) caps and other FEMA regulations, person resident in India

*As per Master Direction number 12/2015-16 titled “Master Direction – Acquisition or Transfer of Immovable Property under Foreign Exchange Management Act, 1999” as updated on September 01, 2022.

 

2. Background check and police verification

You should conduct a thorough check on the potential lessee by verifying the lessee’s identification documents and references from previous landlords, etc. to ensure reliability and trustworthiness. The applicable state laws and municipality rules and regulations require additional actions including submission of particulars of the new lessee or licensee to the nearby police station and/or local municipal authority.

 

3. Documentation

It is important to have a lease agreement in writing to ensure that the commercial terms, duration of the lease, rights and obligations of the lessor and the lessee in relation to the immovable property, etc. are clearly recorded and honoured by the contracting parties. Also note that in certain cases, lease agreements are required to be mandatorily registered with the sub-registrar of assurances of the relevant state of India. It would be prudent to consult a legal advisor on the state specific requirements for letting out an immovable property in a particular state in India.

Did you know?

If you are unable to be physically present in India to sign the documentation or undertake other formalities, you may consider granting a Power of Attorney (PoA) to an Indian resident.

Whether you may execute a lease agreement or a leave and license agreement for renting out of a property, keep in mind that such agreements should clearly cover the following details:

  • Name of the parties and detailed description of the property
  • Duration and lock-in period (i.e., the minimum period during which the agreement may not be terminated by the parties), if any
  • Rental amount, annual increase (if any), payment due date and mode of payment
  • Consequences of non-compliance such as delayed payment, non-payment of rent, breach of lock-in
  • Security deposit and conditions for its deductions and return
  • Restrictions on the use of the property by the lessee/ tenant
  • Notice period for termination
  • Conditions for termination and renewal

 

4. Payment of stamp duty and other fees

You will have to pay stamp duty and other associated fees while signing any agreement. These include:

  • Stamp duty: You need to pay applicable stamp duty before signing of the agreemant. Please note that the rate of stamp duty depends on many factors such as the location of the property and the stamp act of the relevant state.
  • Registration: Depending on the duration of the term and the state in which the property is located, the lease agreement may require to be registered with the relevant sub-registrar of assurances along with the payment of registration fees. In terms of the Registration Act, 1908, it is mandatory to register leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent. Please note that certain states in India require registration of the lease agreement even if the term is less than one year. For instance, in the state of Maharashtra, an agreement for lease of any premises in certain specified areas is required to be registered as per the Registration Act, 1908*. Please reach out to a local lawyer for more details on this.

*Section 55 of the Maharashtra Rent Control Act, 1999

5. No-Objection Certificate (NOC)

In certain housing societies or apartment complexes in India, landlords/owners might be required to obtain an NOC from the local society or the resident’s welfare association before leasing of the property. Such a certificate indicates that the local society or the resident’s welfare association has no objections to the landlord/lessor leasing the unit to the specified tenant/lessee and such tenants’/lessee’s use of other common facilities.

 

Repatriation on NRI rental income

Subject to the applicable laws, rent from an immovable property in India can be deposited and repatriated from a Non-Resident Ordinary (NRO) account or a Non-Resident External (NRE) account. In the event the tenant is an NRI or a PIO, the NRI landlord can receive the rent for such immovable property in his/her NRE account. To know more about repatriation of rental income, click here.

 

Tax implication on rental income for NRIs

As an NRI, the lease rentals received by you will be taxable as income from house property at the applicable slab rates. Further, municipal taxes paid by the NRI can be claimed as deduction for calculating taxable rental income. Also, the Tax Deducted at Source (TDS) on NRI rental income will be charged at a tax rate of 30% (Section 195 of the Income Tax Act, 1961, and the Finance Act, 2023) plus applicable cess and surcharge, cumulatively capped at a maximum of 39%* as per the new tax regime and a maximum of 42.744% as per the old tax regime under the Income Tax Act, 1961.

As an NRI, you may consult your tax advisor to analyse relevant Double Taxation Avoidance Agreement (DTAA) to claim any benefit on such rental income available under such DTAA.

To know more about tax implications for NRIs rental income in India please click here

*As per provision of section 195 of the Income Tax Act, 1961 (“The Act”) read with item 1(b)(O) of the Part II of first schedule of Finance Act, 2023, for tax at the rate of 30% and surcharge at the rate of 25 % on tax as per section 115BAC being default regime, and cess at the rate of 4% on tax and surcharge. Aggregating to maximum tax rate of 39%. 

Conclusion

NRIs can lease out their commercial and residential properties to any resident Indian, NRI, PIO or OCI. However, any inherited agricultural property of NRIs can be leased out to resident Indians only. You must ensure proper due diligence while drafting the lease agreement and conduct thorough background checks and police verification on your tenants. It is advisable to engage an expert lawyer to ensure that all documentation aligns with the applicable laws and includes necessary safeguards.

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Frequently Asked Questions

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Can an NRI lease out multiple commercial and residential properties?

Yes, in the event an NRI owns multiple immovable properties in India, the NRI can lease out such immovable properties in the manner permitted under FEMA and the regulations thereunder*.

*Master Direction number 12/2015-16 titled “Master Direction – Acquisition or Transfer of Immovable Property under Foreign Exchange Management Act, 1999” as updated on September 01, 2022.

Can an NRI lease an agricultural land or commercial property?

NRIs cannot take on lease an agricultural land in India. An NRI can only acquire an agricultural land in India by way of inheriting such property from a person resident in India in accordance with the regulations prescribed by FEMA. There are no restrictions on occupying a commercial property in India on lease by an NRI.

Can an immovable property in India which is jointly owned by a NRI and resident Indian (e.g. NRI husband and resident wife), be leased?

Yes, any commercial or residential property in India owned by NRIs may be given on lease in the manner permitted under FEMA and the regulations thereunder. Further, in the event the property is jointly owned by an NRI and a resident Indian, the underlying lease agreement in relation to the said property may be executed by the NRI and the resident Indian jointly or any one of them (with appropriate authority in place) acting on behalf of both as the lessors. The NRI can also grant a PoA in favour of another individual in India for the purposes of signing the lease agreement and undertaking other related formalities. 

Can NRIs lease property to Non-Residents (NRs) too?

Subject to the FEMA regulations*, you may lease your immovable property to a non-resident as well. In this case, do note that citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Kong and Democratic People’s Republic of Korea can only occupy an immovable property in India on lease for a period not exceeding five years.

*Master Direction number 12/2015-16 titled “Master Direction – Acquisition or Transfer of Immovable Property under Foreign Exchange Management Act, 1999” as updated on September 01, 2022.

Is an NRI required to execute a fresh lease agreement if his/her status changes from a resident to an NRI?

You can consider executing a fresh lease agreement however, this is not mandatorily required. In the event any of the factual details as captured in the underlying lease agreement like the current address, bank account details, etc. are changing, then the parties should execute an amendment agreement to record such changes in writing. Also, please note that in terms of Foreign Exchange Management (Deposit) Regulations, 2016, when a person resident in India leaves India for a country (other than Nepal or Bhutan) for taking up employment, or for carrying on business or vocation outside India or for any other purpose indicating his intention to stay outside India for an uncertain period, his/her existing account is required to be designated as a NRO account.

What is deemed rent and what are its tax implications?

The concept of deemed rent comes into effect when an individual taxpayer (in this case, an NRI) owns more than two house properties. In a situation where all the three properties are lying vacant during the relevant Financial Year (FY) (April-March), then the third property would be treated as deemed let-out property and the deemed rent for the third property needs will be taxed in a relevant FY. Deemed rent is a notional annual rent expected to be received on an immovable property. Similar to your other rental income, the deemed rent received by you will also be taxable at the applicable slab rates.

Hence, an NRI has to report the two residential properties as self-occupied property and designate the third property as deemed let-out property on which deemed rental income needs to be offered to tax in the income-tax return.

What happens to your rental income if you do not repatriate in first year and want to repatriate in 3rd or 4th year?

The rental income is treated as current income for that FY. If the rent is received in your NRO account, it can be freely repatriated, i.e., transferable in that year only, subject to necessary tax compliances and documentation, if applicable. Subsequently, the rental income in your NRO account will be treated as capital income and you can repatriate it under the USD 1 million limit per FY.

If your tenant is an NRI, you can receive the rent in your NRE account only and you can repatriate it freely in any of the subsequent years (3rd or 4th year as well). 

View More

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Disclaimer:

The contents of this article/infographic are meant solely for informational purposes. The contents are generic in nature and are not intended to serve as a substitute for specific advice on any matter whatsoever. The information is subject to updation, completion and verification and the applicable norms may keep changing materially from time to time. This information is also not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to applicable laws or would subject ICICI Bank Limited/its affiliates to any licensing or registration requirements. ICICI Bank Limited/its affiliates and their representatives shall not be liable for any direct or indirect losses or liability incurred arising in connection with any decision taken by any person on the basis of this content. Please conduct your own due diligence and consult your financial advisor before making any decision. Terms and conditions of ICICI Bank and third parties apply. ICICI Bank is not responsible for third party services. Nothing contained herein shall constitute or be deemed to constitute an advice, invitation or solicitation to avail any products/ services of third parties.

 

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