The typical urban scenario used to be about a tenant doing the rounds, looking for reasonable accommodation—and then going through a rigorous know-your-tenant (KYT) pre-verification, police verifications and all sorts of post-signing fine print - including dealing with broker commissions as well as security deposits. This is probably still true, especially if the potential tenant is not clued up enough to use the various online tools that help him bypass many of the traps set up for him and save on brokerages and commissions. These can add up in some cities where the original brokers expect additional commission for renewing a lease agreement, every time.
However, following an update on the definition of non-resident Indians (NRIs) as applied to banks, taxation, and citizenship laws, among others, the know-your-landlord (KYL) acquires serious importance, as the tax deducted at source (TDS) rules of the income-tax (I-T) department lay the onus of adherence squarely on the tenant.
This requirement is regardless of the amount of rent, by any name, including security, paid to the landlord—if the landlord is an NRI, an overseas citizen of India (OCI), or a foreigner. The flat rate for the TDS is currently at 31.2%.
Those aspiring to be a tenant have several options today at their disposal, which include a surplus residential and commercial real estate on rent, lease or sale, in addition to professional property management services through banks or other institutions, and a relatively easy alternative of ready-to-move-in (RTM) real estate available on easy loan terms. This has, to a fair extent, reduced the trauma experienced by most of these people.
People looking for a three-bedroom apartment in a swanky part of town, for example, are pleasantly surprised to learn that taking a loan for a two-bedroom apartment near the same area is often a better idea from all points of view, including fiduciary when rents are compared to equated monthly instalments (EMIs).
But let us see what your responsibilities are, from the know-your-landlord-KYL adherences and compliances, some of them mandatory and some simple common sense, in case you still need to be a tenant, for whatever reason.
The most important part is to establish whether the entity you are paying rent to is actually the owner or the person with a right to let out the premises. That is reasonably easy in this day and age, from checking records online to asking the prospective landlord directly to discreet inquiries with the housing society.
As a matter of fact, many housing societies expect a tenant to be re-verified before any commitments, and the prospective tenants are entitled to the alternate re-verification of the landlord too.
The next equally and, probably, more important fact-check pertains to the tax status of the person or entity accepting the rent. Here please refer to the answer provided to a question at Moneylife Foundation’s Tax Helpline (it is now closed)
- “when any person makes a payment to a non-resident, the payer has to deduct tax at source compulsorily if the amount being paid contains any income that is chargeable to tax in India in the hands of that non-resident. You will need to deduct TDS at a rate of 30% from payments made to a non-resident brother under section 195 of the I-T Act.”
Suppose the landlord or the person accepting the rent is a resident Indian. In that case, the TDS is covered by different levels and exemptions, as amended from time to time and with separate provisions for residential, commercial or other categories.
However, suppose the landlord or person accepting the rent is an NRI (Indian citizen) or an overseas citizen of India-OCI (foreigner or foreign citizen). In that case, there are no exemptions – around 31.2% tax has to be deducted as TDS on all payments made by the tenant, known by any name—rent, security deposit, lease or whatever else—for any and all amounts. (This does not include utilities or maintenance, for example, it is paid directly to another domestic entity.)
It is essential also to be aware of this gazette notification dated 4 March 2021 which defines NRI and OCI as a foreigner clearly from the income-tax point of view and the citizenship and obligations.
Therefore, it is incumbent on the tenant to do the landlord’s due diligence to establish whether the said landlord is a resident Indian citizen or a non-resident Indian or foreigner. The onus and penalties of not adhering to this, for any amount, are at the door of the tenant.
How do you find out the tax or citizenship status of a landlord?
1) Insist on it being part of the draft agreement before it becomes an agreement, and get a copy of the landlord’s permanent account number (PAN) card on record.
2) Ensure that the NRI-foreigner landlord is on the same page as you during the deal.
3) The landlord should understand and agree in advance that the tenant will also have to deduct tax at source from the security deposit. Still, the tenant will be entitled to a full security refund. This understanding must be documented.
Seek guidance from not just your trusted accounts and finance persons, but also directly from the I-T department - and do be aware that there may be a good number of NRIs and foreigners who were issued PAN numbers when they were resident Indians but may not have updated their PAN status for which there is a form 49AA.
The above has been issued without prejudice, without liability, and in good faith. Personally, I find it easier and better to look for a domestic resident Indian landlord in the first place, for multiple reasons.
(Veeresh Malik is an activist from Delhi, who continues to explore several things in life.)