How Is Indian Rental Income Taxed in the USA?

You may also be able to claim a foreign tax credit for qualifying Indian income taxes paid on the rental income.

The India-US tax treaty is relevant here. Article 6 allows India to tax income from immovable property located in India, including income earned by renting it out.

Article 25 provides relief from double taxation through a US foreign tax credit, subject to US domestic tax rules and limitations.

For eligible taxes, individuals generally use Form 1116 to calculate the foreign tax credit. However, the credit is not necessarily equal to the full amount of Indian tax deducted from the rent.

There is also an important issue with foreign tax credit calculations: the US and Indian systems may calculate taxable rental income differently. The amount of income subject to Indian tax may not match the US taxable rental profit.

For this reason, keep your Indian tax return, TDS certificates, tax payment records and any refund information. A cross-border tax professional can help determine the creditable amount and the applicable foreign tax credit category.

One thing that confused me when researching this topic was the difference between Indian and US rental income calculations.

In India, rental income from a let-out residential property is generally calculated after eligible municipal taxes, a 30% standard deduction and eligible housing-loan interest.

The US does not automatically allow the same Indian 30% standard deduction. Instead, you calculate allowable rental expenses under US tax rules.

Depreciation is another important difference. The US may require you to depreciate the building separately from the land. Land itself is generally not depreciable.

For residential rental property located outside the United States, the applicable depreciation rules can differ from those for US residential property. Foreign-use property generally falls under the Alternative Depreciation System (ADS), and the applicable recovery period and method need to be determined under IRS rules.

You should therefore establish the property's US tax basis and the date it was placed in service as a rental property. The original purchase price, eligible acquisition costs and improvements may be relevant.

I would not recommend using the Indian property's book value or Indian depreciation calculation without checking the US rules first.

If you are a US citizen or a US tax resident, you generally need to report rental income from your Indian property on your US tax return, even if the rent is deposited into an Indian bank account.

For a typical individual residential rental property, the income and expenses are generally reported on Schedule E (Form 1040).

You should calculate the rental income under US tax rules rather than simply copying the taxable rental income shown in your Indian income tax return.

You may generally be able to deduct eligible expenses such as:

• Property management fees
• Repairs and maintenance
• Property insurance
• Property taxes
• Mortgage interest
• Depreciation

Keep invoices, bank statements, rental agreements and other expense records. Also, convert the rental income and expenses into US dollars using an appropriate exchange rate and a consistent method.