Keep house keys or cash out? Tax consultant explains what every NRI needs to know before moving to India

Many NRIs, after spending many years abroad, start thinking about returning to their home country. By then, many of them have built a settled life overseas and may even own a house. When they decide to move back, a common question comes up, should they sell their home in the USA or rent it out?

In one such case, Ravi* is planning to return to India after living in Florida for 12 years. He is unsure whether keeping his property in the US would be a good financial decision and what risks might be involved.

In an exclusive conversation with Financial Express (India), CA Ajay R. Vaswani, founder of Aras and company and a specialist in NRI taxation for over 13 years, explains how NRIs can approach this decision and what factors they should consider.

Does retaining a US rental property after moving to India actually make financial sense once US and Indian taxes are considered?

Yes, it can make sense — but only after doing proper tax math. The US will tax the rental income first (federal tax and possibly state tax). India will also tax the same income because a person who becomes Resident in India is taxed on global income. However, the India–US DTAA allows credit in India for tax already paid in the US, so double taxation is avoided, not eliminated.

If the rent is strong, the property is in a good location, and loan interest plus expenses reduce US taxable income, the investment may still be viable. But if the rent barely covers mortgage, property tax, repairs, and high US taxes, the net return after Indian tax may be low. So the decision should be based on post-tax net yield, not emotional attachment to the property.

Is this a good financial decision?

It depends on three factors:
 1. Net rental yield after all taxes – Many NRIs assume US rent is fully profitable, but once federal tax, state tax, property management costs, and Indian tax (after DTAA credit) are considered, returns may fall sharply.
 2. Currency movement – Income is in USD but expenses in India may be in INR. Exchange rates can help or hurt.
 3. Future plans – If the property is likely to appreciate and may be used later (children’s education, return to US), holding may make sense. If not, locking capital in low-yield property may not be efficient.

Financially, it is good only when the property gives stable rent and long-term appreciation — not merely because it is “safe.”

How is US rental income taxed in India, and what DTAA or reporting mistakes increase tax liability?

In India, US rental income is treated like “Income from House Property.” The rent (after municipal taxes) is taxed, and a standard 30% deduction.

Common mistakes NRIs make:

• Not reporting US rental income in Indian ITR after becoming Resident
• Not claiming Foreign Tax Credit (FTC) properly under DTAA
• Missing Form 67 filing for FTC
• Confusing US depreciation rules with Indian deduction rules
• Not reporting the property in Schedule FA (foreign assets)

These errors often lead to higher tax demand and notices from Indian tax authorities.

If the property is sold after becoming an NRI, how are capital gains taxed in the US and India, and how can tax be reduced legally?

The US taxes capital gains on US property regardless of where the owner lives. Federal capital gains tax applies, and state tax may also apply.

India will also tax the gain if the person is Resident, because it is a global asset. DTAA allows credit in India for US tax paid.

Planning steps that can reduce tax:

• Timing the sale when the person is RNOR (if eligible), so Indian tax may not apply
• Using US primary residence exclusion (if conditions met)
• Adjusting cost basis properly including improvements
• Holding the property long enough to qualify for lower long-term rates
• Planning currency conversion impact, since India computes gain in INR

Advance planning before sale is crucial; after sale, options are limited.

What are the biggest compliance and disclosure risks, and how serious are penalties?

The biggest risks are on the Indian side:

• Non-reporting of foreign property in Schedule FA
• Not reporting foreign bank accounts where rent is received
• Missing foreign income in ITR
• Not filing Form 67 for tax credit

Indian Black Money Act provisions are very strict. Non-disclosure of foreign assets can attract heavy penalties (often multiple times the tax) and even prosecution in extreme cases. In short, tax cost is manageable, but compliance risk is serious. Proper reporting is as important as tax planning.

(* name changed)