In USA, rental income from property is calculated by deducting all expenses related to the rental such as advertisement, travel, commissions, management fees, repairs and maintenance, utilities, taxes, insurance and depreciation on the property. Rental income is subject to ordinary income tax and typically reported via Form 1040, Schedule E. Refer IRS website for Topic No. 414 Rental Income and Expenses for details. In additional to Federal income tax, State income taxes may apply based on taxability of income in the state.
In India, rental income from property is calculated as Income from House Property by allowing only certain expenses such as property municipal tax and interest to a limit. In addition, there is a standard deduction of 30% allowed, for other expenses, of the taxable value after the municipal tax deduction. There is no deduction for depreciation or other operating expenses except as mentioned. Refer Indian Income Tax site link for practical examples related to calculation of rental income.
If you are in the business of renting out property in India, then the rental income, even from the residential property, will be considered as business income. In that case, all the property rental related expenses get treated as business expenses, and then the handling of the income from renting out property in India would look similar to calculation of taxable rental income in the USA. By forming a company, it makes the case better to have the income tax officer allow handling as business income instead of income from house property but there is extra paperwork, compliance, etc.
The taxable rental income calculated under USA and India tax laws would be hence different, and would vary depending on the expenses disallowed in India, example depreciation, as compared to the 30% deduction allowed. Thus rental income can result in a loss in USA tax returns, but as a profit for India taxation. This is relevant while showing foreign income in tax returns. There are less changes of rental income resulting in a loss, (unless interest expense is very high) in India, due to the non-availability of expense deduction.
When rental income is taxed in more than one country, say in both India and USA because of foreign income taxability, there are double taxation rules that apply and relief under country specific tax laws and DTAA (Double Taxation Avoidance Treaties).
