Under the Indian Income Tax Act, Section 195 contains a mandatory requirement of Tax Deduction at Source (TDS) for any payment to a Non Resident Indian (NRI) as per the rates in force at that point in time. One reason for this is that in case of non-residents, the income tax department want to be doubly sure that the income does not evade tax, since the NRI can be difficult to track and hold accountable if the funds flow out of India. A non-resident may earn different types of incomes and the TDS rates on these incomes vary. So, in today’s article, let us understand about the TDS on various incomes earned by a non-resident and how to ensure a lower rate of tax.
Note: For the simplification purpose, we assume that aggregate payment/ credit subject to TDS is less than Rs. 1 crore. If it is more than Rs. 1 crore, an additional surcharge of 12% is applicable on the rate of TDS.
Salary
It may be possible that a person may be working on an onsite location for some years thus qualifying as NRI however the payment is made by company in India. In such case, as per Section 192 of the Income Tax Act, the TDS will be calculated as per the normal tax rates as applies to resident individuals.
Short term capital gains from equity shares/ units of equity mutual fund:
Section 111A speaks about short term capital gain from shares/ equity mutual fund u/s 111A of the Income Tax Act. The capital gain qualifies as short term where period of holding of the share/unit of equity mutual fund is less than a year. In such a case, the TDS rate is 15.45%.
Investment income from foreign exchange assets of an Indian citizen
There is a separate Chapter XII-A for provisions relating to non-residents. In that chapter, Section 115C defines foreign exchange assets as shares, debentures, deposit of Indian company and security of central government, purchased in foreign currency. Now, if there is any investment income from these assets, TDS will be deducted at 20.60%.
Long term capital gain from foreign exchange asset
In continuation to the above, if there is any long term capital gain from these assets, unless they are exempt (e.g. LTCG in case of equity shares), TDS rate will be 10.30%
Any other long term gain
For all other long term gains for e.g. from sale of property, equity/ debt mutual funds etc. rate of TDS will be 20.60%.
Royalty/Professional Services
The TDS on royalty/professional services depends on the date of entering into the agreement as follows:
- For agreements entered into before April 1, 1976: 30.90%
- For agreements entered into after April 1, 1976: 10.30%
Taxable accumulated balance of Employee Provident Fund (EPF)
Effective June 2015, for credit of taxable portion of accumulated EPF balance, TDS shall be deducted at 10.30% under Section 192A of Income Tax Act.
Interest on rupee denominated bond of Indian company or Government security
Section 194LD prescribes tax treatment of Interest on rupee denominated bond of Indian company or Government security. As per the provisions, the TDS rate in this case will be 5.15%.
Interest on foreign currency bonds/GDR
Section 196C prescribes tax treatment on foreign currency bonds/GDR.As per the provisions, the TDS rate in this case will be 10.30%.
Income of a foreign citizen sportsperson:
In case of foreign citizen & non-resident sportsperson, Section 194E prescribes a TDS rate of 20.60%.
For any other income not covered above
Now, there may be other incomes that are not covered here, for example the following:
- Proceeds of a life Insurance policy (in case it is not exempt under Section 10(10D) of the Income Tax Act)
- Rental income from house property
- Short term capital gain from debt mutual funds
- Interest income on NRO accounts
In all such cases, the TDS rate will be 30.90%.
Points to note:
- In case the payment is over Rs. 1 crore, an additional surcharge of 12% shall apply.
- The incidence of TDS has to be seen when at the time of receipt of income. For e.g. you have invested in debt mutual fund 5 years back when you were a resident, now you redeem the fund and your status is NRI, in such a case, there will be a TDS @ 20% will apply to that investment.
- Another option to claim a lower rate of TDS is to refer to India’s DTAA with your country of residence & claim a lower rate of TDS, if allowed. For doing this, you need to obtain a Tax Residency Certificate (TRC) from your country of residence and submit the same along with an application quoting your tax identification number etc. to the bank.
- Under Section 195, the incidence of tax is on the full amount and not only on the income – for e.g. full amount redeemed from MF or full value of property will qualify for TDS. In such case, it is better for the NRI apply to Assessing Officer for a certificate granting deduction of tax at a lower rate or no TDS at all.
- NRI are not allowed to set off their short/long term capital gain from exemption limit allowed under the Act.
- NRI can claim indexation benefit in case of long term capital gain except where they’ve opted for special provisions under the Income Tax Act.
- NRIs are not allowed to submit Form 15G/H.
- In case income is tax free (e.g. equity mutual funds after a holding period of 1 year, life insurance policies whose proceeds are exempt u/s 10(10D), NRE FDs), there is no question of TDS.
Conclusion
It is very important for an NRI investor to understand the implications and TDS rates to ensure that the appropriate TDS is deducted and one is compliant of the law.
Hope this post was useful. For personalised tax advice, reach me at contact@abhinavgulechha.com