You may normally see your friend, your colleague, or even your family members who are staying outside India for longer durations qualifying as a NRI as per Indian tax laws during a particular financial year. However, they may still own assets like house property, fixed deposits, and shares and may even have active bank accounts in India. Given that these assets will be income-generating assets in India, Section 195 of the Income Tax Act, 1961 makes it mandatory for anyone making payments to NRIs to deduct taxes at source (TDS).
Let’s throw some light on the key requirements that this section mandates for payments made to a NRI in India.
Who is responsible and what is the primary responsibility?
Any person (be it an individual, HUF, Company etc.) making any payment by way of interest or any other amount other than the salary paid to a NRI is responsible to deduct tax at source under Section 195 of the Act. The tax has to be deducted not just from payments that are pure taxable incomes, but also from payments where only a portion of the payment may be liable to tax.
For e.g., payments made by bank as interest from a NRO savings account to NRIs may be exempt up to Rs 10,000 as per Section 80TTA. However, while making the interest payment, the banker would deduct tax at source on the gross payments made to the NRI. Thus, if the gross interest payment made on NRO savings account is Rs 18,000 in a financial year, then TDS will be deducted from Rs 18,000 rather than excess income of Rs 8,000.
Is there a threshold for deducting tax at source?
There is no threshold limit to deduct tax at source on payments made to NRI. Thus, even Re 1 earned by NRI would come under the ambit of TDS. Further, the income tax law provides that the payer must at the time of credit of such income to the account of the payee (NRI) or at the time of payment thereof in cash or by way of issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
However, TDS shall not be deducted in case of any other income that is not liable to tax in India. For example, interest earned from NRE accounts in India is exempt from taxation in the hands of the NRI. Hence, an evaluation may be required to determine if the payment is not subject to tax or is exempt in the hands of the recipient.
Rate at which TDS has to be deducted
As per the income tax laws, the TDS is to be deducted by the payer at the current tax rates as announced in the annual Union Budget. Below are the applicable rates for a few key income sources of an NRI in India.
- Interest received from bank, NBFC or any other financial institution and dividend payments – 20%
- Long-term capital gains on listed equity shares or equity oriented mutual funds in India (STT paid)- 10%,
- Any other long-term capital gain at 20% (For eg. Debt funds, hybrid funds, etc.)
- Short-term capital gains on listed equity shares or equity oriented mutual funds in India (STT paid)- 15%
- Any other incomes- rental income from house property situated in India- 30%
How to lower the TDS rate on income received by non-residents
An NRI can lower the rate at which tax has to be deducted by making an application to the Assessing Officer (AO) to obtain a lower or nil deduction certificate. The application (in a prescribed format) can be made if the NRI satisfies the conditions prescribed under the income tax laws.
For example, the person concerned has been regularly assessed to income tax in India and has furnished the returns of income for all assessment years for which such returns became due on or before the date on which the application is made, he/she has not defaulted or deemed to be in default in respect of any tax interest, penalty, fine, or any other sum payable, etc. The certificate granted by the AO to the NRI shall remain valid until the date specified.
Do note that NRIs cannot submit Form 15G/Form 15H. Hence, if they want to lower or NIL TDS on their incomes in India, they should apply for certificate in the prescribed format with the AO.
However, if TDS is applicable, then the payer is also required to issue a TDS certificate. The certificate issued will state the details and amount of TDS deducted to the NRI for his/her records.
How Double Taxation Avoidance Agreement (DTAA) can help
If the NRI is subject to double taxation in India and the country of his residence, it becomes important to assess the applicability of the provisions under the Double Taxation Avoidance Agreement (DTAA) between India and that country. If the NRI satisfies the conditions prescribed in the DTAA, beneficial rates under the DTAA shall be applied while deducting tax at the source (TDS). To avail the benefits under the DTAA, the NRI will be required to e-file the prescribed Form 10F with the Indian tax authorities or provide the Tax Residency Certificate (TRC) issued by the country of residence (only if the TRC captures all the details required in Form 10F).
Accordingly, the NRI should carefully evaluate the expected payments and the deduction of tax at the source. While most of the nuances around the compliance requirements are for the payers, the NRI must also document with the payer the details about the applicable TDS, the compliance to be undertaken by the payer, and retain the withholding certificate in order to claim the necessary TDS credit in his/her tax returns.
While the compliances under the provisions of Section 195 are to be undertaken by the payer and the impact of non-compliance also affects the payer only, the NRI individual must ensure that the necessary withholding compliances are done while receiving the payment.
Deduction of TDS at the time of payment surely results in a reduction in cash inflow and recovery of any taxes already remitted as TDS can only be done via the filing of tax returns in India. Even if the individual has total income not chargeable to tax in India, due to the TDS being deducted at the time of payments, it will become a necessary exercise to file the returns and claim the refunds. Not only this, NRI may also in some instances face challenges in finding suitable tenants for a house property in India, as the payer would be required to additionally comply with the applicable tax provisions and face the consequences of non-compliance as well.
Hence, the provisions of Section 195 are an important factor that may influence the investments and income sources of an NRI in India and he/she may need to educate the payer to fully comply with the provisions of the law and ensure that tax deduction at source happens at the correct rate and appropriate filings are done for the NRI to claim the necessary credits.
(The writer is Tax Partner and India Mobility Leader, EY. Inputs from Shanmuga Prasad, Director, EY as well.
Views expressed are personal)