You can usually see your friend, your co-worker, or even your family members who are living outside India for a long time as NRI as per Indian tax laws during a particular financial year. However, they can still own assets like house property, fixed deposits and shares and also have active bank accounts in India. Given that these assets would be income generating assets in India, Section 195 of the Income Tax Act, 1961 makes it mandatory for any person paying NRI to deduct tax at source (TDS).
Let us throw some light on the key requirements that are mandatory for payments made to an NRI in India in this section.
Who is responsible and what is the primary responsibility?
Any person (whether an individual, HUF, company etc.) makes any payment by way of interest or any sum other than salary paid to an NRI, to be deducted tax at source under section 195 of the Act Is responsible. Tax should be deducted not only from payments that are net taxable income, but also from payments where only a part of the payment may be liable to tax.
For example, interest payment made by a bank to an NRI from an NRO savings account can be allowed a rebate of up to Rs 10,000 as per section 80TTA. However, while making interest payment, the banker will deduct tax at source on the gross payment made to the NRI. Thus, if the gross interest payment made on NRO savings account is Rs 18,000 in a financial year, TDS will be deducted from Rs 18,000 instead of additional income of Rs 8,000.
Is there any limit for deduction of tax at source?
There is no limit for deduction of tax at source on payments made to NRIs. Thus, Re 1 earned by an NRI will also come under TDS. Further, the Income Tax law provides that the payee shall have to credit such income to the account of the payee (NRI) or at the time of payment in cash or by issue of check or draft or by any other mode, whichever is earlier. Deduct income tax at the rates.
However, TDS will not be deducted in the case of any other income which is not liable to tax in India. For example, interest earned from NRE accounts in India is exempt from taxation in the hands of NRIs. Therefore, assessment may be required to determine whether the payment is not subject to tax or is exempt in the hands of the recipient.
Rate at which TDS is to be deducted
As per income tax laws, TDS is to be deducted by the payer at the current tax rates announced in the annual Union Budget. Below are the applicable rates for some of the major income sources of an NRI in India.
- Interest and dividend payment received from bank, NBFC or any other financial institution – 20%
- Long term capital gains (STT paid) on equity shares or equity oriented mutual funds listed in India – 10%,
- Any other long-term capital gain at 20% (eg debt funds, hybrid funds, etc.)
- Short-term capital gains (STT paid) on equity shares or equity oriented mutual funds listed in India – 15%
- Any other income – rental income from house property located in India – 30%
How to reduce the rate of TDS on income received by non-residents
An NRI can reduce the rate at which tax is to be deducted by applying to the Assessing Officer (AO) for obtaining a low or zero deduction certificate. The application (in a prescribed format) can be made if the NRI fulfills 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 a return of income for all assessment years for which such return has become payable on or before the date of making the application, He has not defaulted or is deemed to be in default in respect of any tax interest, penalty, penalty, or any other sum payable, etc. The certificate given by the AO to the NRI will be valid till the specified date.
Note that NRIs cannot submit Form 15G/Form 15H. So, if they want to reduce or nil TDS on their income in India, they should apply for a certificate in the prescribed format with AO.
However, if TDS is applicable, the payee is also required to issue a TDS certificate. The certificate issued will tell the NRI the details and amount of TDS deducted for his record.
How a Double Taxation Avoidance Agreement (DTAA) can help
If the NRI is subject to double taxation in India and his country of 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 fulfills the conditions prescribed in the DTAA, the beneficial rates under the DTAA will be applicable at the time of deducting tax at source (TDS). To avail benefits under DTAA, NRIs have to e-file the prescribed Form 10F with the Indian tax authorities or provide Tax Residency Certificate (TRC) issued by the country of residence (only if the TRC captures all the details ) required in Form 10F).
Accordingly, NRIs should carefully assess the expected payments and deduction of tax at source. While most of the nuances around compliance requirements are up to the payers, NRIs must maintain with the payer the details regarding applicable TDS, compliance to be done by the payer and withholding certificate to claim the required TDS. credit in his tax return.
While compliance under the provisions of section 195 has to be done by the payer and the effect of non-compliance also affects the payer only, the NRI person should ensure that the necessary withholding compliance is done while receiving the payment.
Deduction of TDS at the time of payment definitely results in shortfall in cash flow and recovery of any tax already remitted as TDS can be done only through filing of tax return in India. Even if the total income of the individual is not taxable in India, due to TDS being deducted at the time of payment, it will become a necessary practice to file returns and claim refund. Not only this, NRIs may also face challenges in finding suitable tenants for a house property in India in some cases, as the payer will additionally have to comply with applicable tax provisions and the consequences of non-compliance. will have to face.
Therefore, the provisions of section 195 are an important factor that may affect the investment and income sources of an NRI in India and he needs to educate the payer to fully comply with the provisions of the law and ensure deduction of tax at source. may be required. Correct rate and appropriate filing is done for NRIs to claim the required credit.
(The author is Tax Partner and India Mobility Leader, EY. Inputs also from Shanmuga Prasad, Director, EY.
Views expressed are personal)