How DTAA provisions help NRIs avail reduced TDS rate on certain incomes in India

It is very often the case that non-resident Indians (NRI) live abroad but also ean an income in India. In such cases, it is possible that the income earned in India would attract tax in India as well as in the country of the NRI’s residence. This means that they would have to pay tax twice on the same income. However, to avoid doing so, there is something called the Double Tax Avoidance Agreement (DTAA) that NRIs can benefit from.

Currently, India has DTAA with around 80 countries. In this article we will look at DTAA provisions that India has with UK and US. Broadly, NRIs will be able to avail a reduced TDS rate on certain incomes in India. If you are availing this lower rate, you would need to submit a tax residency certificate (issued by the country of your residence) to the payer.

Interest on bank deposits, bonds etc

What DTAA says:

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may also be taxed in the Contracting State in which it arises and accordingly to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest.

What it means for NRIs: It means that if the interest is earned by an NRI out of deposits in India, the country in which he is resident has the right to tax this income. But TDS will be deducted on the same in India at the lower rate of 15 per cent (as against TDS rate of 30 per cent in absence of any DTAA). So the TDS rate on this income will be at 15 per cent.

As an NRI in these countries, you would have to add this income to your taxable income in the country of your residence. But you can get a tax credit for the tax paid in India.

Dividends

Dividend earned on equity shares traded on a recognized stock exchange in India are tax-free in the hands of the person earning the dividend. Therefore, there will be no tax deducted at source on your dividend earnings.

Do remember however, that dividends are taxed in the US and the UK and this income will therefore be taxed in your country of residence.

Capital gains on securities

Equity shares and equity mutual funds (mutual funds with more than 50 per cent in equities)
Long term capital gains, that is profits made on sale after 1 year from date of purchase, on equity shares and equity mutual funds are exempt from tax. There will be no TDS applicable.

Short term capital gains, that is, profits on sale within one year of date of purchase, will be subject to a TDS of 15 per cent. There is no reduction in TDS rate available in the DTAA.

Debt mutual funds, corporate debentures

Long term capital gains from debt mutual funds and corporate debentures (when sold in the secondary market) will be subject to TDS at 10 per cent.

Short term capital gains will be subject to a TDS of 30 per cent.

There is no reduction of TDS rate available in the DTAA with respect to these gains.

For US and UK residents, these gains will be taxed in the country of your residence. You will however, be able to claim a credit on the tax that has been deducted at source.

Capital gains on other assets like house property, gold

There is no reduction of TDS rate available in the DTAA with US and the UK. Therefore, long term capital gains will be subject to a TDS of 20 per cent and short term capital gains will be subject to a TDS of 30 per cent.

Again, for UK and US residents, these incomes need to be added to the total taxable income in the country of your residence. You will be eligible to claim a credit on the TDS paid in India.

Rent

What DTAA says: Income derived by a resident of a Contracting State from immovable property (real property), including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.

What it means for NRIs: If you are an NRI and have given a property on rent in India, the income from rent will be charged to tax only in India. Therefore, TDS would be charged at 30 per cent. If the tenant does not deduct tax at source, you must file your tax returns and pay up the right amount of taxes as per your tax slab.

You would still have to disclose this income in your tax return in the US or UK and claim the credit of tax paid in India.

Professional services

What DTAA says on Professional Services: Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from, the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State:

(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or

(b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.

What it means for NRIs: If you are an NRI providing professional services to a company or person in India, the income will be taxed only in your country of residence. Therefore, no tax would be deducted at source on this income.

However, you will have to submit a tax residency certificate from the tax authorities of the country that you are a resident of.

Royalty

What DTAA says on Royalty: Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:

(a) in the case of royalties referred to in subparagraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services described in subparagraph (b) of this paragraph):

(i) during the first five taxable years for which this Convention has effect,

(A) 15 percent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political subdivision or a public sector company; and

(B) 20 percent of the gross amount of the royalties or fees for included services in all other cases; and

(ii) during the subsequent years, 15 percent of the gross amount of royalties or fees for included services; and

(b) in the case of royalties referred to in subparagraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 percent of the gross amount of the royalties or fees for included services.

What it means for the NRI: If you are an NRI receiving royalty payments for services provided in India, you will be subject to TDS as per the rates mentioned above.

You will however also be taxed in your country of residence but you can claim a credit of the TDS paid in India.

All other income

You will be liable to tax on these incomes even in the country of your residence. However, you can claim a credit of this TDS when you file your return in your country of residence.

It is important to mention here that TDS is different from your tax liability.

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