All you wanted to know about TDS for NRIs | TDS for NRIs

Income earned or accrued by NRIs in India is subject to tax in India. Section 195 of the Income Tax Act covers Tax Deducted at Source (TDS) on payments made by non-resident Indians.

Like the long hand of law, the taxman has an extended reach too. You would know this, especially if you are a non-resident Indian (NRI). For every income that you earn in India after becoming an NRI, tax will most certainly get charged and furthermore, it would be deducted at source.

And the rates for tax deducted at source (TDS) are widely different from the rates applicable to resident Indians. In this column, we will look at the various incomes that an NRI could earn in India and what TDS rate would apply.

Before we begin, it is important to clarify that tax will be deducted only on incomes that are liable to tax in India. If the income is tax free in India like long term capital gains from equity shares, there would be no TDS. Another important thing to remember is that you should be an NRI at the time of receiving the income.

For instance, you may have purchased a long term debenture of a company while you were a resident Indian. But any interest that you receive during the period after becoming an NRI will be subject to TDS.

Interest on bank deposits

Interest earned on Non Resident External (NRE) accounts and Foreign Currency Non Resident (FCNR) accounts are tax free in India. Hence, there would be no TDS.

However, interest earned on the Non Resident Ordinary Account (NRO) is taxable and will be subject to a TDS of 30 per cent. There is no basic exemption limit. For example, interest earned by resident Indians from bank deposits is subject to TDS only over and above a limit of Rs 10000. No such limit applies for NRIs.

Interest on all other investments

Interest earned on all other investments like corporate deposits and bonds will be subject to TDS at 20 per cent. In all these cases, the company or party making the payment will deduct this tax.

Dividends

Dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.

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.

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.

Capital gains on other assets like house property, gold
Long term capital gains will be subject to a TDS of 20 per cent.
Short term capital gains will be subject to a TDS of 30 per cent.

Case of sale of assets like gold

Now in case of sale of assets like gold and house property, the question arises as to who will deduct the tax at source. If the property is sold to an individual, does the individual need to deduct tax at source and deposit the same with the Government? Will the individual then issue a TDS certificate to the NRI?

Sandeep Shanbhag, Director of Wonderland Investments explains, "Yes, the payer of the sale proceeds, even if he is an individual will be responsible for deducting tax at source and paying it to the Government. He must get a Tax Deduction Account number (TAN) and issue a TDS certificate for the same."

What if the individual does not go through this process and fails to deduct tax? "The onus of deducting tax is on the payer. So in case the individual does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible," Shanbhag says.

Rent

There is no separate rate prescribed for TDS on rent paid to NRIs. Therefore, this would fall under the category of other income and be subject to a TDS of 30 per cent.

Again, just like in the case of capital gains on assets, the payer of the rent is responsible for deducting the tax at source. The same process of getting a TAN and issuing a TDS certificate applies in this case too.

Professional services and royalty

If you are an NRI and are receiving a payment from a company in India for providing professional services, your income would be subject to TDS. The rates are slightly complicated.

If your agreement is dated between 1st June 1997 and 30th May 2005, you would be subject to a TDS rate of 20 per cent.

If your agreement is dated on or after 1st June 2005, you would be subject to a TDS rate of 10 per cent.

The same applies to royalty. For definitions of professional service and royalty, please refer to section 115 of the Income Tax Act.

All other income

All other income that you earn as an NRI and which are liable for tax as per Indian laws, will be subject to a TDS of 30 per cent.

All the above incomes would also be subject to surcharge and education cess. If the income exceeds Rs 10 lakh, a surcharge of 10 per cent would be applicable on the TDS. Further, an education cess of 3 per cent would apply to all TDS.

Waiver of TDS, possible?

Yes, in some cases. When you are an NRI, you are obviously a resident of another country for tax purposes. And all countries tax residents on their global income. So it may happen that as per provisions br>of the Indian Income Tax laws, tax will be deducted at source on a certain income earned in India. But at the same time, that income will be subject to tax in your country of residence. In such cases, we need to refer to the Double Taxation Avoidance Agreements (DTAA) that India has entered into with various countries. The DTAA overrides the provisions of the Indian Income Tax Act. The DTAA provides certain further concessional rates of TDS. You can even get a TDS waiver if your total income is less than the basic exemption limit.

It will be our ongoing attempt through these columns to bring you clarity on all these issues. So watch this space for more!

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