Tax Deduction: TDS to be deducted on annuity payable to Overseas Citizens of India, NRI NPS subscribers

Based on a clarification received from IRDAI, it is hereby clarified that annuity payable by ASPs NRIs and OCIs will be taxed at source, at rates applicable as per the DTAA of the country where the annuitant resided.

The pension fund regulator has clarified that the annuity payable from National Pension System (NPS) investments to Overseas Citizens of India (OCIs) will now be taxed at source in accordance with the rates applicable as per the Double Taxation Avoidance Agreement (DTAA).

According to a clarification by the Pension Fund Regulatory and Development Authority (PFRDA) issued on December 24, "Based on a clarification received from IRDAI, it is hereby clarified that annuity payable by ASPs NRIs and OCIs will be taxed at source, at rates applicable as per the DTAA of the country where the annuitant resided."

This way by paying tax in the country of residence, a person may be exempt from paying tax in the country in which it arises. However, the person must refer to the DTAA carefully as it varies from country to country.

According to the PFRDA circular, "Annuity Service Providers (ASPs) are also required to display or convey to prospective and existing NPS subscribers' that 'Annuitants payable to NRI/OCI are subject to TDS' and repatriation of the corpus if any will be subject to applicable laws and regulatory provisions of IRDAI/PFRDA/RBI'. The following notification can be conveyed through their websites, marketing channel, brochures, etc.

Saraswathi kasturirangan, partner Deloitte India said that the pension payout (for OCIs and NRIs) will be subject to tax withholding (also known as TDS). "The rate of tax withholding will depend on the country of residence and the provisions applicable under the relevant double taxation avoidance agreement with such a country. In order to avail the lower rates as prescribed under the treaty it would be important to provide the tax residency certificate from the overseas jurisdiction," she said.

Two months ago, PFRDA had allowed OCIs to invest in NPS tier-1 account wherein the regulator had not clarified the tax treatment on annuity payable.

What is DTAA?

India does not permit dual citizenship. However, a foreign citizen who is a person of Indian origin is provided with the Overseas Citizenship of India status that allows them to live and work in India without immigration requirements. In such cases, DTAA becomes helpful for such citizens.

DTAA is basically a tax agreement between two or more countries who want to ensure that a taxpayer from any of the participant countries but working in one of the others is not taxed twice on the same earnings. Thus, a country in which the gain arises can deduct TDS and the taxpayer would receive foreign tax credit (FTC) in the residence country to reflect that the tax has already been paid and thereby he/she does not have to pay tax twice on the same earnings.

A senior PFRDA official said, "The rules are only applicable for NRI/OCI NPS subscribers where the annuity payments from Insurance companies will attract TDS as per DTAA of the country in which the annuitant (subscriber) resides. "For Resident Indians, no TDS is applicable, the annuity will be added to the income & will get taxed at marginal rates as applicable."