TDS Deduction Rules - TDS Rules on NRI Income in India

An NRI may assume that since they are settled overseas and probably paying tax in the country of residence, Indian income tax does not apply to them. But an income earned in India is taxable in India, whether you are a resident or non-resident. There is an NRI TDS deduction applicable to any NRI income in India. 

Since it would be difficult for the Indian government to ensure that a person living abroad pays the taxes arising in India, the Income Tax Act has made TDS deduction compulsory on NRI income as a proactive measure. So, if an NRI earns in India, the income is paid to them after deducting TDS.

Who is a non-resident Indian?
 

The concept of non-resident Indian (NRI) has been defined in Section 6 of the Income Tax Act. 

In simple terms, NRI is a person not residing in the country. For income tax calculations, a person is a resident of India if they have stayed for 182 or more days in India during the previous year. Additionally, a person can be a resident if they have stayed for 60 or more days in the previous year and 365 or more days in the four financial years preceding the previous year. 

Section 195 of the Income Tax Act
 

Section 195 deals with the deduction of TDS on payments made to non-resident Indians. 

Here are some of the key highlights of Section 195 of the Income Tax Act: 

It applies to any person who is liable to pay an NRI. ‘Any person’ could mean a resident as well as a non-resident. This includes individuals, Hindu undivided families, partnership firms, domestic or foreign companies, non-residents, people with exempt income in India, or any other juristic person whether or not such person has taxable income in India or not. The receiver can be a non-resident individual or a foreign company.

TDS for NRI under Section 195 must be deducted on all payments made to an NRI, except for salary, which is deducted under Section 192, and interest payments deducted under Sections 194LB, LC, and LD.

The deduction must be made when the amount is credited to the NRI’s account or payment to the NRI in cash or bank, whichever is earlier. There is no threshold limit for NRI TDS deduction under Section 195.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/finance/comprehensive-guide-to-nri-investments-in-india

Types of NRI income that require TDS deduction
 

Here are the various NRI income sources that require TDS deduction, along with the rate of withholding tax:

• Dividend income – 20% 

• Short-term capital gains on transfer of equity shares through stock exchanges and liable to securities transaction tax (Section 111A) – 15%

• Other short-term capital gains – 30%

• Long-term capital gains exceeding Rs 1 lakh from the sale of listed equity shares, equity mutual funds, or units of business trust (Section 112A) – 10%

• Long-term capital gains on securities other than Section 112A – 10%

• Long-term capital gains on the sale of property – 20% of the sale value

• House property rent – 30%

• Other income – as per normal income tax slab rate

How NRIs can lower the TDS rate on income received

Form 13

A non-resident receiving any amount on which TDS is to be deducted under Section 195 can apply to the Assessing Officer (AO) for a nil deduction or lower TDS rate. The person must apply in Form 13. 

The AO reviews the duly filled Form 13 and supporting documents and then grants the certificate for a lower TDS rate or nil TDS deduction. The certificate remains valid for the remainder of the financial year, the specified period, or until the AO cancels it.

Double Taxation Avoidance Agreement (DTAA)

An NRI may be taxed in India and the country of residence. In such a scenario, the NRI must examine the provisions of the DTAA between India and the country of residence. If favourable provisions are laid down in the DTAA, the NRI can avail of beneficial tax rates under the DTAA.

To capitalise on such beneficial rates, the NRI must e-file Form 10F with the Income Tax authorities in India. If the Tax Residency Certificate (TRC) issued by the country of residence provides all the details in Form 10F, such TRC can also be provided. 

As the NRI, you must estimate the incoming payment and the TDS likely to be deducted. You must correspond with the payee about the TDS to be deducted, the payer’s compliance needs, and obtain the tax withholding certificate from the payer. You must try to ensure that the payer fulfils all necessary TDS compliances while paying you. 

If you are eligible for a refund on the TDS deducted earlier, the same can be claimed by filing an income tax return in India. This can happen if the NRI’s total income is not taxable, but TDS was deducted nonetheless.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/savings-account/nri-fixed-deposits-mistakes

Consequences of non-deduction of TDS

If a payer fails to comply with the provisions of Section 195 of the Income Tax Act, the primary burden of consequences falls on the payer. Accordingly, the following will apply:

• If the payer fails to deduct the TDS, the payment made will be disallowed. In other words, the payer cannot claim the same as an expense while calculating taxable income, thus increasing the tax liability

• If the deducted TDS is not deposited on time, an interest of 1.5% per month, or part of a month, will be charged from the date of deduction to the date of deposit

• If the TDS is deducted but not paid, a penalty equivalent to the TDS amount will be levied under Section 221

• If a lesser amount is deducted as TDS, a penalty equivalent to the difference between the deductible and deducted amount is charged under Section 271C 

Conclusion

Depositing tax can be convenient if you have an IDFC FIRST Bank Savings Account. 

Log in to the income tax portal, and opt for IDFC FIRST Bank debit/credit card or net banking as the payment option. IDFC FIRST Bank is also the ideal choice for non-residents, with the options of NRE and NRO and FCNR Deposit Accounts. You can enjoy 100% liquidity and attractive interest rates on your India funds with IDFC FIRST Bank!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.