Tax Deducted at Source (TDS) is a system of tax collection by the government directly from the source of income. For NRIs, TDS makes sure that their tax obligations are met in India. Understanding how NRI TDS works is important, as it can help avoid any additional charges and penalties when you file your taxes. In this article, we will explore how TDS is deducted for NRIs, rates of TDS applicable and how NRIs can manage and claim their TDS.
What is TDS?
TDS is the tax that is deducted at the source of income before it gets paid to the recipient. The income can be in any form, such as salary, interest, dividends, rent or any other source. TDS is deducted by the person or organization making the payment. The amount deducted gets deposited to the government.
TDS for NRI is deducted at different rates depending on the type of income they earn in India. This ensures that tax is collected from the source of income, even when the recipient is not present in the country.
How is TDS Deducted for NRIs?
The process of TDS for NRIs is similar to that of resident Indians, but the rates and regulations are different. Below are the common sources of income for NRIs and how TDS is applied:
- Salary Income: When an NRI earns income in the form of salary in India, TDS is deducted as per the income tax rates based on the employee’s income. However, if the NRI is employed by a foreign company and is paid outside India, they are not liable for TDS in India. The employer is required to deduct TDS if the salary is paid in India, and form 16a for NRI is issued for any income earned other than salary and proves that tax has been paid to the government.
- Interest Income: Interest income earned by an NRI on bank deposits or fixed deposits in India is subject to TDS at a rate of 30%. However, NRIs are not eligible for the basic exemption limit of Rs. 2.5 lakh, which is available to resident Indians.
NRE and NRO account TDS: TDS on interest earned in Non-Resident External (NRE) accounts is not applicable, as the interest is tax-free in India. However, TDS for NRO account is 30%. The rate could vary if there is a Double Taxation Avoidance Agreement (DTAA) between India and the NRI’s country of residence. - Rental Income: If an NRI earns income from property rental in India, TDS is deducted at 30% on the rental income received. However, NRIs are allowed to deduct certain expenses related to the property like repairs and maintenance, before the income is calculated.
- Dividends: Dividend income earned by NRIs from Indian companies is subject to TDS at 20%. Lower TDS Certificate for NRIs may be available under the provisions of DTAA between India and their country of residence.
- Sale of Property: When an NRI sells property in India, TDS is deducted on the capital gains. The TDS rate depends on whether the property is a short-term or long-term asset.
- Short-Term Capital Gains (STCG): If the property is sold within 2 years of purchase, the gain is considered short-term, and TDS is deducted at a rate of 30% on the sale price.
- Long-Term Capital Gains (LTCG): If the property is sold after 2 years, it is considered long-term, and the TDS rate is 12.5% without indexation benefits.
- Other Income: Other income such as winnings from lotteries, sports or other sources are subject to TDS at different rates as per the Income Tax Act. For example, section 195 of Income Tax Act ensures that when a person (resident or NRI) makes a payment to an NRI, TDS shall be deducted if such payment generates income that is taxable in India.
TDS Rates for NRIs
The Income Tax Act specifies TDS rates for NRIs, which can be different depending on the income source and whether a DTAA exists between India and the NRI’s country of residence. Here is a summary of TDS to be deducted from the income of NRIs:
What is the Role of DTAA in TDS?
DTAA is an agreement between India and various countries to ensure that NRIs do not have to pay taxes twice on the same income. DTAA helps to reduce the TDS rates for NRIs and, in some cases, even exempts certain types of income from being taxed in India.
NRIs should check if their country of residence has a DTAA with India and whether they can benefit from reduced TDS rates. To claim the reduced TDS rate under the DTAA, NRIs need to submit a Tax Residency Certificate (TRC) from their country of residence.
How Can NRIs Claim TDS Refund?
If TDS has been deducted more than the actual tax liability, NRIs can claim a refund by filing their income tax return (ITR) in India. The tax department will process the return and issue a refund if applicable.
TDS certificate for NRI can be requested from the payer. This certificate helps in verifying the TDS deducted and ensures that the correct amount is reflected in their income tax filing.
How to Check TDS Deduction?
NRIs can check the TDS deducted by visiting the Income Tax Department’s website or through their Form 26AS. This form can be accessed by logging into the Income Tax portal using the taxpayer’s PAN (Permanent Account Number).
Important Considerations for NRIs Regarding TDS
- PAN Requirement: NRIs need a PAN to ensure that TDS is deducted correctly. Without a PAN, the TDS deduction rate could be higher, often at the maximum rate of 30%.
- Tax Filing: Even though TDS is deducted at the source, NRIs may still need to file an income tax return in India if their total income is more than the exempt limit or if they wish to claim a refund for excess TDS.
- TDS on Indian Investments: NRIs who invest in Indian mutual funds, stocks or other assets may also be subject to TDS on their capital gains or dividends. These rates may vary depending on the type of investment and the applicable DTAA provisions.
Conclusion
TDS plays an important role in the Indian tax system for NRIs. It ensures that taxes are deducted at the source of income and helps avoid any potential tax evasion. By understanding how TDS works and the various rates applicable, NRIs can comply with Indian tax laws, claim the right TDS deductions and claim refunds, if applicable.
By knowing their tax liabilities and fulfilling them on time, NRIs can manage their finances in India without fines and charges. Chat with NRI Tax Expert to understand your tax liabilities and fulfill them on time to invest in India without hassle!
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
Frequently Asked Questions
Are NRIs eligible for the basic income tax exemption available to residents in India?
No, NRIs are not eligible for the basic income tax exemption of Rs. 2.5 lakh available to residents. They are taxed only on income earned or received in India, and TDS is deducted accordingly.
Can NRIs claim a lower TDS rate on income through DTAA?
Yes, if the NRI’s country of residence has a DTAA with India, they may be eligible for a reduced TDS rate. To claim this benefit, NRIs need to provide a Tax Residency Certificate (TRC) to the deductor.
What should NRIs do if excess TDS is deducted from their income?
If TDS has been deducted more than the actual tax liability, NRIs can file an income tax return in India and claim a refund of the excess TDS amount.
How to avoid TDS on NRO accounts?
NRO account tax deduction at source can be avoided by:
- Submitting Form 15G/15H if your total taxable income in India is below the exemption limit.
- Applying for a Lower/NIL TDS Certificate from the Income Tax Department.
- Using the DTAA benefits to reduce the TDS rate.
If TDS is deducted, file an ITR to claim a refund.
