The income earned by NRIs in India is taxed if it exceeds the amount of Rs. 2,50,000 per annum. However, the overseas income of NRIs is not taxed in India. Income tax for NRIs largely depends on the number of days an NRI stays in India. Here you will learn how NRIs can avoid paying higher TDS in India.
Important points about NRI income tax in India
- NRIs need to pay tax in India only on income that accrues or is deemed to accrue/ arise, or is received or deemed to be received in India.
- Any income earned by an NRI in India, such as rent, dividends, pension, salary, etc. are taxable in India.
- Any income earned from running a business enterprise in India is taxed by the Government of India.
- Interest earned on NRE and FCNR accounts are totally exempted from taxation. But, interest earned from NRO accounts are taxable.
- Capital gains from transfers of capital assets located in India can be taxed for NRIs.
- Residential property sold by an NRI is subject to TDS at 20%.
- NRIs can claim some exemption from a capital gains tax payment by reinvesting in another property or through investment in some capital gains bonds under the Section 54 and Section 54EC of the Income Tax Act.
TDS rates applicable for NRIs
NRI investment is subject to tax in India in the same way as the tax liabilities faced by resident investors. However, an NRI’s tax is deducted at the source, also known as TDS. The TDS deducted from most investments are deductions made at a flat rate of interest regardless of the income slab.
The applicable taxes on capital gains are deducted during the time of maturity or redemption. NRIs can apply for income tax refunds if the tax liabilities on investment are lower than the TDS amount.
How NRIs can avoid paying higher TDS by opening NRI accounts
- Non-resident customers can open NRI accounts, including Non-Resident External (NRE) Account, Foreign Currency Non-Resident (FCNR) Account, and Non-Resident Ordinary (NRO) account, to avoid paying high TDS in India.
- Funds in NRE and FCNR accounts are fully exempted from tax in India. Hence, NRIs who hold these accounts will not be liable to pay TDS in India.
- Interest earned on funds in an NRO account is however taxable with the TDS at the rate about 30%.
Invest in NRI mutual funds in India to avoid higher TDS
Mutual fund investment is one of the effective ways for NRIs to save on TDS payments. NRIs need to open an NRE/ NRO account to invest in mutual funds. Investing in mutual funds provides NRIs with a number of benefits:
- NRIs will be able to save a higher TDS that they would otherwise have paid.
- Large sums of investment in mutual funds in India may be significantly exempted from TDS or NRIa may have to pay it at a rate which is much reduced.
TDS on capital gains from mutual fund investments by NRIs
Short-term capital gains tax
|Fund Types||Tax Rates||TDS Rates|
|Non-equity oriented scheme||Normal rates applicable to assessee||30%|
|Equity oriented scheme||15% Under Section 111A||15%|
Long-term capital gains tax
|Fund Types||Tax Rates||TDS Rates|
|Listed units of non-equity oriented scheme||10% without indexation or 20% with indexation||20%|
|Unlisted units of non-equity oriented scheme||10% without indexation||10%|
|Units of equity oriented scheme||Exempt in case Securities Transaction Tax (STT) is paid||Exempt in case Securities Transaction Tax (STT) is paid|
There are several ways for NRIs to save on TDS or pay it at a lower rate than typically applicable.
Due to a complicated tax system, understanding tax laws can be confusing and NRIs may miss claiming deductions and other benefits. At SBNRI, we understand this struggle. You can download SBNRI App to connect with our NRI Tax Experts and get end-to-end assistance related to NRI tax filing.