Managing finances as a Non-Resident Indian (NRI) can be challenging, especially when it comes to navigating India’s tax structure. One of the most significant hurdles NRIs face is Tax Deducted at Source (TDS) on income earned in India. While TDS ensures tax compliance, the high rates applicable to NRIs can often lead to excessive deductions, leaving you with less money than you earn.
But the good news is that there are ways to reduce your TDS liability and maximize your income. In this article, we’ll explore how TDS works for NRIs, common income sources subjected to TDS, and actionable strategies to lower your TDS.
What Is TDS and How Does It Affect NRIs?
TDS (Tax Deducted at Source) is a tax deducted by the payer before making any payment to the payee. For NRIs, TDS applies to various types of income earned in India, such as:
- Rental income from property in India
- Capital gains from the sale of property, shares, or mutual funds
- Dividend income from Indian companies
- Interest income on NRO accounts, deposits, or bonds
The challenge for NRIs is that TDS rates are higher compared to residents. For instance:
- Interest earned on an NRO account attracts a 30% TDS, whereas it’s only 10% for residents.
- Long-term capital gains from property sales may attract 20% TDS, but the rate is calculated on the sale amount, not the net capital gain.
- Dividends are taxed at 20% TDS for NRIs, regardless of the amount earned.
This high TDS liability often means NRIs must file tax returns to claim refunds if their actual tax liability is lower than the TDS deducted.
Strategies to Lower TDS on Income in India
Here’s how NRIs can reduce their TDS liability and retain more of their income:
1. Apply for a Lower TDS Certificate
A Lower TDS Certificate is issued under Section 197 of the Income Tax Act, allowing NRIs to pay tax at a reduced rate. This is particularly useful if your actual tax liability is lower than the TDS rate applied.
How to Apply:
- Submit Form 13 to the Income Tax Department.
- Provide details of your income, estimated tax liability, and reasons for requesting a lower TDS rate.
- Once approved, the lower TDS rate applies to payments made to you.
For example:
If you’re selling property worth ₹2 crore, the buyer is required to deduct TDS at 20% (₹40 lakh). However, a lower TDS certificate of 12.5% could significantly reduce your TDS burden.
2. Utilize DTAA Benefits
India has signed Double Taxation Avoidance Agreements (DTAA) with several countries to prevent NRIs from being taxed twice on the same income. Under DTAA, you can:
- Claim a reduced TDS rate on certain types of income (e.g., interest or dividends).
- Avoid double taxation by claiming credit for taxes paid in India in your country of residence.
For example:
Under the India-UAE DTAA, interest income is taxed at only 12.5% TDS, compared to the standard 30%.
Steps to Claim DTAA Benefits:
- Submit Form 10F along with your Tax Residency Certificate (TRC) from your country of residence.
- Provide supporting documents to the payer to apply the reduced TDS rate.
3. Invest in Tax-Efficient Instruments
Choosing investments that offer tax benefits can help NRIs minimize their TDS liability. Some options include:
- NRE Fixed Deposits: Interest earned is tax-free in India, and no TDS is deducted.
- Tax-Free Bonds: Income from specified tax-free bonds is exempt from tax and TDS.
- Capital Gains Bonds: Under Section 54EC, you can invest in capital gains bonds to avoid TDS on property sale proceeds.
4. File Income Tax Returns (ITR)
While filing ITR doesn’t directly reduce TDS, it allows you to claim refunds if excess tax has been deducted. For instance, if your income falls under the basic exemption limit (₹2.5 lakh for individuals below 60 years), you can claim a refund for the TDS deducted.
5. Plan Property Transactions Strategically
TDS on property sales is often a significant burden for NRIs, as buyers are required to deduct 20% TDS on the sale value. To reduce this:
- Apply for a lower TDS certificate before the transaction.
- Use indexation benefits to reduce the taxable capital gains, which lowers your overall tax liability.
- Structure the sale in installments to spread the tax burden across financial years.
Benefits of Lowering TDS for NRIs
- Immediate Cash Flow Relief: Reduced TDS ensures you have more money in hand for investments or personal use.
- Avoid Overpayment: Prevent excess deductions that require filing returns and waiting for refunds.
- Tax Efficiency: Optimize your tax liability by paying only what is due, not more.
- Peace of Mind: Simplifies financial management by eliminating unnecessary deductions and refunds.
Challenges NRIs Face with TDS
- Lack of Awareness: Many NRIs are unaware of the options available to reduce TDS.
- Complex Procedures: Applying for a lower TDS certificate or claiming DTAA benefits requires documentation and compliance.
- Currency Fluctuations: Exchange rate differences can complicate tax calculations.
- Delayed Refunds: Excess TDS often results in lengthy refund processes, tying up your funds.
Conclusion
High TDS can significantly impact an NRI’s income from India, but with the right strategies, you can minimize this burden and make the most of your earnings. From applying for lower TDS certificates to leveraging DTAA benefits, tax-efficient investments, and professional assistance, there are several ways to reduce TDS and optimize your finances.
By taking proactive steps to manage your TDS liability, you can enjoy greater financial flexibility and focus on growing your wealth across borders.
At SBNRI, we’re committed to empowering NRIs with solutions that save taxes and simplify financial management. Download the SBNRI App and let us help you make the most of your hard-earned income in India.
SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
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
Which incomes are subject to TDS for NRIs?
TDS applies to income like rent, interest on NRO accounts, dividends, and capital gains from property or investments.
Can I claim a refund if TDS is too high?
Yes, you can file an income tax return in India to claim a refund for excess TDS deducted.
Is TDS deducted on NRE account interest?
No, interest on NRE accounts is tax-free, so no TDS is deducted.
