Non-residents face a favourable tax regime in India. Their global income is not taxed in India, which is not the case with resident Indians. Only income earned in India is taxed in India.
However, there is one aspect of taxation where residents fare better. Tax deduction at source (TDS) rates are much higher for NRIs as compared to resident Indians. In this post, I shall list down TDS rates for various types of income for NRIs.
For the purposes of taxation, you must be an NRI as per the Income Tax Act (and not as per FEMA).
Definition of NRI as per Income Tax Act
As per Section 6 Income Tax Act, you are a Resident (for a financial year):
- If you are in India for 182 days or more in the financial year; OR
- If you are in India for 365 days in the preceding 4 financial years and 60 days in the financial year. This condition is not applicable if you are leaving India for employment or are a PIO on a visit to India
You are an NRI if you do not meet any of the above conditions.
Taxation of NRI Income in India
Income earned by NRI outside India is not taxable in India.
Only the income which is earned in India is taxed in India. Such income would typically include salary received in India, rental income from properties in India, interest on bank deposits or other securities, dividend income, capital gains etc.
Rates of taxation for various types of income applicable to NRI are same as those applicable to resident Indians.
Why are TDS rates for NRIs so high?
If an income is not taxable such as long term capital gains on sale of equity shares or mutual funds, then TDS is not deducted.
If the income/gain is taxable in India, TDS is deducted at the highest possible income tax rate at which such income is taxed (unless the TDS rate is explicitly provided).
The rationale is that it may be difficult to chase NRI tax-payers if they fail to (or choose not to) file their income tax returns. That’s why TDS is deducted at the maximum possible rate for that particular type of income.
Once the TDS has been deducted and deposited with Government, claiming the refund of excess TDS is NRI’s problem. The Government has got its money.
For instance, short-term capital gain on sale of equity shares is taxed at 15%. In case of NRI investors, applicable TDS on such gains will be 15%.
Let’s look at TDS rates for common sources of income for NRIs.
#1 TDS on Interest on NRO/NRE, FCNR(B) Deposits
Interest on NRE or FCNR(B) deposits is exempt from tax in India. Hence, TDS is not applicable.
On the other hand, interest on NRO deposits is taxed as per the income tax slab of the investor. TDS on such interest income will be deducted at 30% for NRI investors. It is quite possible that the NRI investor does not fall in the highest income tax bracket. However, the bank is not aware of this. Hence, it deducts the TDS at the maximum possible tax rate. If you fall in the lower tax bracket, you can get the refund after filing returns.
For residents, there is no TDS on interest on savings account. On fixed deposits, TDS is applicable only when the interest income on fixed deposits (across the bank) exceeds Rs 10,000 (Rs 50,000 for senior citizens from FY2019) during a financial year. Unfortunately, for non-residents, there is no such threshold. Interest income on NRO accounts is subject to TDS irrespective of the interest amount.
Must Read: How to save TDS on Bank Fixed deposits?
#2 TDS on Interest Income on other investments by NRIs
Interest income on any other investments such as bonds, corporate FDs etc is taxed as per income tax slab. TDS shall be deducted at 30%.
#3 TDS on Dividend Income received by NRIs
Dividend income (mutual funds and equity shares) is exempt from tax in the hands of the investor. Hence, there is no TDS deducted.
Tax on dividend income, if any, is deducted upfront by the mutual fund house in the form of dividend distribution tax (DDT). There is no additional tax to be paid by the investor. Hence, no separate TDS is required to be deducted.
DDT on debt funds is 25%. Please note the DDT is charged on grossed-up basis. After including surcharge and cess, the net tax hit is about 29%.
Budget 2018 introduced Dividend Distribution Tax (DDT) of 10% on the dividend from equity mutual funds. This has, in my opinion, spoilt the case for investing in equity mutual funds for dividends.
If the dividend from equity shares in a particular financial year exceeds Rs 10 lacs, dividend in excess of Rs 10 lacs shall be taxed at 10%. I am not sure if this will have any impact on TDS on the dividend for NRIs.
#4 TDS on Capital Gains on Sale of Equity Mutual Funds/Equity shares by NRIs
If you sell any equity share or unit of equity mutual fund within 1 year of purchase, the ensuing capital gain/loss is termed short-term capital gain/loss. Such short term capital gains are taxed at 15%.
For residents, there is no TDS applicable. For NRIs, TDS on such short term captial gains will be deducted at 15%.
Alternatively, if you sell any equity share or unit of mutual fund after 1 year of purchase, the ensuing capital gain/loss is termed long term capital gain/loss. Such long-term capital gains are exempt from income tax. Since the long term capital gains are exempt, there is no question of TDS either.
Such long-term capital gains on the sale of equity/equity shares by NRIs shall be exempt to the extent of Rs 1 lac per financial year. For the LTCG in excess of Rs 1 lacs, the capital gains will be taxed at 10%.
Therefore, TDS for LTCG on equity shares/equity funds for NRIs will be 10%.
Do note an AMC (mutual fund house) does not know about your gains from other AMCs. Therefore, it will deduct TDS at 10% irrespective of whether your total LTCG for the year exceeds Rs 1 lac or not. You can claim excess tax deducted by filing income tax return.
Read: NRI Corner: How to invest in Equity markets in India?
Read: Long Term Capital Gains
Read: Short Term Capital Gains
#5 TDS on Capital Gains on Debt Mutual Funds (for Non-residents)
TDS for short term capital gains (holding period <=3 years) will be 30%. Short term capital gains are taxed as per investor’s income tax slab. If the NRI falls in a lower tax bracket, he can claim excess tax deducted through income tax return.
TDS for long term capital gains (holding period <=3 years) will be 20%. Such long-term capital gains are taxed 20% less indexation. However, TDS will be deducted at 20%. You can claim the refund of excess tax deducted at the time of filing income tax return.
#6 TDS on Capital Gains on sale of Property/Gold
TDS will be deducted at 20% for any short term capital gains (holding period <=3 years for gold and <= 2 years for a property).
TDS will be deducted at 30% for any long term capital gains (holding period > 3 years for gold and > 2 years for a property).
Note: The holding period for the gains resulting from the sale of property to qualify as long-term capital gains has been reduced from 3 years to 2 years (Budget 2017). For gold, such holding period remains 3 years.
The onus of collecting the TDS and depositing with the Government lies with the buyer (payer).
This is where the problem lies. How does the buyer know how much capital gains you (NRI) are making on such transaction. What does he do? He deducts TDS on the entire sale consideration. Harsh, isn’t it?
There is a way to avoid this. The buyer can get a certificate from Assessing Officer (under Section 195(2)) stating the portion of sale consideration which shall be liable to TDS. Alternatively, the NRI seller can arrange a certificate from Assessing Officer under Section 195(3) or Section 197 of the Income Tax Act specifying a lower rate of TDS. The buyer on receiving such certificate can deduct income tax at the rate specified in that certificate.
Unless such certificate is obtained, the buyer must deduct TDS on the entire sale consideration. If the buyer doesn’t deduct TDS, he stands in violation of Income Tax Act. I am not joking. Go through this case to understand the serious implications: Syed Aslam Hashmi Vs ITO.
As a buyer, if you are purchasing a property from NRI, you must make sure of this. If you make the mistake and the NRI fails to file income tax return (and pay capital gains tax), the tax man will be knocking at your door. So, if you don’t deduct TDS and NRI (the seller) fails to pay capital gains tax, you are in some serious trouble.
Section 195 has been drafted for this very purpose to prevent NRI from taking money abroad without paying any tax, where Income Tax Authorities have no control.
The buyer must get a Tax Deduction Account Number (TAN) and issue TDS certificate to the seller (NRI).
Relief under Section 54, Section 54EC and Section 54F is available to NRIs.
#6 TDS on Rental Income earned by NRIs in India
You have purchased or inherited properties in India. You have given out those properties on rent. Such rental income is subject to TDS at the rate of 30%.
The onus of collecting and depositing TDS lies with the tenant (rent payer). He will have to get TAN and issue TDS certificate to the owner (NRI).
Rental income is taxed at the marginal income tax rate. If you fall in the lower tax bracket, you can claim it back at the time of filing income tax return.
#7 TDS on All other Types of Income
All other types of income unless explicitly specified in the Income Tax Act are subject to TDS at the rate of 30%. Even rental income is not explicitly defined in the Act, hence default rate of 30% is considered.
Can NRIs submit Form 15G/Form 15H to avoid paying TDS?
NRIs cannot submit Form 15G/15H to avoid paying TDS rates. It does not matter if your total income is below the minimum tax exemption limit (Rs 2.5 lacs for <60 years). Only resident Indians can submit Form 15G/Form 15H.
Double Tax Avoidance Agreement (DTAA)
If your country of residence has a DTAA with India, then you may be subject to concessional TDS rates. Respective DTAAs override the provisions of the Income Tax Act.
Your (NRI’s) income in India may also be taxed in your country of residence. DTAAs help avoid double taxation. You get credit for the taxes paid in India. Tax residency certificate must be produced for availing benefit under DTAA.
Points to Note
- For NRIs, the tax exemption limit is Rs 2.5 lacs irrespective of their age. For residents, it is Rs 2.5 lacs (< 60 years), Rs 3 lacs (between 60 and 80) and Rs 5 lacs (80 years and above)
- Surcharge and cess are applicable to NRIs too (except in cases where DTAA rates are applicable)
- The payer (buyer) will issue TDS certificate to the seller (NRI) in case any TDS has been deducted.
- NRIs cannot adjust capital gains by the amount the total taxable income falls short of minimum tax exemption limit. Only residents are permitted to do so.
- If a resident made a capital gain of Rs 2 lacs and has no other income during the year, he won’t have to pay any tax since the total income falls below Rs 2.5 lacs. An NRI, in a similar situation, will have to pay tax on Rs 2 lacs of capital gains.
- If you do not submit PAN, TDS will be deducted at higher of (20% or the rate specified in the Income Tax Act). (Section 206AA(1))
- If your income tax liability is lower than TDS deducted, then you can claim back excess tax paid/deducted at the time of filing income tax returns.
- Deduction of TDS or payment of tax in India does not complete your (NRI’s) tax liability. Depending upon tax laws in your country of residence (local), you may be required to pay tax on Indian Income in your local country. You can seek tax credit for income tax paid in India if your local country has DTAA with India. For instance, interest on NRE deposits is not taxable in India but may be taxable in your country of residence
- The onus of collecting TDS while making any payment to a Non-resident lies with the payer. If such payer does not collect TDS and NRI fails to file income tax return, the payer can be held accountable.
Disclaimer: This is my interpretation and a very simplistic representation of provisions of Income Tax Act. Do understand the list is not exhaustive. There might be many provisions that may change the applicable TDS rate or even the tax treatment in a particular case. You are advised to seek services of a tax consultant before making any investment decision.
Additional Read:
Applicable TDS Rates on Income Tax website
Book: In the Wonderland of Investments for NRIs by A.N.Shanbhag/Sandeep Shanbhag