All about TDS for NRIs| North Loop Official Blog
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28 Aug 2020

All about TDS for NRIs

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If you are an Indian citizen or a Foreign National of Indian Origin residing outside India for the purpose of business, vocation or employment, have an intention to be abroad for an indefinite period and have stayed in India for less than 182 days in the preceding financial year then you get considered as an NRI (Non-Resident Indian).

The income you receive in India which is liable to tax here will get subjected to TDS (Tax Deducted at Source), and if that income is tax-free in India, there will be no application of TDS. To understand this better, let us discuss it in further details and look at the various incomes you can earn in India and the TDS rates that would apply on it –

TDS on interest on bank deposits –

If you open an NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) account in India, the interest earned on these accounts will be tax-free and not get subjected to any TDS.

But an NRO (Non-Resident Ordinary) account is taxable, and TDS will get deducted by your bank at the rate of 30% on both the principal and interest amount. Additionally, a cess of 3% will apply to your overall tax liability.

When filing your income tax return for your NRO account, you can include this deduction by referring to Form 26AS as it gets reflected there.

Although most deductions under section 80C of the Income Tax Act, 1961, are not allowed to NRIs, there is one section you can take advantage of and use as a tax saving option. That is section 80TTA which allows you to claim deduction on the interest income earned on your NRO savings account up to a maximum limit of Rs.10,000.

Get a zero-balance, no-fee NRE/NRO account with North Loop in 5 minutes

TDS on interest from other investments like corporate deposits and bonds –

Interest income on NRE accounts, whether it is savings or fixed deposit, account is exempt from tax in India for NRIs as per the Indian tax laws. However, interest income from corporate deposits and bonds is applicable to tax here, irrespective of your residential status or the account from which you buy the bonds.

Therefore, even if you are an NRI and buy the corporate bonds from an NRE account, TDS on the interest income from corporate bonds will be deducted at 30% along with additional surcharge and education cess. The payer or the company whose bond you hold will be responsible for deduction of the tax.

TDS on dividends –

Earlier, dividends paid by domestic Indian companies were exempt in the hands of both Resident and the Non-Resident Indians under Section DDT of the Income Tax Act.

But the Finance Act, 2020 recently abolished the DDT regime making the dividend payments to Non-residents applicable for tax deduction under section 195 of the Act at the rate in force which is 20% as provided in the Finance Bill, 2020.

Moreover, the Bill has also specified that the maximum surcharge applicable to dividend income shall be 15%. Therefore, if you are an NRI, the TDS on dividend payment less than Rs.50 lakh will be 20.80%, between Rs.50 lakh to 1 crore will be 22.88%, and on amounts more than that will be 23.92% (maximum surcharge at 15%).

TDS on securities –

If you have invested in corporate debentures and the mutual fund market in India, the TDS applicable will depend on your period of holding. For long term capital gains on debt mutual funds, TDS will be applicable at 20% along with indexation benefit.

But if you sell them within three years, it will get considered as short-term capital gain, and TDS will be applicable at 30%. If you invest in NCDs or Non-Convertible Debentures that pay a fixed interest on your investment, you get subjected to TDS according to section 195 of the IT act.

These primarily are debt securities issued by companies to raise money and long-term capital. The tax on mutual funds that invest primarily in stocks and equity investments also depend on your period of holding. If you sell them in less than one year, your fund returns are treated as short-term capital gains and subjected to TDS at the rate of 15%. If you redeem your investments after one year from the date of purchase, the tax will get deducted at 10%.

TDS on other assets –

Capital gains that arise on the selling of assets like house property and gold again get classified based on their period of holding.

So, let us say, if you sell a house property after holding it for two years, the income arising will get treated as long-term capital gains and the TDS applicable to you will be 20%.

On the other hand, if you buy gold in India or own a movable asset like jewellery and sell it within three years, it will be considered as short-term capital gain and the TDS applicable on it will be 30%.

It will be the responsibility of the individual who purchases your property to get a Tax Deduction Account Number (TAN), deduct tax at source and pay the proceeds to the Government along with issuing a TDS certificate to you for the same.

TDS on rent income –

There is no specific rate for TDS on rent paid to NRIs. If you receive rental income in India in your NRO account, it will get subjected to a TDS of 30%.

Conclusion –

Most other income that you receive as an NRI that is liable to tax in India will be subject to a TDS of 30% along with surcharge and education cess.

For incomes that get subjected to tax both in your current foreign resident country as well as India, you can refer to the Double Tax Avoidance Agreement (DTAA) that India has entered into with your specific country and also look for other tax saving investment options in India.

Moreover, the DTAA overrides the provisions of the Income Tax Act, so you can avail concessional rates of TDS if the agreement prescribes so.

To learn about income tax return on interest earned in your NRO account, click here.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.