Unlike residents, Non-residents of India (NRIs) are subject to slightly more stringent tax* rules. Any income earned by an NRI on foreign soil is not subject to taxation in India. However, all income earned by the non-residents, whether from business/taxable investments in India or fixed deposits and saving accounts in India, is taxable in India. In short, NRIs receive an amount after the deduction of TDS payment at the rate specified in the Income Tax Act, 1961.
To transact in India, NRIs must have a valid PAN (Permanent Account Number). Otherwise, they will be subjected to higher TDS.
Before elaborating on the TDS for NRIs, let us discuss specific cases/situations where NRIs must compulsorily furnish PAN.
When is PAN Mandatory for NRIs?
PAN is a 10-digit unique alphanumeric number allotted by the tax department to all taxpayers. NRIs must have a valid PAN if they are involved in the following activities:
- They earn any taxable income in India.
- They trade in shares through a broker or depository.
- They save in mutual funds.
- They purchase land or property in India for trading.
Under this section of the Income Tax Act, 1961, every resident and non-resident taxpayer who receives any taxable income is required to furnish the PAN to the payer of such income. When taxpayers furnish their PAN, such payments are taxed at the TDS rate stated under the provisions of the Income Tax Act, 1961. If they do not furnish PAN, taxpayers are liable to higher tax as per this section. However, for certain payments to non-residents, Section 206AA will not apply. These are:
- Any payments made to a non-resident, such as fees for technical services, royalties, interest, and transfer of any capital asset, will be exempted from this section. But such exemptions would only be available if proper documents are furnished to the payer. The following documents are required:
- Name, contact number, and email ID of the deductee
- Certificate of residence of the deductee from the government of the country outside India if the law of that country provides for the issue of such certificate
- Tax identification number (TIN) of the deductee issued by his resident country is required. If no such number is available, any unique identification number issued by the government of his resident country may be submitted.
When is Higher TDS rate applicable?
Section 195 of the Income Tax Act, 1961, deals with tax* rates and applicable deductions on transactions with a non-resident. TDS or Tax Deducted at Source is a method of collection of taxes.
Under Section 195, all payers from individual to corporates are required to deduct TDS before making a payment to a non-resident, not being a company or a foreign company, only if such income is chargeable to tax*. The TDS payment is compulsory irrespective of whether the NRI holds a residential status or business place in India. The payer needs to make such TDS online payment in the relevant forms as mentioned by the Act. However, salary and interest payments u/s 195LB/LC/LD are excluded from the purview of TDS deductions. In all cases, the receiver must have a valid PAN and furnish it to the payer.
However, in certain cases, the NRI can apply to the relevant authority and request the agency to issue the TDS certificate for NRI for tax deductions. This TDS certificate for NRI to avail nil tax deduction is issued at the discretion of an Income Tax Officer.
The rate of TDS is higher for the provisions of chapter XVIIB or 20%. However, for NRIs, the provisions of DTAA (double tax avoidance agreement), if applicable for the relevant country, are also considered. In such cases, if the payee fulfills all the terms and conditions, the TDS rate will be as per DTAA, which is usually lower than the normal TDS rates.
In cases where the NRI does not hold a PAN, according to section 206AA of the Income Tax Act, the payer is required to deduct tax* at a higher rate. The higher of the following TDS rates will be considered:
- The rates specified in the provisions of the Income Tax Act, 1961
- The rate prescribed in the Finance Act, 2021
- The rate of 20%
Ways for NRIs without PAN to Avoid Higher TDS
- Opening specific bank accounts
The most popular way by which an NRI can avoid higher TDS is to open the following tax-free bank accounts:
- A Non-Resident Ordinary Rupee Account (NRO)
- A Foreign Currency Non-Resident Account (FCNR)
- A Non-Resident External Account (NRE)
NRIs can open these bank accounts easily in India. With these accounts, they will not need to pay any tax, even if they do not have a PAN. Even though the payments held in NRO accounts are tax-free, the interest earned by NRIs on such savings is subject to TDS.
The interest earned through FCNR and NRE accounts, though, is exempt from taxation. Unlike the taxation advantage for residents of India, there is no limit regarding the interest amount being in excess of ₹ 10,000 for it to attract TDS. In other words, every rupee will be subject to TDS. These terms and conditions are also applicable to post office accounts opened by NRIs in India.
- By investing in mutual funds
From the long list of benefits offered by mutual funds, one benefit involves helping NRIs avoid higher TDS. NRIs need to invest only a minimum of ₹ 5000 or smaller denominations of ₹ 500 or ₹ 1000 in mutual funds. Nowadays, it is very easy for NRIs to start their mutual fund investment with a reputable bank in India. They only need to open specific bank accounts. These are the NRO, NRE, and FCNR accounts to get started.
NRIs can even opt for a more comfortable investment strategy such as SIPs or Systematic Investment Plans to invest in mutual funds in India. NRIs gain similar returns, if not more, due to the ease of lump sum investments, as applicable to residents. They can even stop their SIPs at any time without incurring penalties.
The bottom line
The Government of India has eased the taxation norms for non-residents. After reading the above article, we hope you have a fair idea of how NRIs can avoid higher TDS without furnishing PAN. Other than mutual funds, NRIs can invest in unit-linked insurance plans, real estate, etc., to gain a tax advantage.
NRIs should also ensure that the insurance policy is issued by an insurance company that is recognised by the Insurance Regulatory and Development Authority of India (IRDAI) to avail the tax benefits.
The premium paid towards ULIPs is eligible for tax* deductions under Section 80C, and the maturity proceeds are tax-free under Section 10(10D). The maturity proceeds are tax-free if the premium paid during the term of the policy is within the prescribed limits and subject to applicable conditions.
It is important for an NRI to have a PAN card if they wish to purchase a life insurance or ULIP policy in India and to claim the tax* benefits associated with the policy. In case an NRI does not have a PAN card, they can apply for one through the Income Tax Department's website or through authorised PAN card agents.
With the dual benefit of investment and life insurance, as an NRI, you can get financial protection for your family in case of your untimely death, ensuring that your loved ones are financially secure even in your absence.
You can invest in insurance plans of reputable companies like Tata AIA Life Insurance. Tata AIA Life Insurance offers flexible Tata AIA Life Insurance term plans for NRIs. Thus, NRIs can now build a diversified portfolio, earn great returns, and save tax.