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Under the Indian income tax rules, Non-Resident Indians (NRIs) may possess assets such as residential properties, fixed deposits, and shares and maintain active bank accounts within India.
However, considering that these assets generate income in India, Section 195 of the Income Tax Act of 1961 mandates the deduction of taxes at source (TDS) by any entity making payments to NRIs.
This blog explores the TDS for NRIs and why they seek a TDS reduction.
What is NRI Tax in India?
Under the Indian Income Tax Act of 1961, NRIs (Non-Resident Indians) are subject to specific tax regulations concerning their income earned outside their home country. These regulations differ from those applicable to resident Indians.
The taxation of NRIs in India is determined based on their residential status for the particular year, as outlined in the income tax rules mentioned above. If an NRI's status is classified as 'resident,' their global income becomes taxable in India.
If their status is categorised as 'NRI,' only the income earned or accrued within India is subject to taxation.
Examples of income earned or accrued in India include –
Salary: This includes the salary received while working in India or the salary earned for providing services within the geographical boundaries of India.
Income from Property: Any income derived from a property located in India falls under this category. It encompasses rental income received from properties situated within the country.
Capital Gains: Profits obtained from transferring or selling assets in India are classified as capital gains. This can include gains from selling real estate, stocks, bonds, or other capital assets in India.
Interest Income: Income generated from fixed deposits or interest earned on a savings bank account in India is considered taxable. This comprises the interest accumulated on investments made in various financial instruments such as bank deposits, government bonds, or corporate bonds.
These types of income are taxable for NRIs. However, income earned outside India is not taxable in India for NRIs.
Furthermore, interest earned on NRE (Non-Resident External) accounts and FCNR (Foreign Currency Non-Repatriable) accounts is exempt from tax. However, NRI interest earned on NRO (Non-Resident Ordinary) accounts is taxable.
New Rules for NRIs in India
These are the new rules regarding the taxation of Non-Resident Indians (NRIs), as per which one will be subject to taxation in India for the following types of income:
Income earned or accrued in India
Income deemed to accrue or arise in India
Income received or deemed to be received in India
TDS Rates for NRIs
Before Budget 2022, the TDS (Tax Deducted at Source) rates for various assets are:
30% for interest earned on non-resident ordinary (NRO) accounts and deposits
10% for long-term capital gains (LTCGs) on equities
15% for short-term capital gains (STCGs) on equities
30% for STCGs from debt (non-equity) mutual funds
20% for property sale (based on the sale value)
30% for rental income
20% for dividend income
NRIs have prioritised the reduction of TDS (Tax Deducted at Source) over lowering the tax rates due to a significant difference between their actual tax liability and the TDS deducted. Eliminating excessive TDS would allow them to avoid the need to wait until filing their returns to claim the excess tax deducted.
In the Union Budget 2022, most non-resident Indians (NRIs) sought to reduce or eliminate the excessive tax deduction at source (TDS) across different asset classes.
Selling property poses a significant challenge for NRIs due to the impact of TDS. According to a study, 92% of respondents believe that the current 20-23% TDS on property sales should be reduced based on the sale value rather than the capital gain.
The study also revealed that obtaining a low TDS certificate from the income tax department requires considerable time and effort, and potential buyers rarely wait for it.
How to Lower the TDS Rate on Income Received by NRIs?
To lower the tax deduction at source (TDS) rate on income non-residents receive, NRIs can apply for a lower or nil deduction certificate from the Assessing Officer (AO). This application can be made by meeting the conditions specified under the income tax laws.
For eligibility, the NRI should have a regular income tax assessment history in India and must have filed income tax returns for all relevant assessment years before the application. Additionally, the NRI should not have any outstanding tax dues, penalties, interest, or other payable sums. The certificate granted by the AO will remain valid until the specified date.
NRIs cannot submit Form 15G/Form 15H to lower the TDS. Instead, they should apply for the certificate in the prescribed format with the AO to reduce or eliminate TDS on their Indian income.
In cases where TDS is still applicable, the payer is responsible for issuing a TDS certificate to the NRI. This certificate will provide details of the deducted TDS amount, ensuring proper record-keeping for the NRI.
In India, a Non-Resident Indian (NRI) can opt for an NRI insurance policy if they seek life cover protection for their loved ones. NRI life insurance makes it easier for NRIs to purchase a life insurance policy in India and manage it even when abroad.
With a Tata AIA policy, one can choose from various life insurance plans for their different insurance needs and enjoy tax benefits per India's applicable income tax laws. However, it is important to note that the maturity proceeds from an NRI life insurance policy can be taxable if the amount exceeds a certain limit.
Conclusion
NRIs face specific tax regulations and obligations regarding their income earned in India. The tax system for NRIs includes provisions such as TDS (Tax Deducted at Source), which the payer of income deducts before it is disbursed to the NRI. However, one can also avail of specific tax exemptions on their income earned in India, like resident Indians.
