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As an NRI, you might receive investment income from India. And any receipt of such income (not being salary income) specified under Section 195 shall attract Tax Deducted at Source (TDS) in the hands of the payer.
The Government of India mandates the payer to deduct TDS before transferring funds into your account.
The provision for deducting TDS is as per Section 195 of the Income Tax of India Act, 1961, which specifies that TDS deduction has to be made at the time of credit.
TDS is applicable on payments such as interest, royalty or any other amount except salary paid by the payer to your account.
What Is Section 195 of The Income Tax Act?
Section 195 of the Income Tax of India Act, 1961, deals with the TDS deductions in the hands of the payer on any payments made to NRIs (you) or before the receipt of investment income in your account.
The section focuses on applicable tax rates for the different kinds of transactions and helps in avoiding double taxation since the payee is a non-resident.
Note: For better understanding, the tax deductor is referred to as ‘payer’.
TDS Rates Applicable For NRIs
TDS Deductions Specific To NRIs
The government levies TDS as per the following rates considering the one that benefits you the most.
- As per the rates specified in the latest Finance Act
- As per the rates specified in the Double Taxation Avoidance Agreement (DTAA) between India and the country you reside in.
Generally, surcharge and education cess of 4% applies in addition to the TDS rates mentioned above.
However, there is no levy of surcharge and education cess for the rates contained in the DTAA.
How Is TDS Deducted Under Section 195?
The payer is responsible for deducting TDS and he has to obtain a Tax Deduction Account Number (TAN), a ten digit alphanumeric identification number.
Once the deduction is complete, the payer has to deposit the deducted TDS amount through e-challan before 7th of the next month.
Later on, file the quarterly TDS return and obtain TDS certificate.
Form 16A: TDS Certificate For NRI Taxpayers
TDS is deducted on your non-salary income received from the payer.
To deduct the TDS, the payer needs to start with obtaining your TAN. With your TAN, the payer deducts the tax at the applicable tax rate.
The next step is to deposit the TDS amount with the Government and file quarterly Form 27Q (TDS return statement) within the due date.
Further, the payer shares the Form 16A (TDS certificate) obtained from the Income Tax Department of India with the NRI (you).
During your yearly filing of tax returns in India, the TDS Certificate helps in claiming refund since the certificate serves as a proof against any TDS deducted during the financial year.
How To Obtain Lower Deduction Certificate Online?
As an NRI, you need to file Form 13 by visiting the TDS Reconciliation Analysis and Correction Enabling System (TRACES) to obtain a lower or non-deduction certificate.
The following steps can guide you in filing Form 13 -
- Login to TRACES website using your login credentials
- Navigate to Form 13
- Fill in the necessary details including your taxable income, tax liability along with the reasons for non-deduction or lower TDS
- Attach relevant documents like tax returns, financial statements and any other supporting evidence
- Submit your application and collect the acknowledgement receipt.
Once the AO reviews your application, he might request for additional documents or clarification if need be.
Upon successful verification, the AO shall submit a lower / NIL TDS certificate.
If you find the whole process to be tedious then you can seek assistance from a tax-expert. At iNRI, we have curated individual services with Tax experts who specialize with NRI compliances.
Lower Deduction / NIL Deduction of TDS
As an NRI, you are eligible for lower or NIL deduction of TDS under Sec 197 of the Income Tax of India Act, 1961.
To obtain a lower or NIL deduction certificate you need to start by filing Form 13 (follow the steps mentioned above) requesting your Assessing Officer (AO) seeking permission for a lower or NIL.
The AO shall share the Lower TDS certificate once he is satisfied with the details submitted by you.
Lastly, you have to submit a copy of the certificate to the payer before deducting the TDS. The payer shall use this as a proof to justify the lower or NIL deduction of TDS.
TDS Implications For An NRI Seller
Sale of property held by you as an NRI attracts TDS in India. And it is the responsibility of the buyer to deduct the TDS under Sec 195.
There is a TDS deduction of 30% if the property held by you is less than or equal to 24 months old (from the date of purchase).
And if the property held by you is more than 24 months old there is a TDS deduction of 20%.
Know how capital gains are taxed for NRIs on selling property in India.
Applicable Situations For TDS Under Section 195
Rental Income
Your rental income in India attracts TDS.
The tenant of your property in India is responsible for deducting TDS before transferring the rent into your NRO bank account.
Let’s understand this with an example, say, Raia lets out her apartment in Delhi to her friend Ashwa for a monthly rental income of INR 1,00,000.
Now, it is the responsibility of Ashwa to deduct TDS of 31.2% (includes 30% TDS + surcharge and cess 4% on the deducted TDS) from the rental income before transferring the funds to Raia.
Sale Of Property
As an NRI, if you are considering selling property held by you in India then TDS might be applicable on the sale of your property.
In this case, the buyer of your property is responsible for deducting tax before transferring funds. To lower the TDS deducted by the buyer, you can apply for a lower TDS deduction. You must give the buyer the lower TDS certificate, before they transfer the amount to your account.
For example, Yaskin, an NRI living in Canada was considering selling a property held by him in India to Bhairava.
Before transferring the property, Yaskin approached the Income Tax Department of India seeking permission for lower deduction of TDS by filing Form 13.
The AO carefully analyzed all the documents and issued the lower/NIL deduction certificate.
Yaskin presented the same to Bhairava, who will now deduct the TDS at a lower rate as mentioned in the certificate.
Redemption Of Mutual Funds
Redeeming the Indian mutual funds held by you attracts TDS.
The Asset Management Company (AMC) is responsible to deduct the TDS before transferring the funds to your bank account.
The deduction of TDS depends on the type of asset you invested in, the holding period.
If the investment was made in an equity fund with more than 12 months of holding period then the TDS is applicable only if the realised capital gains exceeds INR 1,00,000.
For instance, Mihir, an NRI living in the UK, invested in Indian equity mutual funds two years ago.
The amount invested was INR 4,50,00 and the gains stood at INR 90,000.
If Mihir redeems the funds, the fund house does not deduct any TDS. Since it was an equity fund held for 2 years (long term holding as per capital gains taxes) and the realised capital gains were less than 1,00,000.
Understand how capital gains are taxed for mutual funds held in India.
Receipt of Dividend Income
As an NRI, receipt of dividend income attracts 20% TDS under Sec 195. Also, if there is any DTAA applicable on the transaction then DTAA shall prevail over Sec 195.
For instance, Arun an NRI, residing in Australia received a dividend income of INR 8,000 on a declared dividend of INR 10,000.
Here, Arun’s dividend income attracted 20% of TDS and INR 2,000 has been deducted from the company’s end before transferring the remaining amount of INR 8,000.
Interest Income On FDs
Interest earned on deposits held in your NRO account attracts TDS of 30% along with the cess and surcharge.
However, the interest earned on an NRE FDs is tax exempt in India and doesn’t attract TDS.
For instance, John has an NRO FD account amounting to INR 5 Lakhs and applicable interest rate was 6% per annum.
Now, a TDS of 30% (along with applicable cess and surcharge) shall be deducted from John’s interest receivable.
Consequences Of Not Paying TDS Under Section 195
Non-compliance with Section 195 of the Income Tax Act, 1961 leads to several significant penalties and financial consequences:
- Disallowance of Expenses: Failure to deduct taxes at the source as required means the related expense cannot be deducted for tax purposes under Section 40(a)(i) of the Income Tax Act. Thus, you need to ensure that the payer is deducting TDS before making payments.
- Interest Charges: A 1.5% monthly interest charge, or a portion thereof, shall be imposed if the withheld tax is not remitted within the allotted time. This is computed starting on the day the tax was withheld and ending on the day it is deposited.
- Penalty for Non-payment: A penalty equivalent to the total amount of TDS that should have been paid will be applied if the TDS is not deposited at all.
- Penalty for Under-deduction: For a lower TDS deduction than the actual, a penalty equal to the difference between the amount that should have been deducted and the amount that was actually deducted will be charged.
Conclusion
Understanding TDS and concepts such as TDS certificates and lower / NIL deduction certificates is crucial, as they can be instrumental in claiming refunds against deducted TDS or requesting lower tax deductions.
Remember, there are consequences for not deducting TDS or deducting TDS at different rates.
This is why it's crucial to ensure the right amount of TDS has been deducted, and submitted to the authorities within the prescribed time frame.
Ensure you are claiming back the TDS deducted while filing your Income Tax Returns in India. Providing the TDS proofs will help you get refunds if your total taxable income is below the taxable threshold limit.
You may want to seek a professional tax expert’s advice to navigate through lower TDS certificate issuance and filing for TDS refund.
Tax Deducted At Source (TDS) For NRIs: Frequently Asked Questions (FAQs)
How can I avoid TDS on NRI property?
As an NRI, you need to furnish lower/NIL tax deduction certificate by filing Form 13 to avoid TDS on your NRI property. In order to file Form 13, you need to login to the TRACES website and follow the steps mentioned in the above blog, or hire an expert who can do this for you.
What types of transactions does Section 195 cover for NRIs?
Section 195 covers the following transactions for NRIs for TDS purposes:
- Interest
- Dividends
- Royalties
- Fees for technical services
- Sale of property by NRIs (buyer must deduct TDS from the purchase amount)
- Capital Gains
- Any other income accrued or arising in India
Is TAN required for deducting TDS under section 195?
Yes, you need to provide your TAN number to the payer for them to deduct TDS.
Can NRI get TDS refund?
In case of any excess TDS deducted, you can claim a refund by filing your Income tax return.
Is NRI FD tax-free?
It depends on the type of fixed deposit you are holding.
Any interest you earn on an NRE FD and FCNR FDs is tax-free in India.
On the contrary, interest earned on an NRO FD attracts tax at 30% plus applicable cess and surcharge.
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