As an NRI you might be receiving income in India in many ways. Income earned or accrued in India is taxable in India. Based on the nature of income, tax is deducted at source (TDS). Sometimes, TDS is also called as withholding tax, which is essentially the same.
However, the rates and conditions for TDS and tax refund are different for NRIs from that of Indian residents. If you happen to reside in a country with which India has a Double Tax Avoidance Agreement (DTAA), TDS rates are usually lower.
Here is a low-down on TDS under various income heads for an NRI and methods to reduce it or seek refunds.
Interest earned on NRO banking accounts is taxable, while it is tax-free for NRE and FCNR (B) accounts. The bank deducts the TDS at 31.2% on an NRO account and TDS rate increases with the increase in surcharge rates applicable for annual income over Rs 50 lakh. For instance, TDS is highest at 42.74% for income in excess of Rs 5 crore.
Capital gains on mutual funds
TDS is done at the highest applicable tax rate on capital gains made from selling mutual funds. For equity-oriented funds (investing 65% or more into equities), any redemption made within a year of purchase attracts Short-Term Capital Gains (STCG) tax of 15%, which is also the TDS rate. Similarly, if it is sold after a year, TDS on Long-Term Capital Gains (LTCG) is 10% without indexation benefit.
For debt and other non-equity oriented funds, you need to hold investments for three years or more to qualify for LTCG rates. Given below are its applicable TDS rates for NRIs.
Capital gains on Stocks and derivatives
Akin to equity mutual funds, 10% TDS and 15% TDS is applicable on LTCG and STCG respectively, made from the sale of shares. However, if you are unable to provide documentary proof on trading and source of funds (namely contract note and bank details from where the purchases were made) TDS is deducted at the maximum rate of 15% and that too on the sales proceeds, instead of the capital gains (as the latter is not known).
The TDS rate also depends on the type of bank account you hold. It is lower at 10% in case of NRE or an NRO Portfolio Investment Scheme (PIS) account, even if you do not submit documentary proof, since PIS cell has details of your purchase transactions. PIS is an RBI scheme whereby NRIs can purchase and sell shares and convertible debentures of Indian companies from a stock exchange by routing transactions through a designated bank account.
For those trading in futures and options, TDS at the rate of 30.90% (tax 30% plus service charge 3%) is applicable and is usually deducted from the net profit for a calendar month.
If you have let-out your residential property in India, there is a compulsory TDS of 31.2% that needs to be deducted by the tenant from the rent every month. You can, however, apply for a certificate for deducting TDS at a lower rate with the Jurisdictional Assessing Officer of the Income Tax department in India. After this certificate is received by the NRI, the tenant can deduct TDS at the agreed rates.
Dividend income of non-residents from owning equity shares as well as mutual funds is subject to TDS of 20% plus surcharge and cess.
Sale of house property
If you are selling property within two years of purchase, TDS rates of 30 % become applicable and it is 20% if sold within two years. Moreover, there is a surcharge as well as education & health cess that varies based on the sale value of the property.
If the sale value of the property is above Rs 50 lakh and less than Rs 1 crore, 10% surcharge is applicable along with 4% health and education cess. It takes the effective TDS rate to 22.88%. Surcharge rate increases with the rise in the property value which in turn augments the overall TDS rates. TDS rates are calculated on the sale value of the property and not on the capital gains.
You can apply for a certificate for deducting TDS at a lower rate with the Jurisdictional Assessing Officer of the IT department. However, the application for such a certificate has to be made before executing the sales agreement.
Tax refunds and DTAA benefit
Surcharge and cess are levied additionally on the above-mentioned base TDS rates of NRIs. Surcharge rates are applicable (between 10%-37%) if your annual income is above Rs 50 lakh annually in India. So, for instance, if an NRI has an annual income of Rs 1 crore, then the base TDS rate of 10% effectively becomes 11.44% after accounting for 10% surcharge and 4% cess.
If the TDS amount is more than the actual tax liability, you will get a tax refund after you file your returns. Moreover, if you are resident of a country with which India has a DTAA, you get a tax benefit as an exemption (lower TDS rate), deduction (from total income) or as a tax credit.
Let’s take the case of interest income where the DTAA exemption is available in the form of lower TDS. Currently, TDS rates for most of the DTAA countries are in the range of 10-15% of the interest income (See table). Similarly, it is between 5-25% for dividends received from companies listed in India.
If you are earning income in the form of royalty or fees for rendering technical services, then at least a 10% TDS is applicable on it. Any other income usually attracts 30% TDS. For complete details on TDS rates applicable in all DTAA countries, click on this link.
To seek lower TDS under DTAA, you primarily need to submit Form 10F and Tax Residency Certificate (TRC). And where the TDS is withheld as per the DTAA arrangement, the surcharge, as well as cess, does not apply.
TDS on NRI income in India are usually done at the maximum rate. However, by making necessary applications to tax authorities and seeking DTAA benefits, TDS rates could be brought down.