The law says that if you earn income, you must pay income tax. But if you do not fall in the tax bracket or have paid excess tax, the Government will refund you, but that will come later; after you have paid income tax.
One mechanism that the Government has in place to ensure tax payment and curb evasion is TDS or Tax Deducted at Source. It is a basic form of income-tax collection; you may have seen such deductions reflected in your salary slip. TDS is also applicable on a range of income types, including interests earned and commissions received.
The Income-Tax Act, 1961 has specific sections to address the issue of TDS for different types of earnings – Salary (Section 192), Securities (Section 193), Dividends (Section 194), interest other than interest on Securities (Section 194A), lottery wins (Section 194B) and even prize money on horse racing (Section 194BB).
And then there is Section 195.
The NRI Tax
Section 195 spells out the tax rates and deductions on payments made to Non-Resident Indians (NRIs), who are required to file tax returns in India for income received or accruing or arising in India or deemed to accrue or arise in India. But this can be a tricky area. For example, TDS does not come into play when a Mutual Debt Fund pays up the proceeds of redemption to a Resident Indian, but it does not mean an NRI is exempted. This is where Section 195 comes into play – it identifies the key areas pertaining to tax for NRIs.
As is done with Resident Indians, the deduction is to be made at the time of crediting or making a payment, whichever event occurs earlier; this includes crediting in Suspense Accounts or any other account where the payment is credited.
While, Section 195 does not prescribe any threshold limit, and the TDS amount has to be computed on the entire amount payable. The onus of making the deduction falls on the payer – i.e. anyone making the payment to an NRI, irrespective of whether the entity is an individual or a company/organisation.
What this means is that the payer needs to be aware of TDS rates under Section 195:
- Income from investments: 20%
- Long-term capital gains in Section 115E: 10%
- Income by way of long-term capital gains: 10%
- Short-term capital gains (as per Section 111A): 15%
- Any other income by way of long-term capital gains: 20%
- Interest payable on money borrowed in foreign currency: 20%
- Royalty from Government/Indian concern: 10%
- Other royalties received: 10%
- Fees for technical services from Government/Indian concern: 10%
- Any other income (e.g. rent on property owned): 30%
Surcharge and education cess, which must be statutorily added at the prescribed rate, can be ignored if payment is made as per the Double Tax Avoidance Agreement (DTAA).
As stated earlier, computing TDS for NRIs can be tricky; for instance, Section 195 does not mention salary paid to an NRI in India; this is instead covered under Section 192. Sometimes, an NRI may have to be reimbursed by cheque payment for out-of-pocket expenses; this is not covered under Section 195 as there is no income element in the process.
Also, under Section195 (3) and Rule 29B, an NRI can apply for a nil-deduction certificate, provided the following conditions are fulfilled:
- The NRI concerned is up-to-date on tax payments and tax returns
- He/She has not defaulted in payment of tax, interest or penalties
- He/She has been carrying on business in India for at least five years without a break, and the value of his/her fixed assets in India exceeds Rs 50 lakh.
Such certificates are valid until their expiry or cancellation by the assessment officer.
Also, if as an NRI, you are looking for tax breaks, you could look at the account categories that ensure that. Let us say you have an NRE Account with ICICI Bank; funds lying in such accounts will not attract any tax.
However, if you have an NRO Account, the interest earned on it would be taxable at the rate of 30%, in addition to the applicable cess and surcharge.
TDS Procedure: To deduct TDS under Section 195, the payer should first obtain Tax Deduction Account Number (TAN) under Section 203A, by filling Form 49B, available online.
- PAN is a must for both the payer and the NRI concerned, who must be told of the deduction and the TDS rate. Also, the deducted amount has to be deposited by the 7th of the following month through authorised banks or the income-tax department.
- Following this, TDS return can be filed electronically by submitting Form 27Q; this has to be done on specific dates: on Jul 31 (for the first quarter; Oct 31 (for the second quarter); Jan 31 (for the third) and May 31 (for the fourth).
- The TDS certificate in a specified format i.e. Form 16A (Certificate of Deduction of Tax) can be issued to the NRI within 15 days of due date of filing TDS Returns, as given above.