NRI : TDS,Tax and Income Tax Return

Income tax rules applying to non-residents are slightly different from those for residents. The income that NRI earns abroad is not taxable in India. But if an NRI earns income in India, in the form of interest from deposits, property rent, etc then it is taxable. This income, earned in India, has a basic limit of exemption. This article explains who is NRI,Tax and TDS on various kinds of income for NRI, example bank accounts,fixed deposits,mutual funds,stocks etc. How to use DTAA? When should NRI file Income Tax Return?

Who is NRI as per Income Tax Act?

Non-Resident Indian or NRI under the Income Tax Act, 1961 (IT Act) is tied to number of days of an individual’s stay in India during a particular financial year. Residential status is determined for every year separately. India includes territorial waters of India and Employment includes self-employment

A person is Non-Resident under IT Act if his stay in India does not exceed 181 days in a financial year or previous year( 1st April to 31st March of next year).
If the person has not stayed in India for 182 days or more in the relevant year, he will still be resident if he has stayed here for a total of 365 days in the preceding four years and was in India for 60 days during the relevant year.
For a Person of Indian Origin who comes to India for a visit, the period of stay in immediately previous year has to be 185 days or more to make him a resident in India

Please note: In computing the period of 180 days, the day of entry into India and the day of exit from India shall be included. Our article explains Non Resident Indian – NRI in detail

Tax, TDS and NRI

Tax liabilities of an NRI investing in India are the same as that of a resident investor, but tax is deducted at source(TDS) in case of NRI. TDS is deducted for most of the investments at flat rate irrespective of income slab, unlike the resident Indians. Various investment options , tax rate applicable and TDS are explained below. Applicable tax on gains will be deducted at the time of redemption/maturity. In any of the cases if the tax liability on your investment is less than the amount of tax deducted at source then you can file your income tax refund to get refund from income tax department.

Please note that If NRI does not provide correct Permanent Account Number(PAN) TDS would be deducted at the rate 20% or at the rate specified whichever is higher.

Tax and TDS for NRI for Bank accounts, Fixed Deposits

An NRI can have Non Resident External (NRE) accounts, Foreign Currency Non Resident (FCNR) or Non-Resident Ordinary Rupee Account (NRO Account). Our article, Bank Accounts for NRI:NRO,NRE,FCNR, Their comparison, talks about it in detail.

Interest earned on Non Resident External (NRE) accounts and Foreign Currency Non Resident (FCNR) accounts are tax free in India. Hence, there would be no TDS.

NRO accounts may be opened in the form of current, savings, recurring or fixed deposit accounts. Interest earned on the Non Resident Ordinary Account (NRO) is taxable and will be subject to a TDS of 30%. This holds true for Post office also. There is no basic exemption limit. For example, interest earned by resident Indians from bank deposits is subject to TDS only over and above a limit of Rs 10,000. No such limit applies for NRIs.

TDS and Tax for Mutual Funds for NRI

For investing in Indian mutual funds, therefore, an NRI needs to open one of the three bank accounts-non-resident external rupee (NRE) account, non-resident ordinary rupee (NRO) account or foreign currency non-resident account (FCNR)-with an Indian bank.

Category of Units	Tax Rates under the Act	TDS Rates under the Act
Short Term Capital Gain
Units of Non-equity Oriented Scheme	Taxable at normal rates of taxes applicable to the assesse	30% for Non Resident Individuals
Units of an Equity Oriented Scheme	15% on redemption of units where STT is payable on redemption (u/s 111 A)	15%
Long Term Capital Gain
Listed Units of a Non-Equity Oriented Scheme	10% without Indexation OR 20% with indexation, whichever is lower (u/s 112)	20% for Non Resident Individuals (u/s 195)
Unlisted Units of a Non-Equity Oriented Scheme	10% with no indexation	10% for Non Resident Individuals (u/s 115E/112)
Units of an Equity Oriented Scheme	Exempt in case of redemption of units where STT is payable on redemption (u/s 10(38))	Exempt in case of redemption of units where STT is payable on redemption (u/s 10(38))

Dividends for NRI

Dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.

Equity Investments and NRI

NRIs can invest in Indian stock markets under the Portfolio investment scheme (PIS) of the Reserve Bank of India (RBI). Under this scheme, an NRI has to open an NRE/NRO account with an RBI-authorised Indian bank. An individual open only one PIS account for buying and selling stocks. Each transaction through a PIS account is reported to the RBI. Aggregate investment by NRIs/PIOs cannot exceed 10% of the paid-up capital in an Indian company. An NRI cannot transact in India except through a stock broker so he needs to open a demat account and a trading account with a Sebi-registered brokerage firm.

Long term capital gains, profits made on sale after 1 year from date of purchase, on equity shares (like in equity mutual funds) are exempt from tax. There will be no TDS applicable.

Short term capital gains, profits on sale within one year of date of purchase, are subject to a TDS of 15%.

Capital Gains on Gold , House Property and NRI

For Capital gains on other assets like house property, gold

Long term capital gains are subject to a TDS of 20 per cent.
Short term capital gains are subject to a TDS of 30 per cent.

The payer of the sale proceeds, even if he is an individual is responsible for deducting tax at source and paying it to the Government. He must get a Tax Deduction Account number (TAN) and issue a TDS certificate for the same. The onus of deducting tax is on the payer

Rent & NRI

There is no separate rate prescribed for TDS on rent paid to NRIs. Therefore, this would fall under the category of other income and are subject to a TDS of 30 per cent. Just like in the case of capital gains on assets, the payer of the rent is responsible for deducting the tax at source. The same process of getting a TAN and issuing a TDS certificate applies in this case too.

Professional services and royalty

If an NRI receives a payment from a company in India for providing professional services, his income would be subject to TDS. The rates are as follows.

If your agreement is dated between 1st June 1997 and 30th May 2005, you would be subject to a TDS rate of 20 per cent.
If your agreement is dated on or after 1st June 2005, you would be subject to a TDS rate of 10 per cent
The same applies to royalty. For definitions of professional service and royalty, please refer to section 115 of the Income Tax Act.

Interest on all other investments

Interest earned on all other investments like corporate deposits and bonds will be subject to TDS at 20 per cent. In all these cases, the company or party making the payment will deduct this tax

All other income

All other income that an NRI earns and which are liable for tax as per Indian laws, will be subject to a TDS of 30 per cent.

Double Taxation and NRI

Are NRI subjected to double taxation-once in India and again in the country of their residence? It depends on the country of residence. If the Indian government has a avoidance of double taxation treaty (ADTT) with that country, the NRI will be spared from paying tax twice. Many countries have an ADTT with India. For example, India has an ADTT with the US. If an NRI based in the US makes short-term capital gains from equity investments in India, he pays 15% tax. However, the rate for such gains is 30% in the US. The investor will need to pay tax only for the difference in rate. This means he gets a deduction on the tax paid in India from his tax payable in the US.

For availing the benefit of Double Tax Avoidance Agreement(DTAA), beneficiary of Double Tax Treaty is require to submit Tax Residency Certificate issued by Government of NRI’s residence. For example To obtain U.S Residency Certificate, also known as IRS Form 6166 you will have to fill out ans submit IRS Form 8802. If you need the certification for the next calendar year the earliest you may apply is December 1 of the current year. IRS Information on Completing the Form 8802, Application for United States Residency Certification explains how to get Tax Residency Certificate.

Filing of Income Tax Return for NRI

When does NRI have to file Income Tax Return?

If you are an NRI, you would have to file your income tax returns if you fulfil either of these conditions which fall under section 115G

Your taxable income in India during the Financial yeas was above the basic exemption limit (which for FY 2013-14 is Rs 2 lakh)
You have earned short-term or long-term capital gains from sale of any investments or assets, even if the gains are less than the basic exemption limit.
You may also file a tax return if you have to claim a refund. Alternatively, you can submit Tax Exemption Certificate to all your deductors directing them to deduct less tax or nil tax, as applicable.

There are two exceptions:

If your taxable income consisted only of investment income (interest) and/or capital gains income and if tax has been deducted at source from such income, you do not have to file your tax returns.
If you earned long term capital gains from the sale of equity shares or equity mutual funds, you do not have to pay any tax .
NRIs have a basic exemption limit like any resident Indvidual. For AY 2014-15(FY 2013-14) it’s 2 lakh. If NRI’s income exceed this limits, an NRI should file income tax returns in India.
NRIs are taxed as per the tax rate and slabs prescribed for resident Indians below 60 years irrespective of whether he is a senior citizen or not.
NRIs cannot adjust the taxable capital gains against the basic exemption limit. So if an NRI earns Rs 2 lakh capital gains, he will have to pay tax at applicable rates for the full amount even if he has no other income. Due to this, NRIs may have to claim tax refund if more is being deducted than is their tax liability.

What is the last date for filing India tax returns for NRI?

The last date to file returns for NRI is same as that for the resident India. For the financial year 2013-2014 is July 31st 2014. Like resident Indians an NRI can delay filing his Income Tax returns.

If you do not have any tax payable (that is all your tax has been deducted at source), you can still file your tax return by 31st March 2015 without any penalties
If you do have tax payable, you can still file your returns by 31st March 2015 but you will be charged an interest of 1% per month for every month of delay starting from 31st July 2014 till the time you file your tax returns