Income earned or accrued by NRIs in India is subject to tax in India. Section 195 of the Income Tax Act covers Tax Deducted at Source (TDS) on payments made by non-resident Indians. The rates and conditions for TDS are different for Non Resident Indians compared to Indians. Let us see the TDS terms on different sources of income.
Tax on Interest earned from Bank Accounts
Interest earned on Non Resident Ordinary Account (NRO) is taxable. A TDS of 30% is applicable on it. But interest earned on Non Resident External (NRE) accounts and Foreign Currency Non Resident (FCNR) accounts is not taxed in India. Therefore there is no tax deducted at source.
Must Read – Tax Planning for NRIs
Tax on Dividends
There is no tax and therefore no TDS is deducted on dividend earned on equity shares and mutual funds.
Tax on Capital Gains
If an NRI earns short term capital gains by selling equity shares or equity mutual funds, the gains are subject to 15% TDS. Equity mutual funds are mutual fund schemes that have 50% or more investments in equities.
Short term gains are profits made by selling equity shares or equity mutual funds within a year of purchase.
Tax on Other Income – One can earn income through other means such as rent or income from professional services. Here are the TDS rates for such other income –
|Any income that does not fall in any of the above categories||30%|
Important Points To Remember –
- An education cess of 3% is applicable to all the TDS.
- If the income earned is more than Rs. 10,00,000, a surcharge of 10% is applicable.
- If you buy any property or make an investment when you are a resident Indian but earn income when your status changes to NRI, then the rules applicable to NRI will be in force for tax matters.
- NRIs have to file income tax returns if he/she has earned income more than Rs. 2,00,000 or any income via short term or long term capital gains.
Sometimes it is a challenge for Non-Resident Indians (NRIs)to handle taxation matters when there are amendments to existing rules and provisions.
Amendments regarding TDS for NRI policyholders
To simplify matters, here is a brief overview on taxation rules that have been amended recently and impact NRI policy holders –
- Payments made by policy holders of Life Insurance, Annuity Products, Pension Plans and Health Insurance products who are NRIs will be subject to TDS. Life insurance policies that are exempt from this are those policies that are exempt under section 10(10D) of the Income-Tax Act 1961. There is also a provision in section 197A by which self-declaration in Form No.15G/15H for non-deduction of tax at source can be submitted by the policy holder.
- The policyholder will need to submit the following documents to ascertain the applicable tax rate
- – Tax Residency Certificate (TRC), duly verified by the Government of the country of which the policyholder is a resident.
- – Self attested Form 10F (since the TRCs issued by different countries may not contain all the particulars mandatorily required to be included under section 90(4) or 90A (4) of the Income-tax Act.
- The Indian central Government has entered into Double Taxation Avoidance Agreement (DTAA) with many countries so that a taxpayer (who is resident of one of these countries) can claim beneficial provisions either of DTAA or of the domestic law to be applicable.
- The rate of TDS will be determined as per rules of Income Tax Act 1961 and DTAA with residence country of the policy holder if it has been signed. For availing the benefits of DTAA, a policy holder needs to submit a Tax Residency Certificate (TRC) containing defined particulars and other required documents. The maximum rate will be 30% + surcharge and education cess.
Hope this clarifies matters related to TDS and recent taxation amendments regarding insurance policies for NRIs. Feel free to ask your questions in query section.