How Can an NRI Lower TDS on Income Gained in India?

2 August 2023

607 8 mins read

Explore TDS and Tax-Saving for NRIs: Navigate cross-border finance with TDS compliance while maximising tax benefits for a secure financial future.

Introduction

For globe-trotting souls, managing finances while receiving income in India as a Non-Resident Indian (NRI) can be both exciting and challenging. Understanding TDS as per Section 195 of the Income Tax Act is vital, as it ensures tax compliance for cross-border transactions. As an NRI, explore tax-saving investments to reduce tax liability and reclaim TDS. With options like life insurance plans, NPS, and ELSS mutual funds, you can secure your financial future while optimising tax benefits. Embrace the wealth of tax-saving opportunities and make informed decisions to thrive financially in the global economy.

TDS for NRIs in India

For those adventurous souls who traverse the world, moving in and out of the country frequently, managing finances can be both thrilling and challenging. As a Non-Resident Indian (NRI) with income generated in India, staying on top of tax obligations becomes a paramount responsibility. In this global economy, the Indian government employs Tax Deducted at Source (TDS) as a means to track such cross-border financial transactions.

As an NRI receiving income from India, you may find TDS regularly deducted from your earnings. Understanding the provisions outlined in Section 195 of the Income Tax Act is crucial, as it lays down the guidelines for tax deductions applicable to NRIs.

What is Section 195?

In the world of taxation, compliance can be intricate, especially for those living across borders. For NRIs receiving payments from India, understanding Tax Deducted at Source (TDS) is essential. Section 195 of the Income Tax Act (ITA) sheds light on TDS for NRIs, ensuring that tax evasion is minimised and the tax payment process is streamlined.

The Scope of TDS for NRIs

Section 6 of the ITA defines the non-resident status, and TDS applies to NRIs for any amount generated from business transactions in India. It is important to note that this includes amounts that may or may not be considered income or profit. Surprisingly, NRIs must pay TDS even for income types that are exempt for resident Indians, such as dividends on mutual funds.

Guidelines and Tax Rates for NRIs

Section 195 of the Income Tax Act provides guidelines for relevant deductions and also defines the applicable tax rates for various financial transactions that NRIs conduct in India. This ensures that tax is deducted at the time of payment, reducing the risk of tax evasion and simplifying the tax payment process for non-residents.

Entities Responsible for TDS Deductions

Entities responsible for making payments to NRIs, known as payers, include individuals, Hindu Undivided Families (HUFs), companies (both Indian and multinational), foreign organisations, and non-residents making payments to other non-residents. Interestingly, even individuals with tax-free income or income sources non-taxable in India are required to charge TDS on non-resident payees.

Claiming Credit and Refunds

As an NRI payee, you can claim credit for the TDS deducted when filing your Income Tax Return (ITR) in India. The certificate of TDS remittance is vital for claiming this credit, ensuring you avoid double-taxation in your country of residence. Additionally, if the tax deducted exceeds your actual tax liability, you can claim refunds for the excess amount.

Charging TDS on Non-Residents: Step by Step

If you are a payer or buyer sending payments to an NRI, here are the steps you should follow for TDS compliance:

Obtain TAN (Tax Deduction Account Number): Fill Form 49B online and apply for a TAN under Section 203A.
Provide PAN Information: Enter your PAN and the NRI seller’s PAN in the form to facilitate proper identification.
Deduct Tax from Payment: Deduct the applicable TDS directly from the payment when you credit the amount to the NRI recipient.
Mention TDS Details: Clearly state the charged TDS rate and amount in the sale deed or transaction documentation.
Deposit TDS Amount: Deposit the TDS amount through the appropriate challan within seven days of the subsequent month after the deduction date.
File TDS Return: Electronically file Form 27Q, the TDS return, in the relevant quarter of the financial year.
Issue TDS Certificate: Provide Form 16A, the TDS certificate, to the NRI seller or recipient within 15 days of the pertinent TDS return due date.

Understanding and adhering to these TDS procedures will ensure smooth financial transactions for NRIs and promote tax compliance on both ends. By following these guidelines, NRIs can navigate the complexities of taxation while enjoying the benefits of cross-border ventures.

Rates of TDS on NRI payees

Income Type	TDS Rate (%)
Revenue from investments made by the NRI	20%
Long-term capital gains profits under Section 115E	10%
Long-term capital gains	10%
Short-term capital gains under Section 111A	15%
Other income from long-term capital gains by the NRI	20%
Interest payable on foreign currency loans	20%
Income from royalty owed by the Indian government or an Indian concern	10%
Income from royalty other than government or an Indian concern	10%
Fees for technical services billed to the government or an Indian concern	10%
Other earnings	30%

How Can NRIs Save Tax?

Saving on taxes is a smart financial move, and it applies to both Non-Resident Indians (NRIs) and residents in India. To minimise tax liabilities and even reclaim some TDS deducted from previous years, consider exploring these tax-saving investment options:

1. Life Insurance Plans

a) Term Life Insurance Plans: These plans provide long-term financial protection for your family in case of unfortunate events. They offer peace of mind and can be an effective tax-saving tool.

b) Guaranteed Saving Plans: Opt for these plans to keep your hard-earned money safe while enjoying fully exempt repatriable income. They provide a sense of security and help you achieve your financial goals.

c) Unit-Linked Insurance Plans (ULIPs): ULIPs allow you to invest in Indian markets while offering tax-free returns. They provide a dual benefit of investment growth and life insurance coverage.

d) Life Insurance Pension Plans: Consider plans like Guaranteed Income 4Life Plan, which generate reliable and regular income for your post-retirement years, ensuring financial stability.

2. National Pension System (NPS)

a) Tax-Advantaged Investment: NPS offers tax benefits, allowing you to invest up to 20% of your gross income in India.
b) Deduction Cap: Enjoy a deduction of up to ₹ 2 lakhs per year, significantly reducing your taxable income.
c) Portfolio Choice: NPS gives you the freedom to choose between aggressive and safe investment portfolios, catering to your risk appetite.
d) Ideal for Retirement Planning: NPS is a reliable option for building a robust retirement corpus in India.
e) NRO/NRE Account Compatibility: Operate your NPS account with the same bank handling your NRO/NRE account for seamless transactions.

3. Equity Linked Savings Schemes (ELSS) Mutual Funds

a) NRO/NRE Investment: NRIs can invest in ELSS mutual funds through their NRO/NRE accounts.
b) Tax-Free Capital Gains: Enjoy tax-free capital gains of up to ₹ 1 lakh, making ELSS a tax-efficient investment option.
c) Short Lock-In Period: ELSS has a short lock-in period of only three years, providing liquidity and flexibility.

By strategically investing in these tax-saving options, NRIs and residents can optimise their financial planning and reduce their tax burden. Each option offers unique benefits, allowing you to choose the most suitable plan based on your financial goals, risk tolerance, and investment horizon. Always consult a financial advisor to make informed decisions tailored to your specific circumstances. With the right approach, you can secure your future while enjoying tax savings.

TDS Certificate for NRI Taxpayers

For Non-Resident Indians (NRIs) receiving income in India, navigating the intricacies of taxation is vital. As per Section 195 of the Income Tax Act, TDS (Tax Deducted at Source) is deducted by the payor from payments made to NRIs and other non-resident entities. This mechanism ensures that taxes are collected at the source and helps prevent tax evasion. The payor is required to e-file and submit two essential certificates of information:

Form 15CA: Undertaking of TDS

This form serves as an undertaking of the TDS deduction and must be submitted electronically. It is a crucial step in the TDS process for all remittances made to non-residents.

Form 15CB: Chartered Accountants Certificate

A Chartered Accountants (CA) certificate in Form 15CB is also required. This certificate verifies the nature of the remittance and ensures compliance with Indian tax regulations.

As an NRI receiving income in India, you have various avenues for saving taxes on your earnings. While TDS is applicable to most income receipts, there are opportunities to claim refunds by investing wisely in tax-saving options. Here are some key tax-saving opportunities:

1. Explore Tax-Saving Investments

Invest in tax-saving instruments that not only provide financial growth but also offer deductions on taxable income. Options like Equity-Linked Savings Schemes (ELSS) and Public Provident Fund (PPF) are popular choices among NRIs for tax efficiency.

2. Utilise Double Taxation Avoidance Agreements (DTAA)

NRIs can benefit from DTAA signed between India and other countries. These agreements ensure that you don’t end up paying taxes on the same income in both India and your country of residence, reducing the risk of double taxation.

3. Opt for NPS (National Pension System)

Contributions made to NPS qualify for tax deductions, making it an attractive choice for building a retirement corpus and reducing taxable income.

4. Consider Life Insurance Policies

Life insurance policies not only offer financial protection but also provide tax benefits. Premiums paid towards life insurance policies are eligible for deductions under Section 80C.

5. Plan for Tax-Free Returns

Certain investment options like Unit-Linked Insurance Plans (ULIPs) and specific mutual funds provide tax-free returns, making them tax-efficient choices.

By proactively exploring these tax-saving opportunities and understanding the TDS deduction process, NRIs can ensure effective tax planning and optimise their financial gains. Seeking advice from tax experts and financial advisors can further aid in making informed decisions tailored to individual needs and goals. With the right approach, NRIs can confidently navigate the tax landscape in India and secure their financial future.

Conclusion

In the dynamic world of cross-border finance, understanding tax implications is crucial for NRIs with income generated in India. Section 195 of the Income Tax Act mandates TDS deduction from payments to non-resident entities, including NRIs. Adhering to TDS compliance and submitting Form 15CA and Form 15CB ensures a streamlined process. To optimise tax savings, NRIs can explore diverse investment options, such as life insurance plans, NPS, and ELSS mutual funds. With careful planning and expert advice, NRIs can secure a bright financial future and thrive in the global economy.

FAQs

How can we avoid TDS in NRI India?

To avoid TDS in NRI India, NRIs can explore tax-saving investment options like National Pension System (NPS) and tax-free bonds, or take advantage of Double Taxation Avoidance Agreements (DTAA) with their country of residence.

Is TDS applicable for non residents?

Yes, TDS (Tax Deducted at Source) is applicable for non-residents (NRIs) on certain types of income earned in India as per the provisions of the Income Tax Act.

Is TDS refundable for NRI?

Yes, TDS (Tax Deducted at Source) is refundable for NRIs in India if the tax deducted exceeds their actual tax liability, and they can claim the refund while filing their Income Tax Return (ITR) in India.

What is the tax slab for the NRI?

The tax slab for NRIs in India depends on the total income earned during the financial year. As of my last update in September 2021, NRIs are taxed at the same rates as resident individuals, with different tax slabs based on income levels. However, tax laws and slabs may change, so it’s essential to refer to the latest tax regulations.

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