Last Updated on Mar 2, 2022 by Anshiya Tabassum
Non-Resident Indians (NRIs) invest in India and earn returns on their incomes. Furthermore, NRIs might have a source of income from India. In such cases, when a payment is made to NRIs, a TDS (Tax Deducted at Source) is deducted from the income payable. This deduction is specified under Section 195 of the Income Tax Act, 1961.
Let’s understand this section in detail.
This article covers:
- Section 195 of the Income Tax Act, 1961
- Who is an NRI?
- Onus of deducting TDS
- Deducting TDS on NRI income
- TDS rates on NRI income
- Nil deduction certificate
- Non-compliance of TDS rules under Section 195
Section 195 of the Income Tax Act, 1961
Section 195 of the Income Tax Act, 1961 states the rules for TDS deduction on NRI income arising in India. Payment of the income is subject to TDS at specified rates depending on the type of income earned. TDS is, however, deducted, provided that such an income is taxable in India.
For instance, say, an NRI invests in a mutual fund in India. When the NRI redeems the fund, and if a return is earned, the mutual fund company would deduct TDS on the redemption amount and then credit the amount to the NRI’s bank account.
Who is an NRI?
An individual is called an NRI if he doesn’t fulfill any of the following conditions:
- His stay in India is for 182 days or more in the last financial year.
- His stay in India is for 60 days in the last financial year and 365 days or more in the 4 yrs immediately before the last financial year.
Onus of deducting TDS
TDS deduction from NRI income would be done by the following types of entities if they pay an income to the NRI:
- Resident Indians
- Hindu Undivided Families
- Other NRIs
- Partnership firms
- Foreign companies
- Juristic individuals
- Individuals that earn tax-exempted income in India
Deducting TDS on NRI income
If you are paying an income to an NRI, here are the points that you should keep in mind:
- A TAN number is mandatory
You have to avail of a TAN (Tax Deduction Account Number) if you are liable to deduct TDS. This number captures the TDS deductions that you do. You can get a TAN number if you fill up and submit Form 49B online or offline. After assessing and verifying the form, the income tax department allots a TAN number. To get the TAN number, you would have to provide yours and the NRI’s PAN card number in the TAN form.
- TDS should be submitted within the required timeline
Just deducting the TDS is not enough. You need to submit the TDS to the Government too. Submit the TDS through a challan or a TDS form within the 7th of the following month. This means that TDS deducted in August should be submitted within the 7th of September and so on. You can deposit the TDS through the income tax department or authorized banks.
- File TDS returns
After depositing the TDS, you also have to file TDS returns quarterly in Form 27Q. The due dates for filing the returns are as follows :
- April – May – June quarter – 31 July
- July – August – September quarter – 31 October
- October – November – December quarter – 31 January
- January – February – March quarter – 31 May
- TDS certificate
After the filing is done, you have to issue a TDS certificate to the NRI showing the details of the TDS deducted. The certificate is issued in Form 16A within 15 days of filing the quarterly TDS returns.
- Salary and dividend income are exempt
Section 195 specifically excludes TDS deductions on salary and dividend payments to NRI. TDS on salary is applicable under Section 192 of the Income Tax Act, 1961.
On the other hand, dividend income is taxed in the hands of the NRI at 20% plus surcharge and cess.
TDS rates on NRI income
As mentioned earlier, the TDS rates differ for different NRI incomes. Here are the applicable TDS rates –
|Long term capital gains||10%|
|Long term capital gains under Section 115E||10%|
|Other types of long-term capital gains||20%|
|Short term capital gains under Section 111A||15%|
|Interest income from an amount in foreign currency||20%|
|Earning from technical services rendered to the Government or any other Indian company||10%|
|Royalty income from services rendered to the Government or any other Indian company||10%|
|Royalty income from any other source except the Government or Indian company||10%|
|Other sources of income||30%|
Nil deduction certificate
NRIs can avoid TDS deduction if they avail of a nil deduction certificate. However, this certificate is allowed only if the following parameters are met –
- The NRI is not defaulting on any type of interest, tax, or gratuity.
- The NRI has a running business in India continuously for 5 yrs, and the value of the fixed assets of the business is more than Rs. 50 lakh.
- The assessee has been assessed to tax and has filed income tax returns regularly.
- The NRI is not facing any penalty under Section 271 (1) (iii).
Non-compliance of TDS rules under Section 195
Every individual is required to deduct TDS on NRI payments as per the provisions of Section 195. If the provisions are not complied with, the following repercussions will ensue:
- Expenses specified under Section 40 (a) (i) would be disallowed.
- If TDS has been deducted but not submitted to the Government within the specified time limits, interest would be charged at 1.5% per month or part thereof. This interest would be charged from the date of deduction of TDS to the date the TDS is submitted.
- If TDS is deducted but not deposited with the Government, a penalty would be levied. This penalty would be equal to the TDS deducted.
- If TDS is not deducted at the specified rates and there is a shortfall, a penalty would be levied. This penalty would be the shortfall between the TDS deducted and the TDS deductible.
The bottom line
If you are liable to pay any form of payment to an NRI, know the TDS implications. TDS is applicable, as specified in the provisions of Section 195. Deduct the specified TDS and also deposit it with the Government within the due date to avoid penalties. Consult your CA or tax advisor for more details on TDS and its nuances.