How NRIs can lower TDS on income generated from India?

For income generated in India, non-resident Indians (NRIs) are required to file income tax returns. The deduction of income tax from payments made to non-residents is mandated under Section 195 of the Income Tax Act of 1961. This is applied if a person receives interest or other payments from India as a source of income. Depending on the nature of taxable income, NRIs should pay TDS under Section 195 in the range of 10% to 30%. If you are an NRI, you have a number of choices to reduce the tax you pay on your income in India. For this reason, we have compiled the opinions of many tax experts gathered from interviews.

Dr. Suresh Surana, Founder, RSM India

Section 195 of Income tax Act, 1961 (hereinafter referred to as ‘IT Act’) requires that a person responsible for making any payment to any Non- Resident (NRI) should be liable to deduct TDS from such payment provided such payment constitutes income of the NRI in India.

However, the provisions of the Income Tax Act provides certain relaxations or relief for the NRI being subjected to deduction of part or whole of the TDS as discussed below:

(i) Application for Lower Deduction by the Tax Deductee/ Payee (Form 13)

As aforementioned, there could be certain instances where the NRI is subjected to TDS u/s 195 whereas the NRI’s total tax liability computed for the year is less than the TDS deducted. Thus, section 197 of IT Act provides the tax deductee with an option to make an application for NIL/lower deduction of TDS in Form 13 providing details such as Name, PAN, income details for the past 3 years, estimated tax liability for the current year, etc.

For instance, in case of sale of immovable property by NRI, the buyer is under an obligation to deduct tax @ 20% u/s 195 of the IT Act on the amount of long term capital gains. However, as the details of cost of acquisition and improvements incurred by the NRI cannot be determined by the buyer, the buyer in practice deducts tax on the entire amount of sale consideration paid by him. This unreasonably leads to withholding of higher tax amount by the buyer which ultimately results in blocking the cash flows for NRI – seller. Hence, the NRI seller can resort to make application for lower or NIL deduction of TDS in Form 13, as the case may be.

Alternatively, the application can also made by the Tax Deductor for determination of tax liability as follows:

(ii) Application for Determination of Tax liability by the Tax Deductor/ Payer (Form 15E)

Section 195(2) of the IT Act provides the where the tax deductor/ payer is of the opinion that the recipient/ payee should not be entirely subjected to tax on such income (other than salary income), they may make an application to the Assessing officer to determine the appropriate proportion of sum so chargeable and upon such determination, TDS shall be deducted only on that proportion of the sum which is so chargeable. Such application can be made by the payer in Form 15E in accordance with Rule 29BA of the Income Tax Rules, 1962 with details pertaining to the payer and payee, details of the transaction, taxability under the provisions of IT Act, etc. The Assessing officer shall take into consideration the application filed by the payer and accordingly issue a certificate to the payer.

(iii) Availability of the requisite documents for availing the Treaty benefit

Section 90(2) of the IT Act provides every taxpayer to choose between the beneficial of the income tax provisions or the tax treaty provisions for TDS. Thus, taxpayers generally opt for treaty provisions which are mostly beneficial vis-à-vis the income tax provisions. However, in order to claim the beneficial TDS rate as applicable in accordance with the relevant tax treaty, it is necessary for the NRIs to obtain the necessary documents such as Tax residency certificate, Form 10F, No-PE declaration, etc to the deductor.

For instance, NRI, being a resident of UAE, who receives interest income is subject to withholding tax @ 30% as per the IT Act. However, such NRI can opt for beneficial rate of tax @ 12.5% as per India-UAE DTAA, subject to provision of documents such as valid TRC, Form 10F, etc.

Nishant Kohli, Founder, Director and Business Head-Wealth, Mudra Portfolio

1.) Using the DTAA benefits: NRIs can take advantage of the relief or benefit of having Low TDS deducted by using the provisions of the Double Taxation Avoidance Agreement (DTAA), which was signed between India and another foreign state. This is especially true in regards to Interest Income from NRO A/c, Government Securities, Loans, Fixed Deposits with Companies, etc.

For instance, if DTAA benefits are not granted, interest on an NRO FD is subject to TDS in India at the rate of 30.90%. But, with DTAA provisions, various advantageous and lower rates of tax on Interest are specified for different nations, which may range from 10% to 15%.

2.) Reducing TDS in Property Transactions: In the event of LTCG in property, the buyer deducts TDS at 20% plus surcharges, and that too from the entire transaction value. As a result, a sizeable portion of the deal price is placed as TDS. The seller might, however, submit a Form 13 application to the Income Tax Department and ask them to calculate his or her capital gains. Depending on the capital gains that result from the sale of a property, the Income Tax Department will calculate the seller's capital gains and issue a certificate for a Nil/Lower TDS deduction. As a result, the TDS will be reduced significantly.

The process for submitting this form is a little cumbersome, therefore the seller can use a chartered accountant's services to submit an application to the Income Tax Department.

Aastha Dhowan, Partner, N.A. Shah Associates

NRIs are subject to tax withholding on various payments made to them in India as per provisions of Section 195 of the Income-tax Act. To minimize such withholdings, an NRI has an option to obtain a lower deduction certificate from the tax authorities and provide the same to the payer. In such a case, no withholding/ lower withholding will be required to be made.

Alternatively, NRIs can also obtain a Tax Residency Certificate from respective tax jurisdiction and provide Form 10F and other declarations as may be required based on the Double Taxation Avoidance Agreement between India and their resident country to avail any benefits of tax treaties. While doing so, they may consider the Most Favoured Nation clause in the respective tax treaty.

Sonam Chandwani, Managing Partner KS Legal & Associates

NRIs can save TDS by claiming exemptions, utilizing tax treaties, submitting Form 15G or Form 15H, and deducting expenses related to their income. 

Submitting Form 15G or Form 15H: NRIs can submit Form 15G or Form 15H to the Indian income tax department to avoid TDS on their income if their total income is below the taxable limit. Form 15G is for individuals and HUFs, while Form 15H is for senior citizens. NRIs can claim exemptions on certain types of income such as long-term capital gains on equity shares and equity-oriented mutual funds, interest on NRE and FCNR deposits, and income from savings schemes like PPF and NSC.

Tax treaties: NRIs residing in countries that have a tax treaty with India can benefit from lower rates of TDS. For instance, as per the Double Taxation Avoidance Agreement (DTAA) between India and the United States, the TDS rate on interest income is 15%, which is lower than the standard rate of 20%. This can help in reducing the overall tax liability and consequently, lower the TDS.

It is important to note that NRIs need to file their income tax returns in India if their total income in India exceeds the taxable limit, irrespective of the amount of TDS deducted. Failure to file the returns can result in penalties and legal consequences.

Ms. Bhuvanaa Shreeram, Co-Founder & Head of Financial Planning, House of Alpha

When a Non Resident India sells a property in India that he / she has held on for more than 2 years, TDS is to be deducted on the sale value of the property at the rate of 20.8% to 23.9% depending on the sale value. But typically income tax is payable only on gains made or income earned and not on the value of the property sold. Of course, one can claim a refund of the tax paid in excess of tax due. However refunds can be filed only after the end of the financial year and they take time to come through. This results in opportunity loss for the seller as he / she could earn interest on the TDS paid, but the government pays no such interest.

To avoid this the following can be done: The seller shall file an application in Form 13 with the Income Tax Dept and request them to compute his Capital Gains. The Income Tax Department will compute the Capital Gains of the seller and will issue a certificate under Sec 197 for Nil/Lower deduction of TDS depending on the capital gains arising on the sale of property.

TDS is also deducted on interest on Deposits, capital gains on MF sales, rental income from property in India etc. If the assessee’s income from all such sources is less the basic exemption limit, then the NRI assessee can file Form 15E online to get a certificate of lower or nil deduction certificate from the Assessing Officer. This has to be shared with the bank / MF company or the tenant to avoid or reduce TDS deduction.

Anita Basrur – Partner, Direct Tax – Sudit K Parekh & Co.LLP

Withholding tax rates for non-residents are marginally on the higher side in comparison to resident taxpayers. For non-residents, the withholding is done either as per the income tax act or as per the double taxation avoidance agreement whichever is beneficial to the taxpayer. Having said this, the taxpayers need to furnish certain documents like tax residency certificate, electronic Form 10F, and No Permanent establishment declaration to be eligible for lower withholding. Alternatively, the taxpayer can approach the tax authorities for issuing a Nil Withholding certificate or lower withholding certificate if the non resident is of the view that the entire payment to be received by him is not chargeable to tax and only a specified portion of the same is chargeable to tax.