TDS Needs To Be Deducted On Payment to NRI

In case of NRI (Non-Residents of India), TDS i.e; tax deduction at source is explained as per sec 195 which says any person responsible for paying the same to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Where the person responsible for paying any such sum chargeable under this Act other than interest on securities, and salary to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable :

Special provisions are applicable to non-residents that income arising from interest from deposits, interest from specified securities, income from units of mutual funds etc. are liable for taxation at certain concessional rates i.e. 10%, 20% 30% etc. At the same time, Income-tax Act also fastens a liability on persons responsibility for paying to non-resident (not being a company) or to a foreign company any interest or any other sum chargeable under the Income-tax Act (excluding salary), of deducting Income-tax thereon at source at the rates in force and credit the same to Central Government account. Such deduction of tax has to be made at the time of crediting the income to the account of the payee or recipient or at the time of payment. The rates presently prescribed are:-

• 20% on Investment income and long term capital gains and interest payable by Govt or an Indian concern on moneys borrowed. However, it may be noted that as far as TDS is concerned, long term capital gains relating to foreign exchange assets, for Asst. Year 1998-99 rate of TDS was at 10% as against 20% for 1997-98 and earlier year as specified above;
• 40% on income by way of winnings from lotteries and cross word puzzles and winnings from horse races, and
• 30% on all other income. This is of course subject to concessional rate of tax applicable to non-residents as will be discussed in the chapter dealing with special provisions applicable to non-residents. If the amount of other income like rent etc. exceeds Rs. 1,20,000/- then the tax will be deducted at the rate higher than 30% as may be applicable to the income of non-resident.

Interest on bank deposits Interest on bank deposits

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.

However, interest earned on the Non Resident Ordinary Account (NRO) is taxable and will be subject to a TDS of 30 per cent. There is no basic exemption limit. 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.

Dividends

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

Capital gains on securities

Equity shares and equity mutual funds (mutual funds with more than 50 per cent in equities)

Long term capital gains, that is profits made on sale after 1 year from date of purchase, on

• Equity shares and equity mutual funds are exempt from tax. There will be no TDS applicable.
• Short term capital gains, that is, profits on sale within one year of date of purchase, will be subject to a TDS of 15 per cent.
• Debt mutual funds, corporate debentures
• Long term capital gains from debt mutual funds and corporate debentures (when sold in the secondary market) will be subject to TDS at 10 per cent.
• Short term capital gains will be subject to a TDS of 30 per cent.
• Capital gains on other assets like house property, gold, long term capital gains will be subject to a TDS of 20 per cent.
• Short term capital gains will be subject to a TDS of 30 per cent.

Rent

• There is no separate rate prescribed for TDS on rent paid to NRIs. Therefore, this would fall under the category of other income and be subject to a TDS of 30 per cent.
• Again, 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 individual is an NRI and is receiving a payment from a company in India for providing professional services, his/her income would be subject to TDS. The rates are slightly complicated.
• If individual agreement is dated between 1st June 1997 and 30th May 2005, he/she would be subject to a TDS rate of 20 per cent.
• If individual agreement is dated on or after 1st June 2005, he/she 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.

All other income

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