TAX DEDUCTION AT SOURCE (TDS):
TDS is one of the modes of collecting income taxes in India. The provisions relating to TDS are governed by the Act.
Any payment covered under these provisions made by a person (Resident / NRI) to the other person (NRI) shall be made after deducting a prescribed percentage of the total amount and such deducted amount is remitted to the Government
The responsibility on the payer (Resident / NRI) to deduct tax is only when the payment is in the nature of ‘income’ (as defined in the Act) in the hands of the payee (NRI).
The Rates of TDS prescribed for NRIs is the maximum rate of tax at which relevant income is taxable in India. However, in majority of cases, the actual tax liability of NRIs is lower than this leading to excess tax deduction from income receivable/received by NRIs.
In order to avoid excess tax deduction, an NRI may:
Obtain TEC from the Income Tax Department.
Claim relief / benefit under DTAA, if available.
TAX EXEMPTION CERTIFICATE (TEC):
TEC is an order of the jurisdictional Income Tax Assessing Officer.
NRIs having PAN can apply to the jurisdictional Income Tax Assessing Officer (in a prescribed format) to issue a specific certificate authorizing the payer of income (who deducts tax) to deduct tax at a lower rate or Nil rate, as the case may be.
NRIs should estimate their total income, tax liability and likely TDS and then apply for partial or complete TEC. Such a certificate would be binding on the payer who is required to deduct tax in accordance with the certificate of the Assessing Officer.
DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA):
DTAA is essentially a bilateral agreement entered into between two countries, in our case, between India and other foreign state.
NRIs can avail relief / benefit of DTAA provisions entered into between India and other foreign state, in which he/she resides, more particularly in respect of Interest Income from NRO A/c, Government Securities, Loans, Fixed Deposits with Companies etc.
The provisions of DTAA generally override the provisions of the taxing statute of a particular country.
For example: Interest on an NRO FD is subject to TDS at the rate of 30.90% in India if DTAA benefit is not provided. However, there are different beneficial and lower rates of tax on Interest prescribed for different countries which may range from 10% to 15%.
NRIs can claim the benefit of such lower TDS deduction by availing DTAA benefit / relief after submission of required documents / information as maybe required.
Points to Remember:
The responsibility on the payer to deduct tax is only when the payment is in the nature of ‘income’ in the hands of the payee.
Income of NRIs will be subject to TDS even if it is below the Basic Exemption Limit in the relevant FY.
The Deductor of TDS should keep in mind the specific time-limit and various due dates for deducting TDS and filing TDS returns respectively. The Deductor may be liable to pay interest and penalty on account of such default.
The NRI has to mandatorily file his Return of Income in India within the prescribed due dates for the FY in which the TEC is obtained.
As per the provisions of section 90 (2) of the Act, it is clear that NRIs have an option of choosing to be governed either by the provisions of a particular DTAA or the Act, whichever is more beneficial to the NRI.
Frequently asked questions
Tax Exemption Certificate
When is it ideal for a NRI to obtain a TEC?
What is the usual time taken by the Assessing Officer to issue a TEC?
The Assessing Officer generally issues a TEC within 30-45 working days from the date of application by the Assessee.
What is the validity of the TEC issued by the Income Tax Department?
Normally the TEC is valid for the period for which such TEC is obtained. The Assessee has to re-apply for the TEC on the expiry of such period. Further, at the time of issuing the TEC Order, the Income Tax Authorities clearly mention the validity of the Certificate.
An NRI has obtained a TEC for FY 2016-17. What are the obligations attached to the TEC?
In most cases, the NRI has to compulsorily file his Return of Income in India within the prescribed due dates for the FY in which the TEC is obtained.
Double Taxation Avoidance Agreements
An NRI is a tax resident of US. He has a NRO Fixed Deposit with a Bank in India. He receives interest of Rs. 10,00,000/- on such deposit. The Bank deducts tax at the rate of 30.90% on such interest income. The NRI intends to claim benefit under the India - US DTAA. Will that be beneficial to him?
Yes, the NRI can avail benefit of lower rate of tax in India as prescribed under the DTAA. Under the India - US DTAA, his interest income will be subject to tax at the rate of 15%. Accordingly, the NRI will be able to save excessive tax deduction of 15.90% on the interest income earned on the NRO Fixed Deposit.
What are the documents mandatorily required to be submitted by an NRI to the payer of income for availing beneficial rates of tax as prescribed under the relevant DTAA?
Following documents are mandatorily required to be submitted by an NRI:
- Tax Residency Certificate (TRC) from the Government of his country of Residence
- Form 10F as per Income Tax Rules (in certain cases)
- Declaration to the payer that the payee is eligible to claim DTAA benefit
- PAN copy
- Passport copy
- Other document if any, required by the payer