Tuesday 29 November 2011
How NRIs can claim Tax Deduction at Source exemption
Tax deduction at source in the case of Non-Residents - sec. 195
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 responsible for paying to on-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:-
(i) 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 in so far as T.D.S. on long term capital gains relating to foreign exchange assets, for Asst. Year 1998-99 is concerned, rate of T.D.S. will be at 10% as against 20% for 1997-98 and earlier year as specified above;
(ii) 40% on income by way of winnings from lotteries and cross word puzzles and winnings from horse races, and
(iii) 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.
The amount of income tax deducted is to be increased by surcharge @10%.
One important factor to be kept in mind is that the expression "any other sum" chargeable under the provisions of the I.T.Act as used in Section 195 of Income Tax Act does not necessarily refer to sums which represent wholly income or profit to the recipient. Section 195 takes within its sweep any sums paid to a non-resident which do not wholly represent income or profit chargeable under the Act but a portion of which only so represents. In view thereof, a provision is also made for the determination in advance of the actual amount representing income out of the total sum payable to a non resident. For this purpose an advance determination from assessing officer is required to be obtained by the payer. Non-resident recipient of income can also approach the assessing officer and obtain certificate that no deduction be made while paying amount to the non-resident.
There are two circumstances in which you might be eligible for TDS exemption:
1) If the DTAA between the country of your residence and India allows a lower rate of TDS
2) If your total income is lower than the basic exemption limit of Rs 1.6 lakh
So the next question is: What does an NRI need to do in order to take the benefit of this exemption or reduced rate of tax?
If the DTAA between the country of your residence and India allows a lower rate of TDS
We saw that in case of certain incomes like interest income or royalty income, the DTAA for US and UK allows a reduced rate of TDS for NRIs. For instance, in case of interest income, while TDS is deducted at 30 per cent for NRIs, where there is a DTAA, the TDS rate is reduced to 15 per cent.
Similarly, there is a complete waiver of TDS in case of fees for professional services. So if you are an NRI providing services to someone in India and are receiving payment thereof, you can get a waiver of TDS.
However, in order to claim the reduced rate of TDS or waiver of TDS under the DTAA, you would need to submit a tax residency certification from the country of your residence. This will certify that you are a tax paying resident in that other country and that tax on that income is being duly paid in that country, ensuring no leakage of tax revenue for either countries.
In the US, the tax residency certificate is called Form 6166 and the application needs to be made to the Internal Revenue Service (IRS) in Form 8802. Complete details of the procedure are available here. In the UK you would need to get the tax residency certificate from the HM Revenue and Customs.
If your total income is lower than the basic exemption limit of Rs 1.6 lakh
It may happen that your total income in India is less than the basic exemption limit of Rs 1.6 lakh per financial year. In such cases, you may apply to the Income Tax Officer in your jurisdiction in India, requesting for a waiver of TDS. If the Tax Officer grants you the waiver, you may submit this to the payers such as your bank and claim TDS exemption.
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 responsible for paying to on-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:-
(i) 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 in so far as T.D.S. on long term capital gains relating to foreign exchange assets, for Asst. Year 1998-99 is concerned, rate of T.D.S. will be at 10% as against 20% for 1997-98 and earlier year as specified above;
(ii) 40% on income by way of winnings from lotteries and cross word puzzles and winnings from horse races, and
(iii) 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.
The amount of income tax deducted is to be increased by surcharge @10%.
One important factor to be kept in mind is that the expression "any other sum" chargeable under the provisions of the I.T.Act as used in Section 195 of Income Tax Act does not necessarily refer to sums which represent wholly income or profit to the recipient. Section 195 takes within its sweep any sums paid to a non-resident which do not wholly represent income or profit chargeable under the Act but a portion of which only so represents. In view thereof, a provision is also made for the determination in advance of the actual amount representing income out of the total sum payable to a non resident. For this purpose an advance determination from assessing officer is required to be obtained by the payer. Non-resident recipient of income can also approach the assessing officer and obtain certificate that no deduction be made while paying amount to the non-resident.
There are two circumstances in which you might be eligible for TDS exemption:
1) If the DTAA between the country of your residence and India allows a lower rate of TDS
2) If your total income is lower than the basic exemption limit of Rs 1.6 lakh
So the next question is: What does an NRI need to do in order to take the benefit of this exemption or reduced rate of tax?
If the DTAA between the country of your residence and India allows a lower rate of TDS
We saw that in case of certain incomes like interest income or royalty income, the DTAA for US and UK allows a reduced rate of TDS for NRIs. For instance, in case of interest income, while TDS is deducted at 30 per cent for NRIs, where there is a DTAA, the TDS rate is reduced to 15 per cent.
Similarly, there is a complete waiver of TDS in case of fees for professional services. So if you are an NRI providing services to someone in India and are receiving payment thereof, you can get a waiver of TDS.
However, in order to claim the reduced rate of TDS or waiver of TDS under the DTAA, you would need to submit a tax residency certification from the country of your residence. This will certify that you are a tax paying resident in that other country and that tax on that income is being duly paid in that country, ensuring no leakage of tax revenue for either countries.
In the US, the tax residency certificate is called Form 6166 and the application needs to be made to the Internal Revenue Service (IRS) in Form 8802. Complete details of the procedure are available here. In the UK you would need to get the tax residency certificate from the HM Revenue and Customs.
If your total income is lower than the basic exemption limit of Rs 1.6 lakh
It may happen that your total income in India is less than the basic exemption limit of Rs 1.6 lakh per financial year. In such cases, you may apply to the Income Tax Officer in your jurisdiction in India, requesting for a waiver of TDS. If the Tax Officer grants you the waiver, you may submit this to the payers such as your bank and claim TDS exemption.
