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Understanding Taxation for NRIs : TDS and Taxable Incomes

Is TDS Applicable on NRIs?

Before getting into the details of how the incomes are taxed for NRIs, it is important to know who falls under the ‘NRI’ category under the Income Tax Laws in India.

It may be interesting to note that the Income Tax Act does not define the term ‘non-residents’. However, resident taxpayers are defined and those not fulfilling such conditions are considered non-residents.

As per the tax laws, individuals are residents of India if their stay in India is at least 182 days during a financial year or they have stayed in India for 60 days or more during the relevant financial year and 365 days or more during the preceding four years. If an Indian citizen is employed as a crew member of an Indian merchant ship, the stay in India should be 182 days or more during the financial year to qualify as a resident.

NRI Banking

When it comes to financial matters, NRIs often require specialised banking services. Many banks in India offer NRI Banking Services that cater to the unique financial needs of NRIs. These services include NRI Savings Accounts, NRI Fixed Deposits, NRI Loans and more.

Taxable Incomes for NRIs in India

Resident taxpayers are liable to pay taxes on their global income. However, non-residents must pay taxes only on incomes that have either accrued within India or incomes that are received in India.

Income accrued in India means that the source of income is situated in India or the actions required to earn that income have been performed in the country. Such incomes include income on services provided in India, rental income from an Indian property, etc. Similarly, even if the income pertains to services rendered outside India, it is taxable if received in an Indian bank account.

Is TDS applicable to NRIs?

As per the Indian Tax Laws, any person paying any income (excluding salaries) to an NRI is liable to deduct tax under Section 195 of the Income Tax Act. Section 195 provides that such TDS rate for NRIs should be the tax rate as applicable on such income for non-residents and there are no threshold income criteria for TDS applicability for NRIs.

This ensures that the taxes payable by NRIs on any taxable income is collected upfront through the TDS mechanism. However, even while the TDS applies to NRIs and there may not be any additional tax liability, they must file their Income Tax Returns if TDS has been deducted.

How can NRIs minimise their tax liability/TDS deduction?

NRIs can avail the following three options to lower their tax liability/TDS deduction:

  • Tax Deductions under the Income Tax Act - NRIs can use the tax deductions under Section 80C and Section 80D to lower their tax outgo. Section 80C allows tax deductions against a range of eligible payments and investments including but not limited to life insurance premium, repayment of Home Loan principal, investment in tax-saving Mutual Fund schemes, etc. Similarly, NRIs can also claim deduction on health insurance premium or payments towards preventive health check-ups under Section 80D of the Income Tax Act, 1961.
  • Double Taxation Avoidance Agreements (DTAAs) – NRIs in India may be considered tax residents in other countries which may lead to instances of double taxation. This is because one income may be taxable in two different countries.

For example, fees received directly in an Indian bank account for professional services rendered in Singapore will be subject to tax in India and Singapore under the Income Tax Act. However, DTAA between Singapore and India provides that if such services are rendered outside India by a resident in Singapore and such individual has no permanent establishment in India, then the income is not taxable in India and only taxable in Singapore.

However, DTAA is only an option available to NRIs and not mandatorily applicable. As such, one can take benefit of the DTAA when such provisions are beneficial and discard such provisions if DTAA provides for a higher tax rate than the Income Tax Act.

The information provided in this article is for informational purposes only. Consider consulting professionals for specific tax guidance for you as tax laws are subject to changes regularly.

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