If an NRI, or a Non-Resident Indian, earns any income in India, such an income is subject to tax under the provisions specified in the Income Tax Act, 1961. Moreover, before the income is paid to the NRI, the payer is required to deduct TDS on such income on the NRI’s behalf and deposit the same with the Government. The provisions for TDS deductions on NRI income is specified under Section 195 of the Income Tax Act, 1961. Let’s have a look at the section in detail –
What is Section 195?
Section 195 is an income tax section which states the provisions of TDS in the case of incomes payable to non-residents. If an income is being paid to an NRI and such income would be taxable in India in the hands of the NRI, the payer of the income is supposed to deduct TDS on the same.
For example, say you live in a house property that belongs to an NRI. You pay rental income to the NRI every month. This rental income would be taxable in the hands of the NRI in India since the NRI is earning the income from India. So, in such cases, Section 195 dictates that you should deduct a TDS from the rent amount before you pay it to the NRI. This 195 TDS is deducted on behalf of the NRI and deposited to the Government. Thereafter, when the NRI files his income tax in India, he can claim credit for the Section 195 TDS that you already deducted from his rental income.
Who deducts TDS on NRI income?
As stated in Section 195 of the Income Tax Act, 1961, the following types of taxpayers can deduct TDS from NRI income before crediting the same to the NRI –
- Hindu Undivided Families (HUFs)
- Resident individual taxpayers
- Partnership firms
- Other Non-Resident Indians
- Foreign companies
- Individuals that have tax-exempted income in India
- Juristic individuals
How to deduct TDS on NRI income?
To deduct TDS, here are some formalities that the payer, i.e. the entities that pay income to the NRI, should follow
- Avail a TAN number
The taxpayers who are eligible to deduct TDS on NRI income are required to avail of their respective TAN Numbers. The TAN Number is the Tax Deduction Account Number which records the details of the TDS deducted by the payer and deposited with the Government. Thus, to deduct TDS, the TAN number is mandatory.
To avail of a TAN number, entities should fill up and submit Form 49B. The form can be submitted online or offline and once it is verified, a TAN number is allotted by the income tax department. The PAN Card number of the payer as well as the NRI, who is the payee, would be needed for acquiring and submitting Form 49B.
- Specify the TDS provisions
Though payers are required to deduct the TDS, they should mention the rules for the same in the sale deed or agreement drawn between them and the NRI. This would also inform the NRI of the possible TDS deductions required under Section 195.
- Depositing the TDS to the Government
The payer not only has to deduct TDS under the provisions of Section 195 of the Income Tax Act, 1961, the deducted tax should also be submitted to the Government on behalf of the NRI. To do so, the payer should fill and submit a challan or a TDS deduction form within the 7th of the next month. So, if you have deducted TDS in April, it should be submitted within the 7th of May.
Alternatively, the payer can also deposit the TDS through the income tax department or through Government-authorized banks.
- Filing TDS returns online
Payers are also required to file TDS returns specifying the TDS deducted from the NRI income. These returns should be filed every quarter, online in Form 27Q. The return filing dates are as follows
- For the April – May – June quarter – by 31st July
- For the July – August – September quarter – by 31st October
- For the October – November – December quarter – by 31st January
- For the January – February – March quarter – by 31st May
- Issuing a TDS certificate
After deducting and depositing the TDS on behalf of the NRI, the payer is required to issue a TDS certificate stating the details and amount of the TDS deducted. This certificate is issued in Form 16A and is called the Certificate of Deduction of Tax. The payer should issue Form 16A within 15 days of the quarterly filing of the TDS return. For example, if the TDS return for the April – May – June quarter is filed on 31st July, Form 16A should be issued by 15th August.
Applicable TDS rates under Section 195
The rate of TDS to be deducted from the NRI income depends on the nature of income earned by the NRI. Section 195 of the Income Tax Act, 1961 specifies different TDS rates for different types of incomes. These rates are as follows
|Type of income
|Applicable TDS rate
|Any type of income earned from investments
|Income earned from long term capital gains
|Income earned from long term capital gains as specified under Section 115E
|Any other types of long term capital gains
|Income earned from short-term capital gains as specified under Section 111A
|Interest income earned from a sum of money in a foreign currency
|Earnings received because of technical services rendered to the Government or any other Indian entity
|Earnings from royalty received from the Indian Government or any other Indian entity
|Earnings from royalty received from any other source except the Indian Government or Indian entity
|Other sources of income
The concept of a nil deduction certificate
In some instances, provided that the specified terms and conditions have been met, NRIs can apply for a nil deduction certificate to avoid Section 195 TDS deductions from their income. This certificate would be issued if the following conditions are fulfilled
- The NRI has not defaulted on any type of tax payment, interest or penalty payable by him
- The NRI is engaged in a business being carried out in India for the last 5 years and the NRI has fixed assets in India worth more than INR 50 lakhs
- The NRI has been assessed as a taxpayer in India and has filed his income tax returns without any default
- No penalty, as specified under Section 271(1)(iii), is applicable on the NRI
Implications of not complying with the provisions of Section 195
Payers are required to deduct 195 TDS on NRI as per the above-mentioned rates. However, if the TDS is not deducted or if other provisions of Section 195 of the Income Tax Act, 1961 are not followed, it might result in adverse repercussions. Here are some of the bad implications of not adhering to the provisions of Section 195
- If the deducted Section 195 TDS is not submitted, the taxpayer would not be able to claim the expense as an eligible allowance when filing income tax.
- If the TDS is not deposited with the income tax department within the stipulated time, i.e. the 7th of the next month, interest would be payable on the TDS deducted. The interest rate is 1.5% and it would be calculated from the date that the TDS was deducted from the NRI income till the date that the deducted TDS is deposited.
- If the payer deducts the 195 TDS but does not deposit it with the income tax department at all, a penalty is levied on the payer. The amount of penalty equals the amount of TDS that should have been submitted.
- Under Section 271C, if the payer deducts the Section 195 TDS partially or if the deducted TDS is submitted partially, a penalty would be levied. The amount of penalty would be the difference between the actual amount of TDS that should have been deducted or deposited and the amount that was deducted or deposited.
So, if you are paying any form of income to an NRI or if you are an NRI receiving income from an Indian taxpayer, understand how TDS under Section 195 works. Ensure that the TDS deductions are deducted from the income as per the provisions of Section 195 to avoid violations of the Income Tax Act, 1965.
Yes, the PAN card of the NRI is necessary for TDS deductions. If the PAN card is not submitted, the rate of TDS increases to 20%.
No, the salary income is not liable to TDS under Section 195. TDS on salary for NRI employees are specified under the provisions of Section 192 of the Income Tax Act, 1961.
TDS is not applicable to the dividend income earned by the NRI. The dividend income, however, would be taxed at 20% in the hands of the NRI with a surcharge and health and education cess of 4%. The maximum marginal tax on dividends is 28.5%.
Yes, if the NRI’s tax liability in India does not attract tax or if a higher amount of TDS has been deposited, the NRI can claim an income tax refund when filing his taxes.
The individual is considered as an NRI if he fulfils the provisions specified under Section 6 of the Income Tax Act, 1961.