TDS and DTAA

What is meant by TDS?

Ans.

TDS is one of the modes of collecting income taxes in India wherein tax is withheld at source by the payer (deductor) before making payment to the payee (deductee). In context of a NRI, any person responsible for making payment (payer) to a NRI is required to withhold tax on the income chargeable to tax at prescribed rate qua the nature of income and then make the balance payment to NRI.

The tax withheld is required to be paid to the Government on behalf of the recipient and reported on the recipient’s PAN Number. The recipient can subsequently claim the credit of such income tax deducted against his total income tax liability in India.

It is to be noted that the responsibility on the payer (Resident / NRI) to deduct tax is only when the payment to the NRI is in the nature of ‘income’ (as defined in the Act) In other words, no tax is required to be withheld on income earned by NRI which is exempt and / or not chargeable to any income tax in India.

What are the legal provisions for TDS on income earned by NRI?

Ans.

Any taxable income earned by a NRI is subject to TDS as per the Act. The rates of tax prescribed for NRIs are generally the maximum rates of tax at which relevant income is taxable in India. 
(For Rates of TDS - refer answer to FAQ f. of Chapter 13: Tax Liability)

A NRI has a residential house in Mumbai which he has let out on rent. The tenant wants to make a payment to the NRI towards monthly rent after deducting tax. What is the rate of TDS which shall be attracted at the time of receiving rent in the hands of the NRI?

Ans.

The NRI shall receive rent from the tenant after deduction of tax at the prescribed rates as per answer to FAQ f. of Chapter 13: Tax Liability (at present @ 30%* on the rental income).

In absence of tax deduction by the tenant, it shall be the NRIs responsibility to discharge due taxes by paying advance tax or self-assessment tax as maybe applicable.
*Plus surcharge applicable on the income tax and Health and Education Cess on income tax

Will the answer in the above question differ if the tenant is making payment to the NRI towards refundable security deposit, which shall be fully refunded on termination of the rent agreement without any deductions / adjustments?

Ans. The amount received by the NRI is only in the nature of a deposit which will be refundable on termination of the agreement. Hence, this amount of security deposit may not constitute ‘income’ in the hands of the NRI and accordingly, the NRI may receive the said amount without any tax deduction.

Will the above answer remain the same in case the NRI receives a security deposit which is adjusted against the rent payable by the tenant?

Ans. No, the answer will change. If the security deposit is adjusted against the monthly rentals, then the nature of security deposit changes and it shall partake the nature of ‘rental income’ and such adjustments would be subject to withholding of tax. 

Will the NRIs income be subject to tax deduction even if it is below the Basic Exemption Limit?

Ans.


Yes, income of NRIs will be subject to tax deduction even if it is below the Basic Exemption Limit.

Is there a possibility of tax being deducted in excess of what the NRI is actually liable to pay in India? If the answer is in affirmative, then are there any ways to avoid such excess tax deduction?

Ans.


Yes, as explained above, income of NRIs are subject to maximum marginal rate of tax qua the nature of taxable income. So, yes there is a possibility of tax being deducted at a higher rate vis-à-vis income tax liability of a NRI.

In order to avoid such excess tax deduction, NRI may:

i. Obtain TEC from the Income Tax Department; OR
ii. Claim relief / benefit under DTAA, if available.
    
The above two points are explained in detail in the ensuing questions.

What is meant by TEC and what are the situations in which it is beneficial to obtain the same?

Ans.

Generally, TEC is an order of the jurisdictional Income Tax Assessing Officer addressed to the payer instructing him/her to deduct taxes at Nil or at a particular rate which is lower than what is prescribed under the Act 
NRIs having PAN can apply to the jurisdictional Income Tax Assessing Officer (in a prescribed format) along with relevant supporting documents to issue a TEC 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 Nil or lower rate for 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.
Whenever NRI’s actual tax liability as per the provisions of the Act is lower than the rate of Tax prescribed under the Act, in case of NRI, it is certainly beneficial for him to apply for a TEC. Few instances are mentioned below:

Situations

TDS (%)*

Actual Tax Liability (%)*

Interest Income on NRO Deposits up to below basic exemption limit

(Basic exemption limit for FY 2017-18 is Rs. 2,50,000/-)

30%

NIL

The only Income is by way of STCG [other than on Shares sold on Exchange or Equity oriented Mutual Fund Units] of Rs. 4,00,000/- in the FY 2017-18

30%

1.95%

STCG during the current year of Rs. 10,00,000/- and allowable brought forward STCL of preceding year of Rs. 12,00,000/-

15% / 30%

NIL

LTCG on sale of property and  intention for claiming exemption by re-investment in property / bonds

20%

NIL / Lower than 20%

Rental income

30%

NIL / Lower than 30%



* Plus applicable surcharge and Health and Education Cess on income tax

The NRI has been informed by the tenant that TDS has been deducted and paid on the rental income. What is the procedure to be followed by the NRI to check whether the tenant has deducted and deposited the TDS to the Government in the NRIs name?

Ans.

The NRI can inform the tenant to share with him a copy of Form 16A (TDS Certificate). The TDS Certificate shall be available once TDS is paid by the tenant to the Government and reported against NRI’s PAN Card and TDS return is filed / uploaded by the tenant for the relevant period.
Also, the NRI can login to his e-filing account on the Income Tax website www.incometaxindiaefiling.gov.in and check the Form 26AS (Annual Tax Credit Statement), once it is updated, which shall provide details about the amounts of Taxes deducted under the NRI’s PAN during a particular year. 
The NRI should ensure that while filing his ROI in India for the relevant period, he claims credit for such Taxes deducted by the tenant against his tax liability in India

What is the usual time taken by the Assessing Officer to issue a TEC?

Ans.

The Jurisdictional Assessing Officer (from International taxation ward) of a Non-Resident individual may generally issue a TEC between 2 weeks to 6 weeks from the date of application by the NRI.

What is the validity of the TEC issued by the Income Tax Department?

Ans. Normally, the TEC is valid for the period for which such TEC is obtained and for the specific nature of income stated in the TEC. 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. Also, the Officer issuing the TEC has the power to cancel it at any point of time.

NRI has obtained a TEC for FY 2017-18. What are the obligations attached to the TEC?

Ans. In most cases, the NRI has to compulsorily file his ROI in India within the prescribed due dates for the FY in which the TEC is obtained. He also is required to fulfil the conditions, subject to which the TEC has been issued.

What is meant by DTAA?

Ans.

The incidence of double taxation occurs when an individual is required to pay tax more than once on the same income generated from a country different from his/her home country. A taxpayer’s own country (referred to as home country) has a sovereign right to tax the individual; the source of income may be in some other country (referred to as host country) which also claims a right to tax the income arising in that country. The result is that income arising to a resident of the home country is subject to tax in the home country as part of the individual’s total world income and, also in host country which provides the source for that income.

In order to avoid the hardship of double taxation, the Government of India has entered into DTAA. The basic objective of a DTAA is to mitigate tax on the same income in both home and host countries (i.e. double taxation of same income) and to promote and foster economic trade and investment between two countries.

A NRI can take the benefit of DTAA provisions entered into between India and the home country, more particularly in respect of interest income from NRO a/c, Government securities, loans, FDs with companies and dividends, or other incomes which he/she may have. A DTAA allocates taxing rights to the home country and the host country and the rate of taxation in the host country is restricted to certain prescribed rates for respective sources of income. 
The provisions of DTAA generally override the provisions of the taxing statute of a particular country.

For e.g.: Interest on an NRO FD is subject to TDS at the rate of 30% 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 TDS deduction at such lower rates by availing DTAA benefit / relief after submission of required documents / information as may be required to the deductor. 

What are the advantages of DTAA?

Ans.

The advantages of DTAA are as under:
i. Lower Withholding Taxes (Tax deduction at source)
ii. Complete exemption of tax on certain Income (Treaty dependent)
iii. Tax Credits

What are the documents mandatorily required to be submitted by a NRI to the payer of income for availing beneficial rates of tax as prescribed under the relevant DTAA?

Ans.

   Following documents are mandatorily required to be submitted by a NRI:

i. TRC from the Government of his country of Residence;

ii. Form 10F as per Income Tax Rules (in certain cases);

iii. Declaration to the payer that the payee is eligible to claim DTAA benefit; and

iv. Other document if any, required by the payer

A NRI is a tax resident of US. He has a NRO FD with a Bank in India. He receives interest of Rs. 10,00,000/- on such deposit. The Bank deducts tax at the rate of 31.2% on such interest income. The NRI intends to claim benefit under the India - US DTAA. Will that be beneficial to him?

Ans. Yes, the NRI can avail benefit of lower rate of tax in India as prescribed under the DTAA upon furnishing of the documents as specified in the ensuing questions. Under the India - US DTAA, NRIs interest income will be subject to tax at the rate of 15%. Accordingly, the NRI will be able to save excessive tax deduction of 16.20% (i.e., 31.2% - 15%) on the interest income earned on the NRO FD.

Are there any provisions to avoid double taxation of income in two countries by a NRI if there is no DTAA between the two countries?

Ans. When the NRI has earned income on which tax is payable in both the countries, i.e., India and country of NRI’s residence and there is no DTAA between these two countries, the NRI may claim relief of tax paid in India against tax liability of the said income in country of NRI’s residence. The amount of tax paid in India and qualifying for tax credit is subject to domestic tax laws of country of residence of NRI.