TDS and DTAA

What is meant by Tax Deducted at Source (TDS)?

Ans.

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, a NRI may:

1. Obtain TEC from the Income Tax Department.
2. Claim relief / benefit under DTAA, if available.

What is meant by Tax Exemption Certificate (TEC)?

Ans.

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.

What is meant by Double Taxation Avoidance Agreement (DTAA)?

Ans.

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 E.g.: 
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.

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. Which tax provisions shall be attracted in the hands of the NRI at the time of receiving rent?

Ans.

The NRI shall receive rent from the tenant after deduction of tax at the prescribed rates (at present @ 30.90%* on the rental income). If the tenant fails to deduct tax while making payments to the NRI, the tenant shall be liable for interest and penalty on account of such default.

Further, it shall also be the NRIs responsibility to discharge due taxes by paying advance tax (if TDS has not been deducted from his rental income) or self-assessment tax as maybe applicable.

* Plus surcharge if applicable.

Will the answer in the above question differ if the tenant is making payment to the NRI towards refundable security deposit?

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 will not constitute ‘income’ in the hands of the NRI and accordingly, the NRI will 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 proposed to be adjusted against the rent payable by the tenant?

Ans.

No, the answer will be different. If the security deposit is proposed to be adjusted against the future monthly rentals, then the nature of security deposit becomes same as the nature of ‘rental income’. 

Accordingly, since the amount assumes the character of ‘income’, the NRI will receive the amount of security deposit from the tenant after tax deduction @ 30.90%*.

*Plus surcharge if applicable.

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.

Let’s say that a NRI is earning a rental income of Rs. 1,20,000/- (being the only income) for FY 2017-18. The tenant is deducting tax @ 30.90% on the rental amount payable to the NRI. Does the NRI have any option to avoid such excessive deduction? If yes, what are the different options available for minimizing the TDS?

Ans. The NRI can obtain a TEC from the Income Tax Department for ensuring that his tax is deducted at the appropriate rate (lower than the prescribed rates) / Nil rate as may be applicable.

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), which shall be available once the 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 (TDS Statement) which provides details about the TDS deducted under the Assessee’s name. 

The NRI should look for TDS deducted by the tenant under the relevant section thus ensuring that while filing his Return of Income in India he gets credit for such TDS deducted by the tenant.

When is it ideal for a NRI to obtain a TEC?

Ans.

Whenever a NRIs actual tax liability as per the provisions of the Act is lower than the TDS, 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 upto below basic exemption limit

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

30.90%

NIL

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

30.90%

1.93%

Short Term Capital Gains during the current year of Rs. 10,00,000/- and brought forward Short Term Capital (Loss) of preceding year of Rs. 12,00,000/-

15.45% / 30.90%

NIL

Long Term Capital Gains on sale of property and  intention for claiming exemption by re-investment in property / bonds

20.60%

NIL / Lower than 20.60%

Rental income

30.90%

NIL / Lower than 30.90%

* Plus surcharge if applicable.

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

Ans. 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?

Ans. 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.

A 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 Return of Income in India within the prescribed due dates for the FY in which the TEC is obtained.

A 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?

Ans. 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 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:

- 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

Key Points to be kept in mind:

i. 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.

ii. Income of NRIs will be subject to TDS even if it is below the Basic Exemption Limit in the relevant FY.

iii. 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.

iv. 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.

v. 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.

vi. Following remedies may be kept in mind in case of excess tax deduction:

- Claim Credit of such excess taxes in the country of Residence.
- File Return of Income in India and claim Refund of such excess taxes.