When you are moving in and out of the country frequently, keeping track of your income should be a regular task. You will need to pay tax on the incomes received in India and TDS is the government’s way of tracking such transactions.
If you are a Non-Resident Indian (NRI) but receive income in India, TDS could be a regular deduction from it. Section 195 of the Income Tax Act provides the provisions for the tax deductions for NRIs.
Key Takeaways
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Section 195 of the Indian Income Tax Act 1961 provides for the Tax Deduction at Source (TDS) for all Non-Resident Indians (NRIs).
This section gives you detailed guidelines on tax deductions that are made to all business transactions carried out by a non-resident taxpayer of India on a day-to-day basis. The deduction is done at the given TDS rate under section 195.
Anyone paying any money to a non-resident individual, or a foreign entity should deduct applicable TDS from the amount. The TDS rate under section 195 governs the amount of deduction as per the type of transaction and threshold.
TDS is a must regardless of whether the non-resident individual or entity has a taxable income or not.
The TDS has to be deducted as and when the said income is credited to the account of the payee or during the time of the transaction, whichever of them is earlier.
According to the provisions of the Income Tax Act, any income which is deemed to have accrued or arisen in India, for that income the payer is responsible to withhold tax levied on it in India. Hence,
Section 5(2)(b) of the Income Tax Act, states that the total income of a non-resident includes all income that accrues or arises or is deemed to accrue or arise in India to the non-resident during the previous financial year. Hence, tax shall be deducted on every such income accrued or arisen.
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When making payments to Non-Resident Indians (NRIs), one of the key tax considerations is Tax Deducted at Source (TDS) for NRIs under Section 195 of Income Tax Act. This section mandates that any person making a payment to an NRI must deduct TDS at the applicable rates before remitting the amount. The TDS rates depend on the nature of the payment and are designed to ensure that tax is collected at the source before the income is repatriated abroad.
Below are the standard TDS rates applicable under Section 195 for different types of payments made to NRIs:
| Nature of Payment | TDS Rate (%) |
|---|---|
Interest on NRO Account | 30% |
Interest on NRE/FCNR Account | Exempt |
Dividend Income | 20% |
Rent from House Property | 30% |
Sale of Immovable Property | 20% (on LTCG) / 30% (on STCG) |
Capital Gains on Listed Shares & Securities | 10% (LTCG over ₹1 lakh) / 15% (STCG) |
Professional or Technical Fees | 10% |
Royalty Income | 10% |
Payments for Contracts or Other Services | 40% (if recipient is a foreign company) / 30% (for individual NRI) |
Surcharge and Cess: The above rates are subject to applicable surcharge and health & education cess, which can increase the effective TDS rate.
DTAA Benefits: If the NRI resides in a country with which India has a Double Taxation Avoidance Agreement (DTAA), they may be eligible for a lower TDS rate under the treaty.
Form 15CA & 15CB: For certain payments, the remitter must submit Form 15CA and obtain Form 15CB (issued by a Chartered Accountant) to comply with tax regulations.
Lower or Nil TDS Certificate: NRIs can apply for a lower or nil deduction certificate from the tax department to reduce their TDS liability based on their actual taxable income in India.
Here is the table showing all the types of incomes of the non-residents that are deemed to accrue or arise in India, and on which TDS shall be deducted at the given TDS rate under section 195:
| Types of taxable income of Non-Resident | TDS rate under section 195 of the Act (%) |
|---|---|
Investment income | 20 |
Income by way of LTCG u/s 115 E of the Act | 10 |
Income by way of LTCG from unlisted securities u/s 112(1)(c)(iii) | 10 |
Income by way of LTCG from equity unit or EOU of a business trust u/s 112A of the Act | 10 |
Income by way of STCG from listed stocks having the holding period < 12 months u/s 111A of the Act | 15 |
Other types of LTCGs | 20 |
Interest income of an offshore lender | 20 |
Royalty income (in respect of a copyright of a literary work or computer software) | 10 |
Royalty income other than those specified above | 10 |
Income by way of fees for technical services payable by Government or an Indian concern | 10 |
Any other type of income deemed to accrue or arise in India | 30 |
Whether you are an NRI or a resident, you have several options to save tax on your income in India. Tax saving plans might also allow you to reclaim some of the TDS deducted from your income in the previous year.
You can invest in the following tax-saving options to reduce your tax liability in India:
As per Section 195 of the Income Tax Act, the payor has to deduct TDS from the payments made to the NRIs or other non-resident entities. The person paying such remittance to a non–resident has to e-file and submit the following certificates of information:
So, if you are an NRI and receiving any income in India, you have multiple ways of saving tax on it. TDS will apply to most of the income receipts. However, you may claim refunds if you invest adequately in tax-saving options.
Section 195 covers payments such as interest, royalties, and other sums chargeable under the Income Tax Act, excluding salaries.
Source: Indiafilings
Non-Resident Indians (NRIs) earning income in India are subject to Tax Deducted at Source (TDS) as per Indian tax laws. However, in many cases, the TDS deducted is higher than the actual tax liability, leading to excess tax outflows. To address this, NRIs can apply for a lower or nil TDS certificate under Section 195 of the Income Tax Act. This certificate allows them to reduce or eliminate TDS at the time of income remittance, ensuring better cash flow management.
To obtain a lower or nil TDS certificate, NRIs must submit Form 13 to the Assessing Officer (AO) of the jurisdiction where the income originates. The key steps in the application process include:
Filling Form 13 – NRIs need to provide details of their income sources, expected tax liability, and applicable deductions.
Supporting Documents – They must attach documents like tax residency certificates, past tax returns, and financial statements.
Submission to the Income Tax Department – The completed application should be submitted either online via the TRACES portal or offline at the Income Tax office.
Approval Process – The AO reviews the application and, if satisfied, issues a certificate specifying the applicable TDS rate.
Once the certificate is granted, NRIs must provide it to the deductor (payer) to ensure TDS is deducted at the approved rate.
India has Double Taxation Avoidance Agreements (DTAA) with several countries to prevent NRIs from paying tax on the same income twice—once in India and again in their country of residence. Under DTAA provisions:
NRIs can avail of lower TDS rates on income such as interest, dividends, and royalties.
To claim benefits, they must submit Form 10F along with a Tax Residency Certificate (TRC) issued by their home country’s tax authorities.
If DTAA benefits are applicable, the deductor will apply the lower TDS rate specified under the treaty.
NRIs should carefully review the DTAA provisions relevant to their country of residence to optimise their tax liability.
While applying for a lower or nil TDS certificate, NRIs often make certain errors that can lead to delays or the rejection of their application. Some common mistakes include:
Incomplete or Incorrect Form 13 – Missing details or errors in the application can result in processing delays.
Failure to Provide Supporting Documents – The Income Tax Department requires proper documentation, including TRC and past returns, for verification.
Not Claiming DTAA Benefits Correctly – Many NRIs either fail to claim DTAA benefits or do not submit Form 10F, leading to higher TDS deductions.
Delays in Filing – Applying for the certificate well in advance is crucial to ensure timely processing before the due date of the transaction.
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Filing Income Tax Returns (ITR) as a Non-Resident Indian (NRI) can feel overwhelming, but understanding the process can make it simpler. If you earn income in India—be it through rent, investments, or salary- you are required to comply with Indian tax laws. The taxability of your income depends on your residential status under the Income Tax Act.
NRIs can file their ITR online using the e-filing portal of the Income Tax Department. The applicable ITR form will depend on the type of income earned. For instance, ITR-2 is suitable for NRIs with income from capital gains, house property, or other sources, while ITR-3 applies to those having business or professional income.
Tax Deducted at Source (TDS) is a common concern for NRIs, especially since a higher TDS rate often applies to them. Under Section 195 of the Income Tax Act, any income earned by an NRI in India, such as rental income, capital gains, or interest from bank deposits, is subject to TDS deduction before payout.
However, NRIs can claim a TDS refund if their total taxable income in India is below the exemption limit or if they have paid excess tax. To claim a refund, they must file an ITR and provide details of the TDS deducted in Form 26AS. Additionally, they can apply for a Lower TDS Certificate to reduce the TDS rate at the time of deduction.
To ensure smooth tax filing, NRIs must keep the following documents handy:
PAN Card – Essential for filing taxes in India
Passport – To establish residential status
Bank Statements – For income and foreign remittance records
Form 16A/16 – Issued by employers or deductors for TDS details
Form 26AS – A tax credit statement reflecting TDS deductions
Investment Details – For capital gains, mutual funds, or FD interests
Rental Agreements – If earning rental income in India
Filing ITR as an NRI comes with its own set of challenges. Here are some common mistakes and ways to avoid them:
Not Checking Residential Status – The taxability of income depends on whether you qualify as an NRI. Make sure to determine your status correctly before filing.
Ignoring Section 195 of the Income Tax Act – If you have income subject to TDS for NRIs, ensure that the correct TDS amount has been deducted, and apply for a refund if eligible.
Missing the Deadline – Late filing can attract penalties. Stay updated on due dates for NRI tax filing.
Not Reporting Global Income – While NRIs are taxed only on income earned in India, some exceptions may apply if they have financial interests in India.
Incorrect Bank Account Details – NRIs must provide an Indian bank account (preferably an NRO account) for tax refunds.
Section 195 of the Income Tax Act ensures that tax is deducted at the source for payments made to NRIs, preventing tax evasion and ensuring compliance. While TDS rates may seem high, NRIs can manage their tax liabilities through proper planning, DTAA benefits, and refund claims. Understanding the provisions of Section 195 can help NRIs optimise their tax payments and avoid unnecessary deductions.
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