money matters for NRIs
TDS Dilemma of NRIs

Income tax treatment of non-residents leaves a lot to be desired. Unlike in case of residents, all income of NRIs arising in India is subject to TDS, unless it is tax-free. Therefore, although they are eligible to avail some of the tax rebates available to residents, actually the only way to get the benefits is to claim tax refund or submit tax exemption certificate to their deductors. In this article, read about possible reasons why tax liability of an NRI could be less than what has been deducted as TDS, claiming refunds and tax exemption certificate.

TDS rates of various incomes of NRIs

For non-residents, tax is deducted at source at the highest rate applicable for respective income sources. TDS rate is 30% on interest on FD, other bank and post office deposits; these could the most commonly applicable Indian source of income for NRIs.

Next on the list would be capital gains. If you redeem mutual fund units within a year of buying them it amounts to short-term capital gains (STCG). On debt funds and gold funds, TDS for STCG is 30% whereas for equity shares and funds it is 15%. If redeemed after a year they make long-term capital gains (LTCG). TDS for LTCG is 20% with indexation on non-equity funds, except for notified bonds and GDRs where it is 10%, and nil on equity funds and shares.

View ready recknor TDS rate for NRIs to see all applicable rates.

NRI's tax liability could be less than tax paid as TDS

The first reason why your actual tax liability could be less than what is deducted as TDS is that your total income falls in a lower tax slab or your total income is below the taxable limit. However, in case of capital gains, NRIs need to pay tax on such gains even if their income is less than taxable limit.

Suppose your total taxable income in India is Rs 4.5 lakhs, which means your income falls in 10% percent slab. Now, tax on interest from deposits is applicable at the marginal tax slab. However, TDS is applied at 30% so you might end up paying more tax than you are liable to.

Second case is of loss in capital assets, like shares or property. Like others, NRIs too can set off losses against capital gains arising in that year. Thus their tax liability from capital gains could be nil or reduced. However, since TDS is applied at a fixed rate they would have paid more tax.

Third, you could have reinvested your capital gains in bonds or residential property that give tax exemption.

In case your TDS is likely to be higher than your actual tax liability you can submit Tax Exemption Certificate to the tax deductor before TDS is applied for the year. Alternatively, if TDS has already been deducted you can claim refund while filing income tax return in the relevant assessment year.

Tax exemption certificate for TDS of NRIs

According to section 197 of the Income Tax Act, anyone who is liable to pay lesser tax than TDS can submit a certificate from the Assessing Officer of his tax jurisdiction to his deductors directing them to deduct less tax or no tax, as applicable.

For this, you need to meet your assessing officer and produce documents justifying that you are liable to lesser tax. He would issue a partial or complete Tax Exemption Certificate, as applicable that you must submit to your bank, mutual fund etc or whoever is responsible for deducting tax at source.

TDS is applied every time payment is made, so in case of FDs such a certificate must be submitted at the start of the financial year. In case of mutual funds, it needs to be submitted at least 15 days prior to redeeming.

Check your TDS certificates

It is better to estimate your tax liability for the year in advance and submit tax exemption certificate than waiting to claim refunds.

When TDS is applied, the deductor sends TDS certificate once a quarter in June, September, December and March. Keep all of them and claim refund in the relevant assessment year. Capital losses can be carried forward to set off against capital gains in succeeding years. If tax return is not filed within due date then you lose the benefit of carrying forward capital losses, so better be on time.

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