Tax Deduction at Source or Withholding Tax (TDS)
TDS is a tax collection provision, inserted by legislature in the law to collect the tax at the time of generation of income. This way, neither the receiver of income feels the heat and Govt also collect its money in advance. There is a specific provision in relation to income of NRIs i.e. Non-resident TDS provision under section 195. Generally, NRIs face following kind of TDS provisions in relation to financial transaction incurred by them:
- TDS on Purchase of Immovable Property: As per section 194IA (newly inserted by Finance Act 2013), buyer of property need to deduct TDS @1% and deposit the same with Govt of India. This provision is applicable if the cost of property is more than Rs 50 Lac. Hence, NRIs need to take care of this provision at the time of buying an immovable property in India.
- TDS on Sale of Immovable Property By NRIs, PIOs: This is very important provision of TDS, which is applicable specifically in relation to Non-residents. Hence, NRIs/PIOs are also covered. As per the provisions of section 195 of the Income Tax Act, in case of an immovable property transaction, the buyer needs to deduct total tax liability arising in the hands of NRIs/PIOs on sale of such immovable property. Hence, the provision is very peculiar, where the buyer need to deduct tax on the capital gains arising in the hands of NRI. Further, buyer himself cannot calculate the tax liability. For the purposes of calculation of tax liability in the hands of NRI, buyer needs to approach the Assessing Officer to determine the tax liability. The TDS deducted by buyer can be set off by the NRI against the tax liability payable by him at the time of filing of ITR.
- TDS On Interest Income: NRIs earn interest income from various sources in India. These sources are NRO Bank Deposits, Bonds (including capital gain tax saving bonds), Debentures etc. Under the TDS Provisions (u/s 195), Payer (being bank, company, PSU, Govt etc) is under obligation to deduct TDS before paying interest income to the NRI. As per the provisions of section 195, rate of TDS on the interest income shall be maximum i.e. 30%.
- TDS on Share or Mutual Fund Income: There is no TDS on dividend income distributed (to its shareholders/unit holders) by the Indian Company/Mutual Fund. Also, there is no TDS on payment made in relation to sale of long term shares/mutual fund. However, payment made in relation to sale of Short Term Capital Asset attracts TDS.
- TDS on Rental Income: NRIs are holding immovable property in India either by way of purchase or inheritance or gift or otherwise. These immovable properties fetch them Rental Income by letting out the same. Under the TDS Provisions (u/s 195), Payer (being tenant) is under obligation to deduct TDS before paying rental income to the NRI. Being non-resident, Rate of TDS on the rental income is maximum i.e. 30%.