Like the long hand of law, the taxman has an extended reach too. You would know this, especially if you are a non-resident Indian (NRI). For every income that you earn in India after becoming an NRI, tax will most certainly get charged and furthermore, it would be deducted at source. And the rates for tax deducted at source (TDS) are widely different from the rates applicable to resident Indians. In this column, we will look at the various incomes that an NRI could earn in India and what TDS rate would apply.
Before we begin, it is important to clarify that tax will be deducted only on incomes that are liable to tax in India. If the income is tax free in India like long term capital gains from equity shares, there would be no TDS. Another important thing to remember is that you should be an NRI at the time of receiving the income. For instance, you may have purchased a long term debenture of a company while you were a resident Indian. But any interest that you receive during the period after becoming an NRI will be subject to TDS.
Interest on bank deposits
Interest earned on Non Resident External (NRE) accounts and Foreign Currency Non Resident (FCNR) accounts are tax free in India. Hence, there would be no TDS.
However, interest earned on the Non Resident Ordinary Account (NRO) is taxable and will be subject to a TDS of 30 per cent. There is no basic exemption limit. For example, interest earned by resident Indians from bank deposits is subject to TDS only over and above a limit of Rs. 10000. No such limit applies for NRIs.
Interest on all other investments
Interest earned on all other investments like corporate deposits and bonds will be subject to TDS at 20 per cent. In all these cases, the company or party making the payment will deduct this tax.
Dividends
Dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.
Capital gains on securities
- Equity shares and equity mutual funds (mutual funds with more than 50 per cent in equities)
Long term capital gains, that is profits made on sale after 1 year from date of purchase, on
equity shares and equity mutual funds are exempt from tax. There will be no TDS applicable.
Short term capital gains, that is, profits on sale within one year of date of purchase, will be
subject to a TDS of 15 per cent.
- Debt mutual funds, corporate debentures
Long term capital gains from debt mutual funds and corporate debentures (when sold in the secondary market) will be subject to TDS at 10 per cent.
Short term capital gains will be subject to a TDS of 30 per cent.
Capital gains on other assets like house property, gold
Long term capital gains will be subject to a TDS of 20 per cent.
Short term capital gains will be subject to a TDS of 30 per cent.
Now in case of sale of assets like gold and house property, the question arises as to who will deduct the tax at source. If the property is sold to an individual, does the individual need to deduct tax at source and deposit the same with the Government? Will the individual then issue a TDS certificate to the NRI?
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