Non Resident Indians (NRI) are allowed to invest in various investments on repatriation/non-repatriation basis. With Reserve Bank of India(RBI) deregulating interest rates on NRO,NRE, FCNR accounts, fixed deposits(term deposits) have become a good option. In this article we shall look into different kind of Fixed deposits, Tax, TDS(Tax deducted at Source) also called as withholding tax, Double Taxation of Income. How using Double Taxation Avoidance Agreement (DTAA) TDS can be reduced. TDS on various incomes of NRI. If income is less than exemption limit NRI can ask for Tax Exemption Certificate or claim refund.
Table of Contents
NRI and Fixed Deposits
The NRE/NRO account allows an NRI to maintain a savings as well as term deposit account while FCNR is only a term deposit In December 2011 RBI deregulated interest rates on Non Resident Ordinary (NRO) savings accounts and Non Resident External (NRE) term deposits. In May 2012 RBI also freed up interest rates on the Foreign Currency Non Resident (FCNR) Account. The difference between various types of NRI deposit accounts is given below:
|Source of funds||Local rupee earnings||Foreign funds or certain repatriable rupee funds||Cheque or wire from overseas bank account or currency or travelers cheque|
|Interest rate||7-9% depending on amount, term and bank||7-9% depending on amount, term and bank||On USD deposits: 3%-4% depending on termOn Euro deposits: 3%-4.5% depending on termOn GBP deposits: 4%-5% depending on term|
|Repatriability||The principal amount is not repatriable and can be used only for local payments. However, the interest earned is fully repatriable. Prinicipal up to USD 1 million (or equivalent) per financial year can be repatriated out of the balance held in NRO accounts for any bonafide purpose||Principal and interest credited to NRE savings account and can be freely repatriated.||Principal and interest can be freely repatriated.|
|Tax impact||Interest is taxable. Tax is deducted at source at 30.9%.In case of a Double Taxation Avoidance Agreement (DTAA) between India and other countries, this TDS rate would be lower.||Interest is tax free in India. However, it would be taxed in country of residence depending on tax rules applicable there.||Interest is tax free in India. However, it would be taxed in country of residence depending on tax rules applicable there.|
|Currency risk||Currency risk exists. If rupee depreciates further at time of maturity and repatriation, you will lose.||Currency risk exists. If rupee depreciates further at time of maturity and repatriation, you will lose.||No currency risk as you invest in foreign currency and withdraw in the same currency.|
Let us consider an example to understand this. You invested $ 20,000 in a rupee deposit when the rupee was at 53. Let us say that at maturity, after 1 year, the rupee touches 55. Here are your gains:
- Principal: $20,000 or Rs 10,60,000
- Interest @8%: Rs 84,800
- Maturity : Rs 11,44,800 or $ 20815
- Gain in dollars: $ 815 or 4%
Thus, if the rupee slips to 55 at the end of one year, your 8% interest rate would translate into a net 4% gain after currency adjustment. If the rupee were to slip further, say to 56, your net gains would further drop to 2%.
Instead, had you invested in a dollar deposit, your gains would have been 4% irrespective of currency movement. Conversely though, if the rupee appreciates, say to 51, then your net gains from the rupee deposit would be 12%.
Which type of deposit account to choose?
|Your need||Suggested Account|
|Rupee fixed deposit to invest overseas income||NRE Fixed Deposit Account|
|High returns on funds generated in India.Joint holdings with residents and non-residents||NRO Fixed Deposit Account|
|High yield deposits for your foreign currency earnings||FCNR Fixed Deposit Account|
Double Taxation and DTAA
When taxpayer is resident in one country but has source of income situated in other country it gives rise to possible taxation of income in both countries or Double Taxation. As per Tax Laws of India
Every person who is a resident of India must pay taxes in India on his or her global income. However non-residents have to pay tax only on the income earned in India or from a source/activity in India.
A resident of India is defined as a person who has been in India for a period of 182 days or more in the financial year or who has been in India for 60 days or more in a financial year and 365 days or more in the 4 years before that financial year (section 6). Our article Non Resident Indian – NRI covers definition of NRI in detail.
Tax laws of Other Countries for ex US: According to the US tax code, any person who is a resident of US must pay taxes in the US.
Double taxation refers to the situation when an individual is taxed more than once on the same income, asset or financial transaction.The Double Tax Avoidance Agreements (DTAA) is bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to avoid, taxation of income in both the countries (i.e. Double taxation of same income) and to promote and foster economic trade and investment between the two countries.
NRI and Tax on various incomes
Various incomes of NRI’s and TDS .
|Income source||Rate of TDS|
|Bank and Fixed Deposit: NRE, NRO, FCNR||NRE, FCNR No TDSNRO 30.9% without DTAA,lower with DTAA|
|Interest from other investments:Dividends Shares and mutual funds||No TDS|
|Capital gains:Equity shares,mutual fundsGains on sale after 1 year are taxed as long term capital gains.||No TDS on long term gains;15% on short term gains|
|Debt:Debt mutual funds, debenturesGains on sale after 1 year are taxed as long term capital gains.||20% with indexation or 10% without indexation for long termShort term gains:included in your total income and taxed at your overall tax slab|
|Property, goldGains on sale after 3 years of purchase are taxed as long term||20% on long term gains,30% on short term gains|
|Rent||You can claim an ad hoc deduction of 30% of net annual value as repairs and maintenance expenses in addition to claiming a deduction on mortgage interest.|
|Professional services and royalty||Varies between 10- 20%.|
|All other income||30%|
NRI and Tax Exemption
It may happen that your total income in India is less than the basic exemption limit. You can get Tax Exemption Certificate or place a refund request with the Indian Income Tax authorities. Quoting from EconomicTimes How NRIs can claim TDS exemption:
In such cases, you may apply to the Income Tax Officer in your jurisdiction in India, requesting for a waiver of TDS. If the Tax Officer grants you the waiver, you may submit this to the payers such as your bank and claim TDS exemption.”Granting waiver depends on the discretion of the Tax Officer and may or may not come through easily. So if you are faced with such a circumstance, it is best to file your tax returns and claim a refund of the TDS,” advises Sandeep Shanbhag, Director – Wonderland Investments and an expert in all NRI financial and taxation matters.
Getting Waiver : Tax Exemption Certificate
Where a taxpayer believes that its total income justifies withholding of tax at a lower rate, it can apply to the assessing officer for a certificate of withholding tax at a lower rate. The application by the taxpayer to the Assessing Officer (AO) for a certificate of withholding tax at a lower rate is governed by Rule 28AA of the Income-tax Rules, 1962 (the Rules). Form 13, relating to the application, has been modified. In the new Form 13, the additional details are required to be furnished. After submitting the application to the TDS department , the AO will review your documents and they may ask further queries & documents to satisfy that you are eligible for getting the lower TDS certificate. It must be noted that AO is not bound to issue TDS certificate, once the application had been filed. The AO issues the certificate based on the merit on case to case basis. For details refer to Tax Guru’s Procedure – Lower / Nil rate TDS deduction Certificate and Form13(pdf)
Claim Tax Refund
The procedure of filing returns is no different from that of a resident Indian. Use the correct forms for filing tax returns online/offline.
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