Mr. Shah has been a Non Resident Indian for around 3 years now. When he took up the current assignment abroad, he did the usual banking formalities of converting his existing savings a/c in India into an NRO a/c. He had about 10 lakhs saved from his income earned in India, which he invested in an NRO fixed deposit @ 9.5 % p.a.At the end of the financial year, he realised that he had received only Rs 63,000/- as interest out of the Rs 95,000/- , and around 32,000/- has been deducted as taxes, at the applicable rate of 33.99 % p.a for NRO accounts. Now, Mr. Shah doesn’t actually have to pay tax, as he has no other Indian Income apart from this, and the total interest income is less than the exemption limit of Rs 1.5 lakhs p.a. Now, the only way he can claim this tax back is to go through the process of filing his returns which otherwise wasnt required.
These kind of cases are very common. In most cases, NRIs either do not bother to apply for a refund, or most of them maintain a dual status, open an NRE a/c to deposit/transfer their repatriable funds earned abroad, while still keeping their resident savings a/cs and fixed deposits.
Apart from this scenario, there could be other local financial transactions of NRIs, where a higher amount of tax is deducted at source. Some of them are-
- Incurring short term capital gains, where 33.99 % is deducted as taxes, while the actual tax liability is much lower.
- The NRI tenders some of his shares in a buy back offer, and the company deducts tax at a rate much higher that his tax liability.
Why is the applicable TDS rate so high for NRIs?
This happens because as per the NRI tax laws, the TDS rate applicable to NRIs is the maximum rate which is applicable to that relevant income in India, irrespective of which income tax bracket he falls in- NIL, 10 % , 20% or 30 %.
Can this TDS be avoided or paid at a lower rate?
Yes. An NRI can do so by applying for a tax exemption certificate.
What is a tax exemption certificate ?
A tax exemption certificate authorises the payer of the income to deduct tax at a lower rate or NIL rate, as applicable. Hence a tax exemption certificate can be sought for partial tax exemption or full exemption.
Who is eligible ?
All NRIs whose total Indian income during the financial year is less than the limt of Rs 1,50,000/- per annum OR whose actual tax liability is less than what would be deducted at source.
How to apply,validity and usage
The NRI has to submit form 13 to the ITO specifying the nature of exemption-partial or total. The assessing officer then issues the certificate 15-AA instructing the responsible persons not to deduct tax or deduct it at a lower rate.The certificate can be issued with a validity of 1-3 years, and once obtained, the NRI has to submit the same to the payer of income.