The Government of India has relaxed the taxation provisions for Non-Resident Indians (NRI), enabling them to avoid incurring higher Tax Deducted at Source (TDS). NRIs can gain tax advantages by investing in plans such as mutual funds, unit-linked insurance plans, and real estate, among others.
Also read: NRI Fixed Deposit
When is PAN mandatory for NRIs
Under Section 206AA of the Income Tax Act, 1961, each taxpayer who earns taxable income is required to furnish their PAN to the payer of such income. This applies to both the resident and NRI recipients. In the case of residents, these payments include rent, salary, contractual receipts, and professional receipts, among others. For NRIs, the payments include all receipts that are taxable in India.
Upon furnishing their PAN, payments made to the recipients are taxed at a TDS rate specified under various relevant provisions of the Income Tax Act. A recipient not holding a PAN must incur higher TDS rates as specified in Section 206AA. Both the recipient and payer are required to indicate the PAN in all bills, correspondence, and similar documents sent to each other.
When is a higher TDS rate applicable
When an NRI does not hold a PAN, they are obliged to a higher tax deduction, according to section 206AA of the Income Tax Act. The higher of the following TDS rates would be considered:
- The specified rate in the provisions of the Income Tax Act, 1961.
- The specified rate in the Finance Act, 2021.
- The rate of 20%.
Ways for NRIs without PAN to avoid high TDS
Here are some ways how NRIs can avoid TDS at higher rates:
1. Opening tax-free bank accounts
A popular way for an NRI to avoid high TDS payments is to set up tax-free bank accounts, such as:
- A Non-Resident Ordinary Rupee Account (NRO)
- A Foreign Currency Non-Resident Account (FCNR)
- A Non-Resident External Account (NRE)
Such bank accounts are tax-free and do not require NRI account holders to pay taxes in India. While the payments done through NRO accounts are tax-free, the interest earned by these account holders is taxable at around 30%. However, the interest earned in FCNR and NRE accounts is exempt from taxation.
2. Investing in mutual funds
Among the numerous benefits offered by mutual funds, one involves lowering the TDS for NRIs. This can be done by investing a minimum of Rs. 5,000 or smaller denominations of Rs. 500 or Rs. 1,000 in mutual funds. NRIs can open their mutual fund investment with any reputable bank in India in specific bank accounts, such as NRE, NRO and FCNR accounts.
NRIs can also choose a more comfortable investment strategy, such as Systematic Investment Plans (SIPs), to invest in mutual funds in India. Like residents, NRIs can earn similar returns owing to the comfort offered by these investments. Moreover, they can stop their SIPs at any time without paying penalties.
3. Through property sales
How can NRIs avoid TDS on property sales? When purchasing a property, the buyer would deduct TDS at an applicable rate before transferring the money. However, if the NRI can provide an NIL/lower deduction certificate, the buyer can deduct the TDS at a lower rate specified in the certificate. There are also several TDS consultants who offer advisory services on how to avoid TDS on the sale of property by NRIs.
Also read: National Pension Scheme for NRI
Know about TDS implications for NRIs without PAN
When NRIs generate income in India, they are obliged to file income tax returns. Deductions of income tax from payments made to them are mandated under Section 195 of the Income Tax Act of 1961. This applies to anyone who receives interest or other payments as income from India. Based on the nature of taxable income, NRIs must pay href="/investments/what-is-tds">TDS within a 10% to 30% range.
NRIs are often subject to more stringent tax rules than the residents. To transact in India, they are required to have a valid PAN, which refers to a 10-character alphanumeric number allocated by the taxation department to taxpayers. If not, they will be subjected to higher TDS.
Some exceptions can help NRIs avoid TDS.
Pension plans for NRIs in India
Here are some National Pension Systems (NPS) to help NRI avoid TDS at higher rates and reduce their tax liability in India:
- Invest up to 20% (over Rs. 50,000) of the gross income in India.
- Deduction of up to Rs. 2 lakh per annum.
- Choice of safe or aggressive portfolio for investment.
- Ideal for building a retirement corpus in India.
- Operate with the bank managing their NRE/NRO account.
Conclusion
While navigating TDS without a PAN is possible, it often involves additional paperwork and uncertainty. NRIs should explore these strategies carefully, ideally with professional guidance, and prioritize obtaining a PAN card for a smoother process and the most accurate tax deductions.
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