Purpose of TDS
The main purpose of TDS is to minimize the tax evasion. Through TDS the government can collect the tax at an early stage weather wholly or partially. Some people intentionally tend to evade tax by not disclosing their incomes on the other hand some people cannot show their taxable income due to lack of information about such concepts. TDS successfully removes such difficulty as the responsibility of deducting and paying tax shifts from receiver to the payer. TDS is not applicable to all incomes and persons for all transactions.For example it is mandatory for the employer to deduct the TDS of every employee whose annual income crosses Rs. 2,50,000. Hence it is not necessary to deduct of those employees whose total annual earnings are less than Rs.2,50,000. In this article we would try to learn about the TDS provision in respect of income of a Non- Resident Individual.
Who is a non resident individual?
To understand the TDS provisions of a non resident Individual it is important to first understand who is a non -resident?
One of the misconception regarding non – residents is that they are the people who do not reside in India. But, this statement is not true. As per the definition of the Income tax act a foreign citizen can be a resident in India for a particular assessment year and similarly a person residing in India may be regarded as Non – resident. Let us look at the definition.
Section 6 of the Income tax Act defines a resident as follows:-
(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or
(b) [***]
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
Explanation 1.—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted 6[and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted].
Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.
Following clause (1A) shall be inserted after clause (1) of section 6 by the Finance Act, 2020, w.e.f. 1-4-2021 :
(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.
(3) A company is said to be a resident in India in any previous year, if—
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Explanation.—For the purposes of this clause “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.
(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.
(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.
(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—
(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or
(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less 7[; or
(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India)].
Hence, from the above definition, any person not fulfilling the above mentioned conditions shall be treated as a Non- resident for the purpose Income Tax Act,1961
Overview of TDS on payment to non-residents u/s 195
Non resident Individual are not obliged to file the income tax returns on the income earned by them in India, hence the government loses the tax on the income of such non -resident Individual. Thus, every person doing business with a non- resident individual is obliged to deduct the tax of such non- resident Individual.
A non-resident Individual can earn his income in India through following ways :-
• Letting out a property on Rent
• Earning profits on sale of immovable property
• Providing consultancy services as a professionals from abroad in India
• Receiving salary from Indian Companies or Indian Government for work done outside India
• Earning Interest on Deposits and other types of Bank accounts in India
• Earning Dividends on investments made in India. etc
Amongst all the above forms of income and the other forms of Income received by a Non Resident,TDS will be done only on those incomes that taxed in India. Hence, TDS will not be done on Incomes that are exempt in India.
TDS on Rent
The Income Tax department does not specify any specific rate of TDS to be deducted while paying rent and thus rent falls under the category of other income and TDS is deducted at the common rate of 30%.
TDS on Capital Gains
TDS on Capital gains arising from sale of securities
| Transaction | Nature of Gain | TDS Rate |
|---|---|---|
| Long Term Capital Gains u/s 115E | Long term Capital Gain | 10% |
| Short Term Capital Gains u/s. 111A | Short term gains | 15% |
| Other Long Term Capital Gains (excluding u/s 10(33), 10(36) & 10 (38)) | Long term Capital gains | 20% |
| Investment income from Foreign Exchange Assets | 20% |
Gains on sale of house property will also be liable for TDS and shall be deducted by the payer at the following rates:-
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
TDS ON Technical Fees
The TDS implications in respect of professional services provided by a NRI to Indian companies depends on the date of agreement:-
| Date of Agreement | TDS Rate |
|---|---|
| Agreement dated between 1st June 1997 to 30th May 2005 | 20% |
| Agreement dated after 1st June 2005 | 10% |
TDS on Royalty and other incomes under section 115 of the income tax act
Incomes under section 115 of the Income tax mainly includes royalty received from Indian Companies, Government of India, etc. It also includes dividends and interests in other forms
However, Dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.
Royalties are taxed as follows
| Date of Agreement | TDS Rate |
|---|---|
| Agreement dated between 1st June 1997 to 30th May 2005 | 20% |
| Agreement dated after 1st June 2005 | 10% |
TDS on Payment to Non Resident Sportsmen/ foreign entertainer.
Any person making payment to non- resident foreign citizen sportsman, sports association/entertainer is liable to deduct TDS @ 20 %
OTHERS
Interest payable on moneys borrowed or debt incurred in Foreign Currency is liable for TDS at 20%.
Winnings from Lotteries, Crossword Puzzles and Horse Races are liable to TDS at 30%
Any other income not specifically covered above (not exempt from Tax in India) shall be liable to TDS at 30%
The above rates of TDS would be in addition to the applicable rates of Surcharge and on it cess. In respect of tax deducted, quarterly TDS statements shall be submitted in the form 27Q along with verification statement in Form 27A
The due dates for submitting the returns in each quarter are as follows.
| Quarter Ending | |
|---|---|
| 1st April – 30th June | 31st July |
| 1st July – 30th Sept | 31st October |
| 1st Oct – 31st Dec | 31st Jan |
| 1st Jan – 31st March | 31st May |
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