Non-Resident Indians or NRIs do not have many tax benefits and are subject to higher tax deducted at source or TDS. It is good to understand the logistics of tax to avoid legal troubles.
Closure of NSCs and PPF accounts
NRIs are not allowed to maintain post office schemes including Monthly Income Schemes, National Savings Certificates (NSCs) and Public Provident Funds (PPFs). If a holder changes their status from Indian to NRI, according to the new rules, the mentioned accounts would be closed before maturity. In case of NSCs, they will be considered to be encashed from the day of change in the status of nationality. Though the income is tax free, NRIs have bear with the strict TDS rules and other tedious processes that mention very details of income flow. Also, they do not enjoy some of the benefits enjoyed by resident Indians.
The NRIs won’t enjoy the tax deductions such as medical expenses incurred in the treatment of a member of the family suffering from specific listed diseases under Section 80DDB, medical expenses incurred in the treatment of a disabled person in the family under Section 80DD, royalty income enjoyed under Section 80QQb or self-disability or dependent’s disability under Section 80U by a resident citizen of India.
While Tax Deduction at Source (TDS) for resident Indians is only 10 percent, NRIs have to part with 30 percent. The Mutual funds and stock investments account to TDS. Also, the property, gold, debentures and debt funds are subject to 30 percent TDS while 15 percent is for short term investments. In fact, the gold and property gains in the long term are also account to TDS.
A 30 percent TDS is deducted from the rent amount given to an NRI for a property in India. Form 15 CA has to be submitted along with a certificate from a chartered accountant verifying and declaring the details of the payments and TDS as per Section 195. NRIs can’t escape TDS even if their incomes are lesser than the tax range and 20-30 percent tax has to be borne by an NRI.
Ways to avoid paying higher amounts of TDS
Playing a second fiddle or being the second in joint investments can help an NRI save tax. The accountability of tax lies on the first holder who should be an Indian resident. This will also enable the joint investors to save on TDS on gains. Unless and until the rent from a property in India earns more than Rs 50,000 a month, as the second holder in a joint investment, the NRI can save on TDS.
Applying in the name of spouse or adult children who enjoy the status of resident Indian can help an NRI save on TDS. The Fixed deposits can be gifted to parents, spouse or children who are adults before becoming an NRI. As an NRI, they can’t hold fixed deposits. However, an NRI can hold a joint deposit as a first holder with a Non-Resident Ordinary Savings Account.
The Joint liability is an arrangement to avoid TDS but individual tax on income has to be borne by both the holders. The NRIs can’t invest in mutual funds as the main holder in joint investments. Also, the NRIs would have to be a part of investment schemes offered by banks in order to trade in the Indian Stock Exchange.
Some benefits accrue
The NRIs also have a few benefits. Any income earned outside India has to be maintained in a Non-Resident External (NRE) Account, the interest earned is tax free even after two years of the return of the NRI to India. These tax deposits can be moved into the regular savings account after the period of two years.