All payments made to NRIs involve TDS deductions. This is applicable even if their income falls within the income tax slab of 0% - which is for those earning an annual income below ₹2.5 lakh. Owing to Section 195 of the Income Tax Act, TDS deductions for NRIs are applicable to every type of income.
TDS deductions for NRIs are applicable on most common types of income earned such as:
- Rent from property located in India
- Sale of property
- Interest earned from NRO (Non-Resident Ordinary) accounts is subject to TDS deductions, but NRE (Non-Resident External) and FCNR (Foreign Currency Non-Residence) accounts are not
- Sale of mutual funds, bonds and shares
- Payments received for providing services to customers based in India
If NRIs file Income Tax Returns (ITR) after the financial year has ended in India, they can claim refunds on the deducted TDS. For an NRI to claim a refund on the TDS deducted, he/she must self-compute their income and tax liability according to existing slab rates.
If an NRI does not file his/her return before July 31st of the next financial year, the delay will attract significant penalties.
Since Financial Year 2017-18, it has been mandated that NRIs cannot file ITR-1 (Income Tax Returns 1) form, and they must instead file the ITR 3 or ITR 2. If an NRI has a business located in India from which they are generating income, they are required to file ITR 3. However, if they do not generate income from business and are instead earning through capital gains from the sale of bonds, shares or mutual funds or property, or through rent, they can file ITR 2 instead.
If their income is below ₹2.5 lakh but the NRI wants the additional TDS that has been deducted to be refunded, they should also file ITR.
If an NRI decides to file ITR 2 himself/herself, they are advised to download the Java or Excel utility from the website of the Indian Income Tax department and select only the parts of the document applicable to their individual situation. NRIs must remember that it takes at least 6 months to issue refunds. Refunds are issued with an annual 6% interest. NRIs should also take advantage of deductions which are available owing to Section 80C and can help them further reduce tax liability.