PAN AADHAAR holds importance in managing finances, for Non-Resident Indians (NRIs) who are dealing with income, investments and tax regulations in India. In this article we will explore the details of income tax and investment planning for NRIs including factors like interest on accounts the need, for a Permanent Account Number (PAN) and filing income tax returns.
Interest Taxability on NRE, FCNR, and NRO Bank Accounts
When it comes to the interests generated from NRE, FCNR and NRO bank accounts it’s important for NRIs to understand the tax implications. In India the interest earned on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is not subject, to income tax. However, the interest received from NRO (Non-Resident Ordinary) accounts is taxable as, per the prevailing income tax laws.
The Mandatory Nature of PAN for NRIs
Although Non-resident NRIs are exempted under the Income Tax Act from quoting PAN in specific financial transactions under Income Tax Rule 114C, it becomes obligatory in certain circumstances. For instance, if an NRI intends to invest in shares or open a Demat account, providing a PAN becomes mandatory. Furthermore, if an NRI receives any payment subject to TDS (Tax Deducted at Source), they must quote their PAN; otherwise, TDS will be deducted at the higher rate of 20% or the standard rate applicable in their case.
Filing Income Tax Returns: The Scenario for NRIs with PAN
Section 139 of the Income Tax Act mandates filing an income tax return only if the taxpayer’s total gross income surpasses the prescribed exemption limit of income tax. For NRIs, the exemption limit from the assessment year 2015-16 is Rs. 2,50,000. Notably, Senior Citizen or Super Senior Citizen NRIs cannot avail of additional tax exemptions of Rs.3,00,000 or Rs.5,00,000. If an NRI PAN holder’s total gross income is less than Rs.2,50,000 for the assessment year 2015-16, they are not required to file an income tax return. From the assessment year 2024-25 for NRIs who choose the new income tax scheme, this exemption limit will increase to Rs.3,00,000.
Is obtaining an Aadhaar number compulsory for Non-Resident Indians (NRIs)?
When it comes to Aadhaar numbers for non-residents it’s worth noting that as, per the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act of 2016 non-residents are not required to obtain an Aadhaar Number if they haven’t stayed in India for 182 days or more during a year. However, having an Aadhaar number can be advantageous for property transactions and other provisions. It is therefore advisable for non-residents to get an Aadhaar number while visiting India.
Now let’s talk about the taxation on interest earned from NRE, FCNR and NRO bank accounts as fixed deposits. It’s important to understand the differences between them. The interest earned on both NRE and FCNR accounts or deposits is completely exempt from tax under Section 10 of the Income Tax Act. This means that there is no income tax liability on the interest earned in these accounts.
On the contrary the interest earned on Non-Resident Ordinary (NRO) accounts or deposits is subject to taxation. The regular rate of TDS deduction for interest, under Section 195 stands at 30%. Unlike taxpayers’ resident taxpayers don’t have the privilege of filing Form No. 15 G if their total interest income isn’t taxable.
However, non-residents residing in countries such as the UK, USA, Canada, Australia, can benefit from a reduced TDS rate of 15% due to Double Tax Avoidance Agreements (DTAA) between India and the respective countries. To avail this benefit, it is important for non-residents to inform their banks about their residency status and provide a “Tax Residency Certificate” (TRC) issued by their resident country’s government as per Section 90(4). This certification has been mandatory since the Assessment Year 2013-14.
If an NRI’s interest received from their NRO account exceeds the tax payable calculated with other taxable income, they should file their income tax return to obtain a refund.
TDS Rate for NRI on Interest Payments
Interest earned on deposits, in Non-Resident External (NRE) Accounts is completely exempt from taxes unless there are any restrictions mentioned in Section 10(4) of the Income Tax Act. As a result of this tax status there are no deductions made for Tax Deducted at Source (TDS), on NRE Accounts.
However, interest earned on NRO (Non-Resident Ordinary) Accounts is subject to income tax. According to Section 195 of the Income Tax Act, TDS must be deducted at a rate of 30% on interest payments made to non-residents. This is distinct from the TDS rate of 10% under Section 194A for resident taxpayers.
In cases where India has a Double Tax Avoidance Agreement (DTAA) with the non-resident’s country, specific provisions under Section 2(37A) (3) allow a lower TDS rate. Many DTAAs with countries such as the USA, UK, Australia, and Canada set the interest payment TDS rate at 15%. NRIs should inform their bank about this lower rate to avoid over-deduction and refund claims.
For availing DTAA relief from the assessment year 2013-14 onwards, NRIs must obtain a Tax Residency Certificate (TRC) from their domicile country. Moreover, the option to submit Forms 15-G or 15-H for TDS exemption does not apply to NRIs who possess no taxable income. Lastly, regardless of the interest amount paid to NRIs exceeding Rs. 5,000, the liability to deduct TDS remains applicable.