Banks withhold income-tax at 30% on interest income paid to non-resident Indians
I am a resident of Mauritius. On a recent trip to India, a bank employee informed me that the tax on an amount in NRO account is much more than in a savings account. Is that correct?
Under the exchange control law, when an individual leaves India for employment or for business or for vocation outside India or for any other purpose indicating his intention to stay abroad for an uncertain period, his existing resident bank account should be designated as a Non-Resident-Ordinary (NRO) account due to change in his residential status. The rules for determination of residential status under the exchange control law are different from those under the income-tax law. Under the income-tax law, residential status is determined on the basis of physical presence in India. Interest income from resident savings bank account and NRO savings bank account is taxable at the same slab rate. Also, interest income from savings bank account (either resident or NRO) is eligible for deduction from taxable interest income up to Rs10,000. However, withholding tax provisions are applicable in case of NRO savings bank account.
Under the income-tax law, interest income from savings bank account paid to a ‘Resident’ (residential status as determined under the income-tax law) is not liable for withholding tax. Accordingly, banks do not withhold income-tax at the time of payment of interest income from resident savings bank account. In case of resident fixed deposits, banks are required to withhold tax at 10% if the total interest income exceeds Rs10,000. However, once the resident bank account is designated as NRO bank account, the withholding tax provisions on amount paid to a non-resident is triggered as any payment made to non-resident is liable for withholding tax. Accordingly, banks withhold income-tax at 30% (plus surcharge, if applicable and education cess) on interest income paid to non-residents.
In your case, bank is withholding income-tax as your account is an NRO savings bank account and you likely qualify as non-resident in India under the India income-tax law. However, as discussed above, the taxability of interest income from resident savings bank account and NRO savings bank account is same.
The said withheld tax may be claimed as an income-tax refund in your India income-tax return in case your total taxable income, after claiming the permissible deductions, is below the maximum amount not chargeable to tax (Rs2.5 lakh for financial year 2017-18).
In case of double taxation, applicable benefits under the relevant Double Taxation Avoidance Agreement may be explored.
What is a Tax Residence Certificate? What is it needed for?
Taxability in India depends on the following factors:
(a) Source of income
(b) Residential status
Typically, source of income lies where the services are performed, or where the asset, from which the income arises, is located. Residential status in India is determined based on the physical presence in India in the current financial year (FY) (1st April to 31st March) and preceding 10 FYs.
An individual qualifying as a Resident and Ordinarily Resident (ROR) is taxable on the global income in India, i.e. income earned in and/or outside India. Thus, there may be cases where the same income is being taxed in the resident country (i.e. India) as well as the source country. Similarly, income sourced in India may also be taxed in the resident country of the individual.
To avoid such double taxation, applicable relief may be claimed under the Double Taxation Avoidance Agreement (DTAA) between India and the other country.
Under the India income-tax law, tax residency certificate is required from the resident country tax authorities as a proof of your residency to claim applicable relief under the DTAA in India along with Form 10F.
Similarly, if you need to claim applicable relief under the DTAA in the other country, the other country tax authorities may request for a tax residency certificate from Indian income-tax authorities to prove tax residency in India. In such case, an application may be made in Form 10FA to the Indian Income-tax authorities. The tax residency certificate is issued by the Indian income-tax authorities in Form 10FB, on successful processing of the application.
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Sonu Iyer is tax partner and people advisory services leader, EY India