TDS is a mechanism under the Income Tax Act, 1961, whereby tax is collected at the point of payment. The applicable rates vary depending on the type of payment, the recipient’s residential status, and the legal classification of the entity involved.
TDS provisions can be broadly categorized as follows:
For individuals:
- Resident individuals
- Non-resident individuals (NRIs)
For companies:
- Domestic companies
- Foreign companies
India’s TDS rate chart is a detailed table that specifies deduction rates for different types of transactions, such as salaries, rent, interest, dividends, and professional fees. These rates are determined based on the recipient’s status (resident or non-resident) and the nature of the payment.
Why is TDS deducted at a higher rate for NRIs?
When making payments to NRIs, Indian payers are generally required to deduct TDS at the maximum marginal rate, typically 20 percent plus applicable surcharge and cess, as a precautionary measure. This higher withholding rate is applied without factoring in deductions, exemptions, or DTAA benefits, unless the NRI has obtained a lower withholding certificate from the Income Tax (IT) Department under Section 197.
It’s important to note that this is a conservative deduction, and the NRI’s actual tax liability may be lower once their total income is assessed and applicable treaty benefits are applied.
What is a lower TDS certificate?
A lower TDS certificate is an official approval issued under Section 197¹ of the Income Tax Act, 1961. It allows the payer to deduct tax at a reduced rate, preventing excess tax deduction and reducing the need for claiming refunds later.
Who can apply for a lower TDS certificate?
Any NRI (individual or foreign company) receiving income from India that is subject to TDS can apply. Eligible income categories include:
- Salaries
- Interest (on securities and other sources)
- Dividends
- Interest (other than interest on securities)
- Rental income
- Royalties and technical service fees
- Payment of compensation on compulsory acquisition of immovable property
- Income subject to TDS during property purchase by NRIs
If your effective tax liability is lower than the default TDS rate, you are eligible to apply.
What is the eligibility for a reduced TDS rate?
Eligibility for a lower TDS certificate is assessed based on several factors, including:
- Projected total income for the financial year
- Availability of DTAA benefits
- Applicable exemptions, deductions, and carry-forward losses
- Tax residency and permanent establishment considerations
- Last three audited records (if any)
Professional tax advisors or qualified consultants can assist NRIs by evaluating eligibility and guiding them through the approval process, including documentation and coordination with tax authorities.
What documents are required to apply?
The list may vary depending on the case, but common requirements include:
- Permanent Account Number (PAN)
- Computation of estimated total income
- Copies of income contracts or agreements (rent, sale deeds, etc.)
- Previous year’s tax return (if applicable)
- Tax Residency Certificate (TRC) and Form 10F
- Passport or visa copies (for individuals)
- Supporting documents for DTAA claims
These documents are submitted to the jurisdictional assessing officer for evaluation.
What are the benefits of obtaining this certificate?
Obtaining a lower TDS certificate offers several benefits for NRIs earning income in India. It helps avoid excess tax being deducted at the source, especially when the actual liability is lower than the default rate. This reduces reliance on refund claims and shortens the cash recovery cycle.
From a compliance perspective, the certificate supports alignment with FEMA, Double Taxation Avoidance Act provisions, and other applicable Indian tax laws. It also strengthens documentation and audit preparedness, enabling NRIs to maintain a clear and traceable compliance record with tax authorities.
Conclusion
For NRIs receiving income from India, applying for a lower TDS certificate under Section 197 of the Income Tax Act, 1961, is an effective way to reduce unnecessary tax outflows and minimize refund-related delays. By assessing eligibility early and submitting a complete application, NRIs can improve their compliance profile and avoid refund processing issues.
