How is Dividend and Interest Taxed for NRIs?
Taxes / Jul 27, 2023
_1692270909.png)
Introduction
For Non-Resident Indians (NRIs), managing financial affairs across borders can be a complex endeavor, especially when it comes to understanding the taxation on various investment incomes. Two crucial components that NRIs often encounter in their investment journey are dividends and interest. In this blog, we will delve into the taxation aspects of dividends and interest for NRIs, shedding light on the rules and regulations that govern these earnings.
Taxation of Dividends for NRIs
1. Dividends from Indian Companies: As an NRI, if you hold shares of Indian companies, any dividends received from these investments are subject to taxation. The Finance Act of 2020 introduced a new provision, making dividend income taxable in the hands of the shareholder.
2. Dividend Distribution Tax (DDT): Before the amendment in 2020, Indian companies were required to pay Dividend Distribution Tax on the dividends they declared. However, after the revision, the DDT was abolished, and instead, the dividends became taxable in the hands of shareholders, including NRIs.
3. TDS (Tax Deducted at Source): Companies are now required to deduct TDS at the rate of 10% on dividend payments exceeding INR 5,000 in a financial year. This rate may vary depending on tax treaties between India and the country where the NRI resides.
4. Tax Treaty Benefits: NRIs residing in countries with which India has Double Taxation Avoidance Agreements (DTAA) may avail of reduced TDS rates, subject to providing necessary tax residency certificates.
Taxation of Interest for NRIs
1. Interest on Bank Deposits: NRIs often maintain Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts in India. The interest earned on NRE accounts is tax-free, meaning there is no tax liability in India. On the other hand, interest earned on NRO accounts is subject to TDS at the rate of 30% (plus applicable surcharge and cess), but it can be eligible for relief under DTAA.
2. Interest on Fixed Deposits: The interest earned on fixed deposits with Indian banks is treated similarly to interest on NRO accounts, with TDS applicable at 30% (plus surcharge and cess) unless reduced by DTAA benefits.
3. Interest on Bonds and Securities: Interest earned on various bonds and securities is also subject to TDS at 10%, with the same DTAA benefits potentially applicable.
4. Tax-Saving Fixed Deposits: NRIs cannot avail of tax benefits on fixed deposits eligible for tax deduction under Section 80C of the Income Tax Act.
Conclusion
Understanding the taxation of dividends and interest is crucial for NRIs to ensure compliance with Indian tax laws. The recent changes in dividend taxation have shifted the responsibility from companies to shareholders, including NRIs. It is essential for NRIs to keep themselves updated on the latest tax regulations, especially regarding TDS rates and DTAA benefits. Seeking professional advice from tax experts or financial advisors can help NRIs optimize their investments and tax liabilities.
As an NRI, staying informed about the tax implications on dividends and interest can enable you to make well-informed investment decisions and ensure a smooth financial journey across borders. Remember to keep track of any amendments in tax laws and take advantage of available DTAA benefits to maximize your returns and minimize your tax burden.
Share this with others:
