TDS on NRI FDs: What you should know

If you are a Non-resident Indian and are looking to invest your hard-earned money, you could consider NRI Fixed Deposits (FDs). They are easy to invest in, they offer attractive interest rates and ensure afety of your funds. But before you invest in NRI FDs, it is crucial to understand the tax implications, particularly the Tax Deducted at Source (TDS), applicable in NRI FDs.

What is TDS?

TDS is a means of collecting income tax in India. TDS for NRI FDs is the tax deducted by the bank from the interest earned on the FDs, before the interest is credited to your account.

TDS for NRO Deposits

As an NRI you may earn income in India by way of rent, pension, interest earned from Fixed Deposits and NRO Savings Accounts. This income is taxable. Thus, FD interest income from an NRO Account is subject to taxation and TDS. The TDS on NRO FD interest for NRIs is subject to a rate of 30%, plus applicable surcharge and cess (i.e. 30*4% = 31.2%)

TDS on NRE Deposits

The funds invested in a Non-Resident External (NRE) FD is derived from income earned abroad and not in India, which makes it non-taxable.

An NRE Account is entirely tax-free, meaning both the Fixed Deposits and savings in NRE Accounts, along with the interest earned on them, are exempt from income tax, wealth tax and gift tax in India.

While there is no TDS on interest on NRE deposits, once you lose your NRI status and your NRE FDs are redesignated as resident Indian accounts, your investments will be subject to TDS at the applicable rates.

Double Taxation Avoidance Agreement (DTAA)

India has signed Double Taxation Avoidance Agreements (DTAAs) with multiple countries to provide NRIs relief from being taxed in both countries. You can claim tax benefits if you are a resident in a country that has a DTAA with India.

This is particularly beneficial for NRO Deposits, where you can claim a concession in tax deduction. For example, if you are a US citizen, the applicable tax rate under the DTAA is 15%. Note that under Section 90(2) of the Income Tax Act, 1961, you have to provide a Tax Residency Certificate (TRC) containing prescribed details issued by the government authority of the country in which you reside, to avail of benefits under DTAA.

Also Read: Top 5 reasons to open a Digital Fixed Deposit

Conclusion

Understanding the tax implications of NRI Fixed Deposits in India is crucial for effective financial management. While NRO Accounts are subject to a 30% TDS on interest income, NRE Accounts are tax-free. However, if your NRI status changes, NRE Accounts will be taxed as resident accounts. You can use DTAA to significantly reduce your tax burden on NRO Deposits. If you are planning to invest in NRI FDs, consider Axis Bank's Fixed Deposit Plus. It offers attractive interest rates and flexible interest payout options, making it an ideal choice for your investment goals.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.