Taxability of Dividends – NRIs
Taxability of Dividends in case of NRIs:
Further to the article on NRI residential status, there were a couple of queries raised by the readers on the taxability of dividends. Here are some of those queries and answers for the benefit of the readers.
Are dividends received by NRIs from Indian shares/mutual funds taxable in India?
Till 31 Mar 2020, dividend income from an Indian source was completely exempt in the hands of NRIs. However, from 01 April 2020, such dividends would be taxable in India and NRIs would need to pay tax at applicable rates. If there is a Double Taxation Avoidance Agreement (DTAA/tax treaty) between India and the country of residence, a beneficial rate as per the treaty could be applied. Taking the UK as an example, most dividends are taxed at 10% as per India-UK DTAA. This is subject to the availability of TRC from the country of residence.
What is TRC? Is it mandatory to avail treaty relief?
TRC stands for Tax Residency Certificate. This will be issued by the tax authorities of the respective country certifying that the individual NRI is a resident of such country. Most countries have a specific form prescribed for this purpose and an NRI who wishes to avail the treaty benefit would need to apply for the same to the respective country’s tax authorities. As per the Indian tax laws, TRC is a mandatory document required to avail any treaty relief by a non-resident.
Is withholding tax/Tax Deduction at Source (TDS) applicable in case of dividends paid to NRIs?
Yes, the dividends paid to NRIs would generally be subject to 20% withholding tax in India. However, the actual tax on dividends may vary depending on the total income of an individual and applicable slab rates. So, the differential taxes would get adjusted at the time of filing the tax return.
Can an NRI avail the beneficial rate as per the treaty at the time of tax withholding itself?
Yes. An NRI can avail of the beneficial rate on dividends at the time of tax withholding. In order to avail this, the individual needs to submit the TRC and other prescribed documents to the company. Some companies are contacting individual shareholders to confirm their residential status and other documentation to avail of the treaty benefit. Please ensure that this information is submitted to the companies so that the beneficial rate is availed at the time of withholding itself. In this way, refunds on the tax return could be avoided as well.
Can an NRI avail Foreign Tax Credit in his home country on taxes paid on dividends in India?
Generally, yes. However, this may also depend on any specific conditions/documentation requirement specified in the tax treaty or domestic tax laws of such resident country. It is advisable to go through the same and ensure that those requirements are met before availing the credit.
The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on tax implications.
AUTHOR:
A S Amarnatha B.com, FCA, LLB
Amar is a practicing Chartered Accountant specializing in the field of NRI and expat taxation. His expertise includes various facets of global mobility like expatriate tax, DTAA, social security, ESOPs etc. He is also specialized in US individual taxation both from expat and foreign national tax compliances perspectives. He can be contacted at [email protected].