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POSTED BY ON July 19, 2012 8:48 am COMMENTS (11)
Hi I just started reading about TDS and income tax. I am going to start working soon in california and I have a question regarding TDS or general FD investments for NRIs:
Let’s say I save USD 20,000 after tax cuts in the US (total taxes are about 40% there). I decide to invest 10 lakh INR in india, should I choose an NRE FD or an NRO FD account? what will be my return in each case (after all further tax cuts)?
Let’s say my bank offers 9% return for an FD of 1 year.
in an NRO account, if there is a 30% TDS, (Is it 30% TDS even if I show my PAN card? will my PAN card be useless if I am an NRI? I heard TDS is 11.3% for other cases..what are those? this site shows TDS as 11.3% http://www.rupeetimes.com/article/fixed_deposits/complete_guide_to_tds_on_fixed_deposits_in_india_1006.html ) will my return be 70%(9%(10 lakhs)) = 0.63 lakhs? Do I need to pay anything extra here in the US based on this return of 0.63 lakhs?
what’s a DTAA? I am sure there must be a DTAA scheme for india for california residents.
If i make use of a DTAA, will I be able to reduce TDS in India or the extra tax I need to pay back in the US after I get the 0.63 lakh?
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There is one more angle with DTAA (and tax refunds from India) that you need to consider. To the best of my knowledge – below applies.
Say – your India income from FD interest is 10 Lakh, TDS 30% deducted at source. Your US tax rate is 40% for this income head but as per DTAA US tax authorities will only give you credit for 15% tax paid in India – so when you are filing your US tax – you will have to pay 25% on 10Lakh. – your tax PAID suddenly increased to (30%+25% = 55%) and not 40%. Now in order to get it back to 40% as allowed – when filing the tax in India you will need to show this income in the DTAA section (instead of how you would show if you were a resident) – clearly list the clause in DTAA and mark tax rate as 15%; and claim the rest as refund. (30-15 = 15). So net tax is – 15% paid in India and 25% in US for total 40%. [of course this math does not take into account the overall tax return for India as there are exemptions available and so on – so if you have no other income – your refund from India MAY go up; and your tax in US MAY similarly go up a bit). See ITR2 Schedule OS Income from other sources – part 1.f.iii – ” FOR NON-RESIDENTS – Income Chargeable to be taxed under DTAA”.
@PK @Ashal – please advise.
Dear Ashal,
Sorry for the late reply, my parents are retired now, but they used to earn 5+ lpa earlier. I guess their pension now also far exceeds 2.5L. I guess I can pay for the tax too every year..and just use the interest from their accounts. Thanks for the info.
Anon,
Apologies it appears that your DTAA question got lost in this post.
DTAA in most cases asks the taxation to be higher of any of the countries. If India charges 40% and US asks 20%, then you would have to bear 40%. On the contrary, if India says 20%, and US asks for 40%, then you have to pay additional 20% in US and claim deduction of 20% of India tax which is already deducted.
From US Tax perspective, both NRE & NRO would have the same final impact. However, where NRE scores an edge – you don’t have to pay taxes in India and takes away the pain point of maintaining your taxation hassles in India and controlling every thing from US.
@PK,
assuming there’s no gift tax and a 30% tax on the interest rate from their account, my money will still be growing at 6.65% (if the interest itself is greater than 10 lakh, 70% of 9.5%) but I don’t think there’s any extra tax on the gift/starting amount is there?
Dear Anon, there is no question of gift tax for parents. As & when the income for your parents, preferably mother as I assume she is a house wife, crosses 2L Rs. for under 60 age or 2.5L Rs. for above 60Y age, then only the question of tax arise. In between your parents can file form 15G or H to save on TDS on bank FDs.
Thanks
Ashal
Dear Anon, if you are gifting X amount regularly to your parents, there is no issue & no question ‘ll be asked by Indian authorities or US. No Gift Tax is there in India.
Please do quote what’s the income status of your mother & father with their age?
Thanks
Ashal
according to the article here: http://trak.in/india-tax/gift-tax-india/ … if my spouse puts my gift in her FD account, will I have to pay tax on the interest? I find that totally ridiculous..it’s the same as me having an NRE/NRO account.
@PK thanks for the answers. Your solution looks appealing but I wonder if it’s legal. Do I have to answer to any authority as to why a large sum of money keeps disappearing from my account (although it keeps re-appearing in my parent’s FD accounts every year)? I think I still need to pay a gift tax though.
If I “gift” my parents something above 10 lakh rupees, I/(my parents) would still be losing flat 30% off due to gift tax on whatever I’m trying to send wouldn’t I? although there is about 70% x 9% or 6.3% increase on whatever that’s left, I would still be at a loss. I really hope my logic here is flawed about the gift tax cut!
@Anon Smith,
As far as I know gifting to parents doesnot attract any gift tax. Many people do it.
Also, if parents are senior citizens, then its an added advantage of 0.5% more interest.
However, the income from the FD will come into their income bucket and they may have to pay tax based on their total income.
Can someone clarify on this?
PK
Anon Smith,
By the way, the TDS is 30% in NRO FD though have a PAN CARD.
PK
Anon Smith,
From the tax perspective, i think both NRE FD and NRO FD are the same. In case of NRO FD, 30% TDS is deducted at source(bank) and remaining(may be around 10% or more) will have to paid during US tax filing. In case of NRE FD, there is no TDS; however the entire (40% or more) will have to be paid during US tax filing. Also, this income will get added to your yearly salary and the total tax paid on this intrest amount could be above 40%.
As far as I know there is no escape from paying these taxes. The only thing decision is in choosing a better interest rate. NRE FD gives good rate like around 9.5% for long term (like 10 yrs).
Another way to think could be, put the FD in someone else’s name; like your spouse(if you are married and if she is not employed in US) or on the name of your parents in a normal Indian bank FD. I dont think You can avoid paying huge taxes as long as the FD is in your name.
PK