A Detailed Guide on How NRIs Can Avoid Higher TDS

Table of Content

1. Why Do Some NRIs Face Higher TDS?

2. Role of PAN in Avoiding Higher TDS

3. How DTAA Benefits Can Help Reduce TDS?

4. Applying for a Lower TDS Certificate Through Form 128 as per the Income Tax Act, 2025 (corresponding to Form 13 as per the Income Tax Act, 1961)

5. Other Practical Ways NRIs Can Reduce Higher TDS

6. Common Mistakes That Lead to Higher TDS

7. Conclusion

8. FAQ's on How NRIs Can Avoid Higher TDS

By way of TDS, Government collects taxes^# directly from the source of income. This means a person (deductor) who must pay a certain amount to another person (deductee) must deduct tax at the source and deposit it into the Central Government's account.

When sending money out of India, it is important to understand the TDS implications for foreign remittances^# since misunderstanding withholding rules can result in too much tax being withheld at source.

Common Types of Income Subject to TDS

1. Interest Income

Interest income is earned from maintaining a bank account, lending out money, or from fixed deposits (FDs) and bonds. Unlike resident taxpayers, there is no minimum threshold (such as ₹40,000 or ₹50,000) for NRIs; TDS is deducted on the very first rupee of interest. However, NRIs can mitigate this high tax rate by claiming lower treaty rates (usually 10% to 15%) under the Double Taxation Avoidance Agreement (DTAA) by submitting a Tax Residency Certificate (TRC) and Form 41 as per the Income Tax Rules, 2026 (corresponding to Form 10F as per the Income Tax Rules, 1962)^#.

2. Rental Income

Rental income means the income generated by permitting another individual to utilise one’s property, land or machinery. The tenant is legally obligated to deduct TDS^# at a flat rate of 30% (plus applicable surcharge and cess) on the gross rent. The resident threshold of ₹50,000 per month does not apply. TDS must be deducted regardless of the monthly rent amount.

The tenant cannot use a PAN-based payment system. They must obtain a Tax Deduction and Collection Account Number (TAN) and file quarterly TDS returns in Form 144 as per the Income Tax Rules, 2026 (corresponding to Form 27Q as per the Income Tax Rules 1961)^#.

To avoid a flat 30% deduction on gross rent, the NRI landlord can apply to the Income Tax Department for a Lower/Nil TDS Certificate.

3. Capital Gains

It comes from selling a capital asset such as a home, property, or shares at a price higher than the purchase price, the transaction is subject to mandatory withholding tax (TDS)^# on the entire sale value, rather than just the net gain.

On sale of immovable property, the buyer must deduct TDS on the entire sale consideration at 20%/12.5% for LTCG and 30% for STCG, plus applicable surcharge and cess; the ₹50 lakh threshold for residents does not apply. An NRI may obtain a Lower TDS Certificate to restrict TDS to the actual capital gain. For shares and mutual funds, TDS is generally deducted at source at 12.5% on LTCG and 20% on STCG.

NRIs investing in specified foreign exchange assets may also avail the Special concessional regime under Section 214 of the Income Tax Act, 2025^#, subject to prescribed conditions.

4. Investment-Related Earnings

The income from investments is profits from the realisation of assets like FDs or shares. The payer directly deducts TDS at standard rates when these earnings exceed certain levels in the financial year.

For instance, if you are investing in an NPS for NRI account, knowing the taxation on earnings and withdrawals will help you manage the overall tax exposure.

Moreover, for NRIs building long-term wealth, investments may also include financial products such as life insurance plans, retirement-focused investments, fixed deposits and market-linked instruments. Understanding the tax treatment of different investment avenues can help optimise overall financial planning and minimise unnecessary tax deductions^# wherever applicable.

Why TDS Is Important in Tax Collection?

By withholding a part of revenue, such as rent or pay, at the source, TDS assists the Indian government in collecting taxes in advance consistently throughout the year. The tax deduction is correctly credited to the taxpayer's tax account and recorded in Form 168 as per Income Tax Act, 2025 (corresponding to Form 26AS as per Income Tax Act, 1961)^# when TDS is linked to the taxpayer's PAN.

Without a PAN link, tax credits could not be accurately recorded. This will result in refund delays, and TDS will be deducted at the higher of the prescribed rate, the "rate in force" (which is typically 30% plus surcharge and cess for NRIs), or 20%.

Why Do Some NRIs Face Higher TDS?

NRIs have to pay TDS^# with applicable rates based on the type of income. For instance, 31.2% on rental income and 31.2% up to 42.74% for NRO account interest. However, some of them have to pay higher TDS due to the following reasons:

1. Non-Availability of PAN Details

According to Section 397(2) of the Income Tax Act, 2025 (corresponding to Section 206AA of the Income Tax Act, 1961)^# if an NRI is unable to submit a valid PAN, then the tax will be deducted at 20% or the appropriate higher rate. In addition, by not having a valid PAN, the NRI cannot avail the advantage of lower withholding rates.

Therefore, NRIs need to have a valid PAN card to ensure that the proper TDS rate is charged to them.

2. Incomplete Tax Documentation

Incomplete documentation also results in higher TDS for NRIs due to higher maximum tax rates^# allowed under the rules of NRI taxation in India in the absence of adequate documentation. The incomplete documentation primarily includes a lack of PAN number, lack of residency documentation for treaty relief, and failure to obtain a low TDS certificate.

3. Failure to Claim Eligible Tax Benefits

NRIs frequently find themselves paying more TDS because, by nature, the TDS is always calculated based on gross pay at the set percentage and not after factoring in their actual tax liability^#.

NRIs are often unable to avail opportunities simply due to the lack of awareness about various options. These include DTAA, certificates of low or zero deduction, and PAN linkage. It can facilitate proper tax planning and cash management, resulting in reduced excess TDS which needs adjustment.

Role of PAN in Avoiding Higher TDS

For NRIs, the PAN plays an important role in avoiding higher TDS. Hence, you need to keep it updated.

Why PAN Matters for NRIs?

Taxpayers use the validity of PAN as an identification number. It facilitates the right reporting of tax transactions. Additionally, it also allows NRIs who meet certain criteria to benefit from reduced rates of withholding on their taxes^# as per the relevant provision of law or DTAAs.

Keeping PAN Information Updated

To update your PAN as an NRI and not fall into increased TDS rates as per Section 397(2)^#, you must:

1. Update your residence status on the Income Tax e-filing website

2. Inform your Jurisdictional Assessing Officer (JAO)

3. Provide your banks or deductors with a Tax Residency Certificate (TRC) along with Form 41.

How DTAA Benefits Can Help Reduce TDS?

DTAA prevents the same income from being taxed twice by guaranteeing that income generated in one nation by a resident of another is only taxed in one of the two. Multinational firms and people that operate internationally will particularly benefit from this.

Based on the terms of the agreement, qualifying taxpayers can benefit from reduced TDS rates, tax credits, and exemptions. To enjoy these benefits, taxpayers must, among other things, be tax residents of a country which has a DTAA agreement with India. The table below shows the benefits of both using and not using a DTAA agreement:

What Is a Tax Residency Certificate (TRC)?

A TRC assists NRIs in avoiding double taxation by demonstrating their tax residency in a particular nation. It lowers tax obligations by allowing NRIs to claim tax savings^# under DTAA. To avail the benefits under treaties, NRIs have to furnish their TRC along with other documents.

Documents Commonly Required for DTAA Claims

To avail DTAA benefits in India, NRIs have to provide relevant documents, such as:

1. A valid TRC

2. Form 41 (or any other declaration applicable, if any)

3. PAN number

The bank or any other deductor would verify these documents before applying the DTAA tax rate. Provision of accurate and valid documents ensures that you comply with the Indian tax regulations^#.

Applying for a Lower TDS Certificate Through Form 128 as per the Income Tax Act, 2025 (corresponding to Form 13 as per the Income Tax Act, 1961)

Tax Deducted at Source (TDS) is deducted from your income before you receive it. However, the standard TDS rate may sometimes be higher than the actual tax you need to pay. In such cases, Form 128 under Section 395(1) of the Income Tax Act, 2025^# allows eligible taxpayers to apply for a Lower or Nil TDS Certificate, helping them avoid excess tax deduction and improve cash flow.

Resident individuals, NRIs, sole proprietors, and companies can apply if their estimated tax liability^# is lower than the applicable TDS rate. This is especially useful for freelancers with high business expenses, property sellers, businesses with low profit margins, or those carrying forward previous losses.

To apply, taxpayers must submit Form 128 online through the TRACES portal along with documents such as financial statements, past income tax returns, and estimated income details. The Assessing Officer reviews the application before approving the lower or nil TDS rate. Consulting a tax professional can help ensure accurate filing and avoid delays or rejection.

What is Form 128?

Form 128 allows NRIs to request a lower or nil deduction of TDS when the applicable TDS is more than their estimated tax liability^#.

The application has to be made to the Income Tax Department, and the lower or nil deduction is permitted only after the tax authority approves the request and issues the requisite certificate. Then, the deductor can apply the approved TDS rate at the time of making the payments.

Situations Where Form 128 May Be Helpful

Section 395(1) of the Form 128 mechanism will benefit taxpayers whose actual tax liability^# is less than the default TDS rate. It permits tax to be deducted at a reduced or zero rate, subject to the approval of the Income Tax Department. This avoids excess tax deductions and also improves cash flow.

For example, an NRI sells property in India or repatriates funds from a long-term retirement plan for NRIs. He or she can gain substantially by a lower TDS certificate.

Other Practical Ways NRIs Can Reduce Higher TDS

Beyond requesting lower deduction certificates, Non-Resident Indians (NRIs) can proactively minimise excessive Tax Deducted at Source (TDS) through structured compliance measures:

Leverage DTAA Provisions: Submit a valid Tax Residency Certificate (TRC) and Form 10F to deductors to claim lower tax treaty rates^#.

Maintain Account Status: Keep your Permanent Account Number (PAN) operational and linked to NRO/NRE accounts to prevent higher default deduction rates.

Practice Proactive Tax Planning: Time asset sales strategically and track capital gains tax offsets^#.

Seek Professional Guidance: Consult cross-border tax advisors to navigate complex cross-border compliance and seamlessly recover excess withheld taxes through annual return filings.

1. Maintaining Accurate Financial Records

It helps NRIs to keep track of their income, investments and tax documents. Maintaining accurate financial records makes it easier to comply with Indian tax laws^#.

Proper documentation also helps to procure a Lower Deduction Certificate (LDC) on the TRACES portal via Form 128. It can be used to reduce excess TDS on transactions such as property sales, by ensuring tax is deducted on the relevant income.

Also, keeping your records organised can make it easier to file your tax return, and can be a great help in the event of tax assessments or audits.

2. Monitoring Tax Deductions Regularly

NRIs can reconcile the TDS deducted with their Form 168 and Annual Information Statement (AIS) by regularly checking the tax deductions^#. This will help them spot any discrepancies or missing tax credits and take timely corrective action.

It also allows them to avail applicable DTAA treaty benefits, apply for lower TDS certificates and avoid excess tax deduction wherever eligible.

3. Seeking Professional Tax Assistance

Professional tax help is very useful when NRIs are caught up in complicated tax situations. This can be minimising TDS, applying for a lower deduction certificate through Form 128, availing benefits under the DTAA and computing the actual capital gains accurately instead of tax being deducted on the total transaction value.

Tax professionals also assist NRIs in staying abreast of the changing tax laws and reporting requirements and adhering to applicable regulations.

Common Mistakes That Lead to Higher TDS

Taxpayers and Non-Resident Indians (NRIs) frequently incur excessive Tax Deducted at Source (TDS) due to preventable procedural oversights. Recognising and addressing these mistakes early safeguards working capital, ensures statutory compliance, and prevents unnecessary administrative delays:

• Ignoring PAN and KYC Updates

NRIs may face higher TDS if they have not updated their PAN and KYC. Inactive or mismatched PAN may attract a punitive 20% or double the normal rate of tax deduction^# under Section 397(2). It denies valid DTAA treaty claims and classifies bank accounts wrongly.

• Missing DTAA Documentation

Where DTAA documentation is not available, Indian banks, tenants or other payers may be required to deduct TDS at the higher domestic rates instead of the lower treaty rates, where applicable.

To claim treaty benefits, NRIs need to submit prescribed documents including a valid TRC, Form 41, PAN and other supporting declarations for verification. If you do not provide these documents, you may get bigger tax deductions^# and may wait longer before getting a refund or treaty relief later.

Conclusion

Understanding how NRIs can avoid higher TDS is extremely crucial for NRIs who face this problem. Primarily, non-availability of PAN details, incomplete tax documents^#, and failure to claim tax benefits lead to this issue.

NRIs must change their residency status and let their JAO know. This helps them to avoid being subject to higher TDS rates under Section 397(2) and update their PAN. Moreover, qualifying taxpayers may be eligible for tax credits, exemptions, and lower TDS rates under the DTAA terms.

While reducing higher TDS can improve cash flow and minimise unnecessary tax deductions, it is equally important for NRIs to build a well-rounded financial plan. Along with staying compliant with tax regulations, considering long-term financial solutions such as life insurance can help protect your family's financial future while you continue building wealth across borders.

FAQ's on How NRIs Can Avoid Higher TDS

1. Why is higher TDS deducted for some NRIs?

Some NRIs face higher TDS due to a lack of PAN details, submitting incomplete tax documents^#, and not claiming eligible tax benefits.

2. Can PAN help reduce higher TDS deductions?

Yes, PAN permits NRIs who meet specific requirements to receive lower tax withholding rates in accordance with applicable legal provisions or DTAAs.

3. What is DTAA and how does it help NRIs?

DTAA is a tax agreement between two countries to stop the income from getting taxed twice in two countries. DTAA facilitates NRIs with a low rate of taxation, tax credit for income already taxed, and full tax exemption^# in some cases.

4. What documents are required to claim DTAA benefits?

To claim DTAA benefits, NRIs need documents like a valid TRC, Form 41, and PAN number.

5. What is a Tax Residency Certificate (TRC)?

A TRC helps NRIs avoid double taxation by proving their tax residency in a specific country. By enabling NRIs to claim tax savings under DTAA, it reduces tax obligations.

6. How can Form 128 help reduce TDS?

Form 128 for NRIs helps to request a lower or zero TDS deduction when the applicable TDS exceeds their estimated tax liability.

7. Can NRIs apply for a lower TDS certificate?

Yes, NRIs can request a reduction in the TDS certificate as per Section 395(1)^# of the Income Tax Act through submission of Form 128 either online through the TRACES portal or the IT Department portal.

8. What happens if an NRI does not provide PAN details?

If PAN details are not available, NRIs may face an appropriate higher TDS rate or 20% as per Section 397(2) of the Income Tax Act, 2025^#.

9. How can NRIs check whether excess TDS has been deducted?

NRIs should be able to see if there is any extra tax deduction from their income by visiting the Income Tax e-filing website and comparing Form 168 or the AIS with each Form 130, 131 and 132 as per Income Tax Act, 2025 (corresponding to Sections 16A, 16B, and 16C respectively) separately^#.