For any individual responsible for making any disbursement (with the exception of dividend declared post June‘97) to a NRI or a foreign company it is mandatory to withhold tax at source at the approved rate at the time of payment of such earnings to the account of the payee or at the time of payment thereof.. However, if the organization responsible for making the payment is the Indian government, a bank in the public sector or a public financial institution, tax is to be deducted at the time of payment only.
In cases where the entity or person liable to make a payment considers that the payable amount is only partially taxable, an application can be made to the assessing authority to settle the taxable share, and adjust the tax proportionately. The Finance Act for the specific year, or the agreement to avoid double tax with the NRI’s adopted country, in case such an agreement has been made, can be referred to for the rate of tax to be deducted. In case of conflict between the rates specified by the Finance Act and the agreement, whichever is beneficial to the payee would prevail.
For certain payments, the remitter is required to provide an undertaking to the Assessing Officer along with an endorsement from a qualified Chartered Accountant in the approved form. This guarantee is to be placed before the RBI or the authorised trader/dealer in foreign currency who will further a copy to the assessing officer.
In case of over-deduction of tax, the NRI is entitled to claim a refund.
In case of interest earned from the NRE and FCNR accounts, the NRI is not liable to pay tax. However, interest on NRO accounts does invite tax, and it is the banks’ responsibility to deduct the taxable amount from the account holder’s account.
Similarly, returnee NRIs are liable to be taxed on their FCNR (B) and RFC accounts on capital gains and interest on NRE account payable.