Category: Worldwide disclosure facility

TDS on NRO deposits in India

UK residents can restrict Indian bank to deduct TDS at 15%

Usually Indian bank deduct c31% as tax on the interest they pay on NRO deposits – savings bank or fixed deposits.

A UK resident can use double taxation avoidance agreement between India and UK to restrict Indian banks to deduct TDS at 15% (treaty rate).

Usually, Bank ask for Form 10F and a self-declaration (sample forms).

Please be aware, India UK DTAA restricts FTCR at 15% for interest income even if tax suffered is higher i.e. c31% in this case.

Incase UK resident has deposits in other countries, similar forms will be required. Please check with you bank. Treaty rates for different countries can be access via DTAA digest.

This exercise is only worth if taxpayer has material deposits.

Bonus material

You may find another blog post on similar topic useful – UK resident earning overseas interest income from India

For further reading, visit our Worldwide Disclosure blog.

Taxation of investments in Indian Mutual Funds in the UK

Gains made on disposal of Indian mutual funds are taxed at highest marginal rate of taxation

HMRC has classified overseas mutual funds as `reporting` and `non-reporting`.

Reporting means mutual funds which provided certain data to HMRC on periodic basis. HMRC publishes a list of these funds monthly. In case your mutual fund is such a fund your gain will be taxed as Capital Gains.

Non-reporting means any mutual funds which do not comply with these requirements.

Recent article in taxation magazine states that not a single mutual fund from India is a reporting fund. For a list of reporting offshore funds click here.

When you dispose offshore non-reporting mutual funds

Any gain on disposal of investments in Offshore non-reporting mutual funds (i.e., any fund based outside UK) will be taxed at the highest marginal rate of income tax and not as capital gains.

Double whammy – in case of loss, the loss is only allowed to be set-off against capital gains and not against income .

Lastly, annual capital exemption is also not available to such gains.

Conclusion: From a tax perspective, if you wish to invest in Indian stock market better invest directly in stock and shares and not via a Mutual fund.

Bonus:

  1. An article with an example.
  2. This is a complex area of law; further information can be seen at HMRC Investment Funds Manual – IFM12000 and IFM13000.
  3. Offshore gain is treated for tax purposes as miscellaneous income – [see Tolley Income tax annual 50.3] to be mentioned in SA106 2023 in Box 41.

Further reading:
1. HS265 Offshore Funds
2. Visit our Worldwide Disclosure blog.
3. To know about taxation of UK mutual funds.

Taxation of Interest Income from NRE and FCNR Deposits for UK Residents

NRE and FCNR get tax credit even without paying taxes in India

For basic guidance on foreign income see gov.uk: link.

Is overseas interest income taxable in the UK?

Example, a UK tax resident have a fixed deposit in India and earns interest on it, does he have to pay tax on that earned interest income in UK?

Brief answer is Yes. Source: see point 6.62 of RDR1 guidance.

Thus, all interest earned on NRO,NRE or FCNR deposits (savings and fixed deposits) are taxable in the UK.

This blog post deals with NRE and FCNR deposits for NRO see link.

Is there any relief, as this income may suffer tax twice once in India and again here in the UK?

Yes, Double Taxation Relief (DTR) is available see our blog DTR.

Besides DTR does UK India Double taxation agreement have any other provision which can lower my tax bill? Yes, in case of NRE and FCNR accounts there are special provisions, read below:

  1. Double Taxation Avoidance Agreement (DTAA) provides for credit to be given for tax `spared` (i.e. not paid) in India under the provisions of Indian law set out in Article 24 (4)
  • Tax spared relief is restricted to a period of 10 years from the tax year from which tax exemption is first granted from Indian income tax – Article 24 (5). HMRC has clarified that 10 year period is for each account. So new account will restart the time period. Note commercial banks in India usually make fixed deposits for 10 years or less. Please ensure to get a new account number allocated for the new fixed deposit.
  • Credit for `tax spared’ is limited to the amount of tax which would otherwise have been paid under the terms of the agreement. As per UK India DTAA interest can be taxed maximum @ 15% Article 12 (2). Thus, relief restricted to 15%.
  • DTAA does not mention any certification requirements.
  • Income under sections of Indian Income Tax Act 1961 as mentioned in DTAA:
SectionsType of Income
10(4)Non-Resident (External) Account
10(15) (iv)FCNR Deposits
Other sectionsNot relevant for present scenario

Conclusion:

Interest on NRE and FCNR Deposits gets Foreign Tax Credit Relief without paying tax in India. This relief is restricted to 15% of gross interest.

Sources:

  1. Double Taxation Relief Manual DT9553
  2. International Manual INTM161270
  3. UK India DTAA Agreement – Synthesized text
  4. Source of Indian Income Tax text
  5. Institute of Chartered Accountants of India – Taxation of Non-residents 2018 version.

Bonus:

  1. Prior to 1st April 2020 dividends distributed in India were subject to Dividend Distribution tax (DDT). Indian residents did not need to pay tax on dividends, but non-residents were at a disadvantage as they could not get credit for DDT.

Now DDT has been abolished, dividend will be taxable in the hands of the shareholders.

2. Interest on Fixed Deposits – interest arises and is taxable each year as it is credited. see Example 2 on SAIM2440

3. Interest Certificate – Your bank can easily provide this certificate for individual tax years. It will make tax computations much easier.

4. For further reading, visit our Worldwide Disclosure blog.