I’m an NRI and want to know if TDS (tax deducted at source) is applicable on dividends for me. I’m a resident of Dubai and as such, there is no tax certificate issued and I can’t avail benefits under double taxation as my salary is tax-free in Dubai. I don’t have any other source of income in India. Please advise.
—Name withheld on request
Effective FY2020-21 and onwards, dividend income from shares of an Indian company is taxable in India. In the case of a shareholder qualifying as ‘non-resident’ in India under the Indian income tax law, dividend income is taxable at 20% plus applicable surcharge and 4% health and education cess (maximum marginal rate of 28.5%) on a gross basis. In the case of a shareholder qualifying as a ‘resident’ in India under Indian law, dividend income is taxable at applicable slab rates.
However, under the Double Taxation Avoidance Agreement (DTAA) between India and the UAE, such dividends may be taxable at the rate of 10%. To apply for the beneficial rate of 10%, you will need to qualify as a ‘resident’ of the UAE under the DTAA, obtain a tax residency certificate from the UAE and furnish along with Form 10F to the Indian dividend-paying company. Under the DTAA, an individual qualifies as a ‘resident’ of the UAE if he/she is physically present in the UAE for at least 183 days in the calendar year.
In the case of a ‘non-resident’ shareholder, the Indian company will withhold tax on dividend income either (a) at 20% plus applicable surcharge and 4% health and education cess or (b) at a rate under the DTAA. You will need to inform the Indian company if you intend to claim the beneficial rate of 10% under the DTAA and furnish the declarations.
Further, effective FY2020-21 and onwards, an individual may qualify as a ‘resident but not ordinarily resident’ (RNOR) in India if the individual (i) is a citizen of India; (ii) earns total income (other than income from foreign sources) exceeding ₹15 lakh during the financial year under consideration; and (iii) is not “liable to tax” in any country or territory by reason of his/her domicile or residence. Furthermore, the term “liable to tax” is defined in relation to a person and with reference to a country to mean that there is an income tax liability on such person under the laws of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the laws of that country.
An individual qualifying as an RNOR is liable to tax in India only on (a) his/her India-sourced income including incomes deemed to accrue or arise in India and (b) foreign-sourced income if derived from a business controlled in or a profession set up in India.
Accordingly, if you qualify as an RNOR in India under the income tax law as per the above provisions, the dividend income will be taxable at applicable slab rates and not at the flat rate of 20% (plus applicable surcharge and cess). Even in such a case, you may apply the beneficial rate of tax of 10% under the DTAA, provided you qualify as a ‘resident’ of the UAE under the DTAA, obtain a tax residency certificate from the UAE and furnish along with Form 10F to the Indian dividend-paying company.
For this purpose, you will need to satisfy the ‘tie-breaker’ test for residency in favour of the UAE. The ‘tie-breaker’ test is prescribed under the DTAA and there are sequential tests to determine in which country you have a permanent home, centre of vital interests, habitual abode and nationality.
Thus, in your case, you will need to first determine your residential status under the Indian income tax law, determine the rate of tax applicable on dividend income based on your residential status under the law and then apply the beneficial rate of tax under the DTAA, subject to satisfaction of the conditions stated above.
(Sonu Iyer is tax partner and people advisory services leader, EY India.)