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Self-declaration of non-liability by non-resident Indians

Interest payable to non-residents falls under Sec. 195 and not under Sec. 194A, which deals with interest payable to residents. Notwithstanding the same, sub-section (1A) was inserted in Sec. 197A, where self-declaration form was permitted not only for interest payments to residents falling under Sec. 194A but also for “any income of the nature referred to.......in Sec. 194A.....”. This was with effect from July 1, 1995. With effect from the same date, Form 15H, the Form then in vogue, was also amended omitting the declaration that the declarant is a resident.

Form 15H was substituted on its being confined to senior citizens with Form 15G replacing Form 15H. Both these Forms do not contain the declaration that the declarant is resident.

This relaxation is not only for all interest income, but also income from National Savings Scheme and dividend income, when it was taxable. These changes were made to meet the demand from the non-residents, who have no taxable income in India.

In the absence of specific circular explaining these changes, many institutions responsible for payment of interest continue to follow the pre-amended law. The grievance of the readers has been aired in these columns even earlier without eliciting any response one way or the other from the authorities including the Central Board of Direct Taxes. As for the rate of tax for deduction, both Sec. 194A and 195 require tax deduction “at the rates in force”. Sec. 194A would require tax deduction to residents at 10 per cent and to a non-resident Indian (NRI) at 20 per cent under the category of “on any investment income” under Part II of First Schedule 1(b)(i). Both “non-resident” and “investment income” are defined under Explanation to this part in the words “shall have the same meaning assigned to them under Chapter XII-A of the Income-tax Act”. Chapter XII-A deals with liability of NRI on the income from all investments though held as foreign exchange assets.

The rate of tax for such income from investment is 20 per cent. Investments include assets, which are specifically defined to include shares, securities, debentures and deposits. Thirty per cent is, therefore, applicable only for residual income and not for investment income of NRIs.

It is unreasonable to imagine that 30 per cent could have been intended for tax deduction for payments of interest to non-residents, when the rate for tax deduction even for payment of interest on loan in foreign currency is 10 per cent and interest payable to foreign companies on debts is liable for tax deduction at 20 per cent, so that the inference of tax deduction at 30 per cent interest on these bonds for NRIs borders on absurdity.

Clarification to accord with law on both points is overdue. If it is considered necessary to warrant a differential treatment for payment of interest to non-residents, it may be pointed out, that there was no need to deduct tax till maturity by way of payment in “cash or by issue of cheque or draft or by any other mode” under proviso to Sec. 195(1).

As for the deduction under Sec. 80C, it is available to all individuals and Hindu Undivided Families irrespective of the fact whether they are residents or not.

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