Q.843 Pros & Cons of getting US

Residency Certificate to Save TDS

Question: Hi, I have a question on TDS on fixed deposits in India for NRI. I know that the TDS is around 30% for NRIs and it can be reduced to 15% under DTAA if we submit proper documentation (including the Tax Residency Certificate) to our Indian bank. So for an FD of say USD2000 = INR 130,000, my TDS will be around INR 39,000 (USD 600) @ 30% or TDS will be around INR 19,500 (USD 300) @ 15%. My question is what if I don’t submit the TRC document to my bank and get the TDS of 30% deducted, I can anyway get Foreign Tax credit of USD600 instead of USD 300 if I had submitted the TRC. I am unable to see the benefit of applying for TRC (paying a fee of USD 90) when I can anyway get the tax credit of the amount I paid in India. Regards, Chirag [January 30, 2016] Answer: While on the surface what you say would make sense to many people. Why bother paying for a US residency certificate if you can simply claim the TDS tax paid as a credit in USA! However, its not easy to beat the US tax system. Read on . . . To answer your question and make it easily understandable to most readers who may be thinking along the same lines: Assuming that you decide not to bother getting a US residency certificate and save the US$ 85/- fee. [currently fee to get a residency certificate in USA is $85 and not $90] 1. The Higher TDS rate would apply as you correctly state around 30% and using your figures, your bank would deduct US$ 600/- as TDS 2. A TDS deduction will be issued by the bank showing the rate of TDS deduction and amount deducted. You would need to provide this certificate when claiming credit for foreign tax paid, when you file your US tax return. One of the tests that must be met before the IRS allows any foreign tax paid to qualify as a credit when filing US taxes is that ‘The tax must be the legal and actual foreign tax liability’ • So is TDS tax paid in India legal? Yes! • Is the actual foreign tax liability 30%? No! because as per DTAA agreement, US citizens pay a reduced TDS rate of 15% o The IRS does not always take into consideration the amount of tax withheld abroad. The amount of foreign tax they would allow, usually is reduced by any amounts negotiated in the DTAA agreements. Since the tax agreement between USA/India states a rate of 15%, The IRS will only allow a foreign tax credit claim calculated @15%. Even though the higher rate of 30% was paid! • Using the numbers you mentioned in your email. Even though $600 was paid as TDS, only $300 would be allowed to be claimed as a foreign tax credit. Check with an accountant familiar with US tax laws. I am sure though that my assessment is correct.