Introduction

For all taxpayers, resident Indians and non-residents (NRIs), the Income Tax Bill 2025 proposes to remove the concept of 'Nil TDS' for tax deducted at sources for income that are not taxable. Clause 395 of the new tax bill does include only the provision to apply for 'deduction of tax at a lower rate'. This can have a significant impact on NRIs as they might need to file income tax returns to claim the tax refund. Earlier, they could have avoided this hassle. 

This article discusses everything that you, as a non-residential Indian, need to learn about the impact of the proposed provision. 

What is the 'Nil TDS' certificate? 

The 'Nil TDS' or 'no tax deduction at source' is a TDS exemption certificate under section 197 of the Income Tax Act 1961. It was a provision that the pre-2025 direct taxation policy included to free up taxpayers, especially NRIs, from the hassles of filing returns for TDS refunds. The objective of the section was to mitigate the financial burden associated with TDS laws for income that is not taxable. Besides, it also helped avoid TDS obligation, where the taxpayer's actual tax liability is far less than the estimated TDS. 

The principal components of Section 197 were: 

• Reduced or zero tax 

• Avoiding excess deduction 

• Favour taxpayers with zero to minimal income tax obligation 

• Covered income sources that come under TDS rules 

The new tax bill shifts the provisions covered under the erstwhile Section 197 (of Income Tax Acts 1961) to Clause 395. This clause covers the provision of certificates that taxpayers need to apply for to become eligible for lower TDS rates. 

Under this clause, however, there is no provision for a 'Nil' TDS certificate. The only provision that the clause includes reads—- 

"application before the Assessing Officer for deduction of tax at a lower rate". 

This is the key context behind the removal of the 'Nil TDS' certificate for NRIs. However, this equally affects resident taxpayers. Anyone, even without any net taxable income, will be required to pay TDS for income beyond a certain threshold (as in force). Here, ‘in force’ refers to the tax rate applicable currently for a particular financial year. 

An assessing office or AO is the designated officer in the Income Tax Department responsible for validating regularity of tax returns filed.

Brief differences for NRIs:  

How does the new provision work? 

As per the new provision of Clause 395 of the Income Tax Bill 2025, NRIs will have any of the following options regarding payment of TDS on income in India. 

1. Pay TDS at the applicable rate in force in the specific period or at the lower rate as certified by the assessing officer. 

2. File tax return and claim refund for tax deducted at the sources 

3. If the person is not liable to pay income tax, the authority refunds the TDS amount. 

4. If the tax liability is lower than the TDS paid, the authority refunds the excess amount.   

Irrespective of the situation, NRIs have to bear the burden of TDS even when there is zero tax liability. The lower TDS certificate can reduce the financial burden, but it cannot be removed. Besides, they also need to bear the excess burden of filing tax returns for the said financial period.  

Let us understand the difference in tax treatments between ‘Nil TDS’ and ‘Lower TDS‘ provisions with an example of proceeds from a sale of property. 

How to get a ‘Lower TDS’ certificate?

The new provision requires NRIs receiving TDS-applicable income from India to bear the deduction at a rate in force. To reduce the financial burden of TDS for a particular income proceeds, 

• They can apply online before the respective assessing officer requesting deduction at a lower rate.  

• The AO, upon satisfaction with the grounds mentioned in the online application, may approve and issue a certificate stating the exact TDS rate applicable to that particular income. 

• Once the taxpayer submits the certificate to the seller, or the person paying the money to the NRI, will deduct at the specified rate.  

How can NRIs be more compliant? 

Indian direct taxation laws are very accommodating in lowering the tax implications on earnings in India in the hands of NRIs. However, to address and control tax evasions, the authority introduces new amendments to existing provisions from time to time. It can be challenging for NRIs to keep track of all the provisions. This may cause 'coming unintentionally in the crosshair' of compliance issues. 

Have you moved out of India for education or work? If you intend to stay outside India for a long term it is critical to convert your resident bank account to a Non-Resident Ordinary (NRO) account for depositing money earned in India. For parking your funds earned in foreign currencies you can open NRE or FCNR accounts. Rupeeflo, with its cutting-edge financial management platform, makes life easier for NRIs to open and maintain NRO and NRE accounts with major Indian banks.