Under Section 195 of the Income Tax Act, any person making a payment to non-residents (excluding companies) or to a foreign company must deduct TDS (Tax Deducted at Source) if the payment is subject to income tax. The details of such payments must be reported in Form 15CA. Before making the remittance, the person responsible for the payment is required to submit Form 15CA. This form can be filed both online and offline. In certain cases, a Chartered Accountant’s certificate in Form 15CB is necessary before submitting Form 15CA online.
This blog will help you understand what is section 195 of the Income Tax Act and other factors affecting your tax liability under it.
What is Section 195 of Income Tax Act?
Section 195 of the Income Tax Act, 1961 deals with the deduction of TDS (Tax Deducted at Source) on payments made to non-resident Indians (NRIs). This section outlines provisions to prevent double taxation and specifies the tax rates applicable to business transactions involving NRIs. TDS is deducted either at the time of crediting the payment to the non-resident's account or when the actual payment is made.
Also read about: Income tax slab for FY 2024-25
Scope and Importance of Section 195
- Section 195 applies to various payments made to non-residents, such as interest, dividends, royalties, and fees for technical services.
- It plays a crucial role in the taxation of cross-border transactions involving non-resident Indians (NRIs) and foreign companies.
- The TDS rates under Section 195 are determined based on the type of income and any relevant provisions of Double Taxation Avoidance Agreements (DTAAs).
Compliance and Reporting under Section 195
- It is mandatory for all individuals and companies making payments to non-residents that are subject to tax to comply with Section 195.
- TDS must be deducted at the prescribed rates before any payment is made to the non-resident.
- Section 195(2) allows payers to seek clarification from the Assessing Officer regarding the specific portion of income liable for TDS and the applicable rate.
Also read about: What is direct tax code
Distinct Features of Section 195
- Section 195 specifically addresses payments to non-residents, focusing on the complexities of international financial transactions.
- It ensures that tax is efficiently collected on income earned in India by non-residents.
- The section also includes provisions for real estate transactions, known as "TDS on property purchases from NRIs," which require TDS to be deducted from sale proceeds paid to non-residents.
Example of Section 195
Section 195 of the Income Tax Act details that the payer (you) must deduct TDS from the amount payable to an NRI. For example, imagine that as an Indian citizen, you have business transactions with an NRI residing outside India. However, if there are no taxes in India for the amount you are paying to the NRI, the NRI will only have to pay taxes on the total income generated in India (paid by you to the NRI) once. Hence, you must deduct TDS from this amount so that the NRI can fulfill the tax liability in India.
Once you deduct the TDS, the income tax authority requires you to deposit the deducted TDS amount with the Indian government within a specific period. However, NRIs can obtain certificates from the Indian tax authorities to register for a lower or nil withholding tax rate.
Who is a non-resident?
As per the provisions of the Income Tax Act, a person is considered a non-resident in India if they do not meet the residency criteria outlined in Section 6.
A person is deemed a resident of India in a financial year if they satisfy either of these conditions:
- Physical presence: They stay in India for 182 days or more during the financial year.
- Days of stay: They stay in India for 60 days or more during the financial year and have stayed for 365 days or more in the immediately preceding four financial years.
Exceptions for Indian citizens and persons of Indian origin (PIOs):
For Indian citizens or PIOs whose total income, excluding income from foreign sources, exceeds ₹15 lakhs during the relevant financial year:
- The 60-day threshold mentioned in the second condition above is increased to 120 days.
- For Indian citizens leaving India for employment outside the country, the 60-day threshold is increased to 182 days.
Consequently, an Indian citizen or PIO earning a total income exceeding ₹15 lakhs (excluding foreign sources) is considered a resident of India unless they are taxed in another country.
Any individual who does not fulfil these residency requirements is considered a non-resident Indian.
Also read about: Difference Between Income Tax Act and Direct Tax Code
Who deducts TDS on non-residents?
These entities are responsible for deducting TDS under section 195 of the Income Tax Act:
- Individuals
- HUFs
- Partnership firms
- Non-resident Indians
- Individuals with exempted income in India
- Juristic individuals
- Foreign companies
Non-resident Indians who have a chargeable income in India are deemed payees under section 195. One must also note that the rate of TDS under Section 195 is determined based on the type of income or payment made.
Also read: Short term capital gains tax
How TDS is deducted under Section 195?
Here are the ways to deduct TDS under section 195 of the Income Tax Act:
- Buyers are required to get their Tax Deduction Account Number (TAN) before claiming TDS deductions. They can get TAN by attaching their and the NRI’s PAN and filling out form 49B online or offline.
- The payer must deduct the TDS from the amount payable to the NRI and mention the TDS details in the sale deed of the transactions.
- The payer must deposit the deducted TDS through the TDS payment form, bank challan, government-authorised banking institutions, or the Income Tax Department of India before the 7th of the following month.
- After depositing the TDS, the buyer can provide the NRI with a TDS certificate, known as Form 16A or the Certificate of Deduction of Tax. It is compulsory to issue this form within 15 days of filing the TDS return.
Who should deduct tax under section 195?
Here are the entities that are responsible for deducting tax under section 195 of the Income Tax Act:
- Individuals: Any Indian residents making payments to an NRI or foreign companies.
- Partnerships and LLPs: Partnership firms and limited liability partnerships making payments to non-resident Indians or foreign companies.
- Companies: Indian companies making payments to non-residents or foreign companies that are liable to pay taxes in India.
- Trusts and other entities: Trusts or any other entity, such as an organisation making payments to non-residents.
Also read: How to avoid LTCG tax on mutual funds
Is there a threshold limit to deduct TDS u/s 195
Pursuant to Section 195 of the Income Tax Act, there is no specific threshold limit for deducting Tax Deducted at Source (TDS). However, TDS is mandatory only when the payment made to a non-resident is considered taxable in India. Consequently, no TDS is required for exempt income or other non-taxable income unless specifically mandated by government notification.
TDS rate under section 195 of the Income Tax Act
Here are the TDS rates under section 195 of the Income Tax Act:
Type of Income |
TDS rate |
Payments, income, or transactions arising from investments |
20% |
Interest to be paid on the sum of money availed in a foreign currency |
20% |
Income accrued from long-term capital gains |
10% |
Income accrued from capital gains acquired in the long term under Section 115E |
10% |
Other sources of long-term capital gains |
20% |
Earnings generated from capital gains acquired in the short term (Section 111A) |
15% |
Earnings from technical services paid by an Indian citizen or the government |
10% |
Earnings from royalty paid by an Indian citizen or the government |
10% |
Income from royalty earned from sources other than an Indian resident or the government |
10% |
Income from other sources |
30% |
Payment of TDS under section 195
TDS deduction for payments to non-residents (Section 195)
Deductor requirements
- TAN acquisition: A Tax Deduction Account Number (TAN) must be obtained under Section 203A of the Income Tax Act before deducting TDS.
- PAN details: Both the deductor's and the non-resident's PAN numbers are required.
TDS deduction and deposit
- Timely deduction: TDS must be deducted at the time of payment to the non-resident.
- Deposit deadline: The deducted TDS should be deposited via challan on or before the 7th of the following month.
- Payment methods: TDS can be deposited online or through authorized banks using challan 281.
TDS return filing
- Quarterly filing: A TDS return (Form 27Q) must be filed quarterly within the specified deadlines:
- Q1 (April-June): July 30th
- Q2 (July-September): October 31st
- Q3 (October-December): January 31st
- Q4 (January-March): May 31st
Electronic filing: TDS returns must be filed electronically.
TDS certificate issuance
Timely issuance: A TDS certificate (Form 16A) should be issued to the non-resident within 15 days of the TDS return filing deadline for the relevant quarter.
Also read: Long term capital gains tax
Applicable situations for TDS under section 195 of the Income Tax Act
Here are the applicable situations for TDS under section 195 of the Income Tax Act:
- The payer must deduct TDS during the transaction or when the income is credited to the payee’s account, whichever comes first.
- Income credited to suspense accounts, interest payables, or any other type of account is considered a credit to the payee’s account.
- If the income is regarding the public sector or government bank, TDS should be deducted only at the time of cash/demand draft/cheque payment.
- Under section 5(2)(b), an NRI’s total income includes all earnings arising/accrued/deemed accrued in India.
Declaration of information on foreign payments
All payers of any amount to a non-resident or foreign company are obligated to submit comprehensive and accurate details of such payments through Forms 15CA and 15CB on the income tax e-filing portal. This requirement applies regardless of whether the payment is taxable under Indian income tax law. Banks typically mandate the submission of these forms before remitting funds abroad. Non-compliance with this obligation can result in a penalty of Rs. 1 lakh under Section 271-I.
TDS return and certificates
Pursuant to the provisions of section 195 of the Income Tax Act, any individual or entity making a payment to a non-resident is mandated to obtain a Tax Deduction Account Number (TAN), withhold tax at the prescribed rates, and remit the deducted tax to the government against the Permanent Account Number (PAN) of the non-resident within the stipulated timeframe. Additionally, the payer is required to file the Tax Deducted at Source (TDS) return in Form 27Q within the quarterly due dates and issue a TDS certificate in Form 16A to the non-resident.
Implications of not paying TDS under section 195
In case entities fail to deduct and deposit TDS under section 195 of the Income Tax Act, they may face the following implications:
- The income tax authorities may cancel the allowance in the year of payment if the deducted TDS is not submitted.
- If the payer deducts the TDS but fails to deposit it within the due date, the penalty is 1.5% interest from the date of deduction to the date of final late submission.
- Under section 221 of ITA, the payer will be penalised with an amount equal to the TDS in case of failure to deposit the TDS.
- If the payer has only deducted or deposited the TDS amount partially, the payer will be penalised with an amount equal to the amount remaining to be deducted and deposited as per section 271C.
Conclusion
Section 195 of the Income Tax Act is a crucial provision that addresses the taxation of payments made to non-residents, ensuring that tax is appropriately deducted at source. Compliance with Section 195 is essential for businesses and individuals paying NRIs to avoid penalties and legal consequences. Now that you know what is section 195 of the Income Tax Act, you can ensure better taxation compliance.
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