Section 195 of Income Tax Act

Section 195 of the Income-tax Act, 1961 outlines the TDS rules for individuals making payments to NRIs or foreign companies, excluding salary payments. NRIs are required to file tax returns for their income earned in India.
Section 195 of Income Tax Act
3 min
25-June-2024

Section 195 of the Income Tax Act details the Tax Deducted at Source (TDS) guidelines for income generated through business transactions with non-resident Indians (NRIs), including foreign companies. It is one of the numerous sections included in the Income Tax Act of 1961, which serves as the constitution for income tax in India. If you are an Indian citizen conducting business operations with an NRI, you must deduct TDS on the amount under section 195 of the Income Tax Act.

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?

Section 195 of the Income Tax Act of 1961 provides rules and regulations related to TDS deductions on income or payments of non-resident Indians (NRIs). In general, NRIs are Indians living abroad or persons of Indian origin residing outside India. Section 195 of the Income Tax Act details the provisions that avoid double taxation, a situation where the same income is taxed twice in two different countries.

Furthermore, the section focuses on TDS rates applicable to such business transactions with NRIs and tax deductions available in the process. Some types of payments covered under the section include royalty, interest, dividends, and capital gains.

Also read about: Income tax slab for FY 2024-25

Understanding section 195 with example

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 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.

Also read: Short term capital gains tax

Ways to deduct TDS u/s 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

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

It is the responsibility of the buyer or the payer to deduct the TDS from the amount payable to the NRI. However, after depositing the TDS, the entities must file quarterly income tax returns by submitting Form 27Q.

TDS return dates are as follows:

  • First quarter from 1st April-3Oth June: File TDS return by 15th July.
  • Second quarter from 1st July to 30th September: File TDS return by 15th October.
  • Third quarter from 1st October to 31st December: File TDS return by 15th January.
  • Fourth quarter 1st January to 31st March: File TDS return by 15th May.

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.

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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Frequently asked questions

What is the new amendment of Section 195?
The new amendment is the addition of sub-section 7, where the government is allowed to specify a class of persons or cases for submitting applications to Assessing Officers to determine the appropriate proportion of the sum chargeable.
What is section 195 with example?
Section 195 of the Income Tax Act provides the rules for deducting TDS by an Indian national making payments to an NRI. For example, assume you are an Indian resident making payments to an NRI or a foreign company for business purposes. In that case, you must deduct and deposit TDS with the Indian government.
What is the limit of Section 195 of the Income Tax Act?
There is no threshold limit for TDS under section 195 of the Income Tax Act. However, the payer is responsible for deducting TDS when the payment made to an NRI is taxable in India.
Who is responsible for deducting TDS under Section 195?
Individuals, partnerships, LLPs, companies, trusts, and other entities are responsible for deducting TDS under section 195 of the Income Tax Act.
What types of payments fall under Section 195 for TDS deduction?
Payments falling under section 195 include interest, royalty, fees for technical services, dividends, capital gains, etc.
Are there any exemptions from TDS under Section 195?
Yes, some exemptions exist, such as income not chargeable in India, lower or nil TDS certificate, DTAA provisions, and prescribed payments.
How is the rate of TDS determined under Section 195?
The TDS rate under section 195 of the Income Tax Act is determined based on the payment mode or the type of income.
What is the procedure for applying a lower or nil TDS rate under Section 195?
The process for applying requires submitting Form 15E to the Assessing Officer. The AO analyses the application and approves or rejects it based on the amount being liable for tax in India.
What are the consequences of non-compliance with Section 195?
There are numerous consequences if the payer fails to comply with section 195. The penalties include 1.5% interest or cash amount equal to the TDS amount or the difference between the full and the partial amount submitted.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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