Section 195 of the Income Tax Act: TDS on Payments to Non-Residents

In summary

Section 195 of the Income Tax Act, 1961 applies to taxable interest and other sums paid or credited to non-residents or foreign companies, other than income taxable under the head Salaries. The payer must deduct tax at the applicable rate when the income is credited or paid, whichever occurs earlier.

• Earlier provision: Section 195 of the Income Tax Act, 1961.
• Current provision: Section 393(2) of the Income Tax Act, 2025 for non-resident payments.
• Main trigger: The payment must contain income chargeable to tax in India.
• Threshold: Section 195 itself does not prescribe a general minimum threshold.
• TDS timing: Generally, at credit or payment, whichever occurs earlier.
• Tax treaties: An applicable DTAA can affect the rate or taxability, subject to its conditions.

From 1 April 2026, payments or credits are governed by the Income Tax Act, 2025. The corresponding non-resident provisions are contained in Section 393(2), which uses a table to specify the nature of income, payee, payer, and applicable TDS rate.

Section 195 of the Income Tax Act, 1961 requires a person making certain payments to a non-resident, including a foreign company, to deduct Income Tax where the payment contains income chargeable to tax in India.

It covers interest and other taxable sums, except income chargeable under the head Salaries. The obligation can apply whether the payer is resident or non-resident.

For payments made or credited from 1 April 2026, the corresponding withholding framework is contained in Section 393(2) of the Income Tax Act, 2025. The new framework consolidates the earlier TDS provisions into a tabular structure.

Residential status is determined under the applicable Income Tax provisions rather than simply by citizenship. An individual may be an Indian citizen but qualify as a non-resident for Income Tax purposes.

This distinction matters because Section 195 concerns payments to non-residents and foreign companies. Before determining TDS, the payer should establish the recipient's residential status and examine whether the income is chargeable to tax in India.

For a broader understanding of tax periods and terminology, see Assessment Year and Financial Year.

Section 195 can apply to several categories of taxable income paid to non-residents. Examples include:

• Interest: Interest income payable by an Indian payer can be subject to TDS, depending on the nature of the borrowing or instrument.
• Dividends: Dividend income paid to a non-resident can attract withholding under the applicable provisions.
• Royalties: Payments for specified rights or intellectual property can be taxable in India.
• Fees for technical services: Certain technical, managerial, or consultancy payments can fall within the relevant provisions.
• Capital gains: Payments connected with the transfer of taxable Indian assets can involve withholding obligations.
• Other taxable sums: Other income chargeable to tax in India can fall within the non-resident TDS framework.

The correct classification is important because the applicable rate can vary significantly.

Section 195 does not prescribe a general minimum monetary threshold comparable with several resident-payment TDS provisions. The central question is whether the payment contains income chargeable to tax in India.

This means a payer should not assume that a small payment is automatically outside Section 195. The nature of the payment, its taxability in India, applicable exemptions, and any treaty provisions should be assessed before making the remittance.

Under Section 195 of the 1961 Act, tax is generally deducted when the income is credited to the payee's account or when the payment is made, whichever occurs earlier. A credit to a suspense account can also be treated as a credit to the payee.

The Income Tax Act, 2025 retains the earlier broad mechanism for non-resident TDS under Section 393(2): deduction generally occurs at credit or payment, whichever is earlier.

For transactions spanning March and April 2026, the date of the earlier credit or payment event determines which Act governs the TDS obligation.

There is no single flat TDS rate under Section 195. The applicable rate depends on the nature of the income, the recipient, the relevant statutory provision, and whether a tax treaty provides a different treatment.

For the 1961 Act framework, current Income Tax Department guidance lists, among others, 20% for specified short-term capital gains under Section 111A and 12.5% for qualifying long-term capital gains under Sections 112 and 112A, subject to the applicable conditions.

For payments governed by the 2025 Act, Section 393(2) contains separate entries for specified categories and a residual entry for other taxable sums, for which the rates in force apply.

Last updated: October 2026

These rates should not be applied mechanically. Surcharge, Health and Education Cess, domestic-law provisions, and an applicable DTAA can affect the final withholding.

A Double Taxation Avoidance Agreement (DTAA) can provide a lower tax rate or different taxing rights compared with domestic law, where the taxpayer satisfies the treaty's conditions.

A payer should therefore compare the applicable Income Tax Act provision with the relevant treaty article before determining withholding. Documentation such as a tax residency certificate and other prescribed information may be required to claim treaty benefits.

A treaty does not automatically eliminate TDS. The recipient must satisfy the applicable conditions, and the payer should retain adequate supporting documentation.

Yes. Where the payer considers that only part of a payment to a non-resident is chargeable to tax in India, the applicable law provides a mechanism for approaching the Assessing Officer for determination of the appropriate taxable proportion. Section 195(2) of the 1961 Act specifically provides for this process.

A recipient can also obtain a certificate for lower withholding tax rate where the applicable statutory requirements are met.

The certificate or determination should be obtained before relying on a lower deduction. A payer should not simply apply a reduced rate based on an informal estimate of the recipient's final tax liability.

Forms 15CA and 15CB were used under the Income Tax Act, 1961 for information and certification relating to specified foreign remittances.

From 1 April 2026, the corresponding forms under the Income Tax Rules, 2026 are Form 145 and Form 146. Form 145 is the equivalent of Form 15CA, while Form 146 replaces Form 15CB for the relevant Chartered Accountant certification.

The Income Tax Department states that the substantive requirements remain broadly similar, although the forms and statutory references have changed. Form 145 has different parts depending on whether the remittance is taxable, whether an Assessing Officer certificate is available, and whether a Chartered Accountant certificate is required.

A payer making a taxable payment to a non-resident should establish the recipient's status, classify the payment, determine the applicable rate, deduct the required tax, and complete the relevant reporting and remittance formalities.

For a transaction governed by the 1961 Act, the payer may need to use the applicable PAN, TAN, TDS return, and certificate procedures.

For post-1 April 2026 transactions, the corresponding provisions and forms under the Income Tax Act, 2025 and Income Tax Rules, 2026 apply. The Income Tax Department has specifically stated that old section numbers should not be quoted for new transactions when the corresponding Section 393 table item applies.

Incorrect deduction or non-payment can create interest, penalty, reporting, and, in some circumstances, expenditure-disallowance consequences.

The payer should therefore establish the taxability of the payment before remitting funds. This is particularly important for cross-border payments involving services, royalties, interest, property transactions, and capital gains.

For payments involving foreign exchange, Foreign Exchange Management Act (FEMA) requirements may also need to be considered separately. FEMA compliance and Income Tax withholding are different obligations.

A purchase of an Indian property from a non-resident can involve TDS under Section 195 because the seller's capital gain may be taxable in India.

The applicable withholding should be determined from the nature of the asset, acquisition and transfer dates, holding period, capital-gains provisions, and the seller's residential status. The buyer should not simply use the resident-property TDS rules applicable to Section 194-IA transactions.

For related tax treatment, read - Long Term Capital Gain Tax on Property and Long Term Capital Gain Tax on Shares.

Non-residents investing in Indian securities or mutual funds may receive income that has separate tax treatment depending on the investment and type of gain.

For example, capital gains and dividend income can have different tax rules. You can compare relevant tax concepts through Income Tax vs Capital Gains Tax and Short Term Capital Gains Tax.

A non-resident investor should also consider whether a treaty applies and whether the transaction is subject to additional regulatory requirements.

A payer should complete the following checks before remitting a potentially taxable amount:

• Recipient status: Establish whether the recipient is a non-resident or foreign company.
• Nature of payment: Identify whether it is interest, dividend, royalty, technical-service fees, capital gains, rent, or another payment.
• Indian taxability: Determine whether the amount is chargeable to tax in India.
• Applicable rate: Check the Income Tax Act and any applicable surcharge and cess.
• DTAA: Determine whether treaty provisions offer a different rate or taxing right.
• Documentation: Obtain the required residency, treaty, certificate, and remittance documents.
• TDS timing: Deduct tax at the legally prescribed point.
• Reporting: Complete the applicable TDS and foreign-remittance reporting requirements.

For wider tax planning, you can also review Income Tax Slabs FY 2025-26, Inheritance Tax, Tax to GDP Ratio, and Income Tax Return Extended Date.

The correct Section 195 treatment often depends on the underlying transaction. A payer dealing with capital gains may need to consider how to file ITR 2 Form with capital gains, while an investor holding securities should understand the relevant capital-gains provisions.

The transition to the Income Tax Act, 2025 also makes it useful to understand the Direct Tax Code 2025, particularly where older articles continue to quote the 1961 Act section numbers.

Section 195 of the Income Tax Act, 1961 is a key withholding provision for taxable payments to non-residents and foreign companies. It does not impose one universal TDS rate or a general monetary threshold; the applicable treatment depends on the nature and taxability of the payment, domestic law, and any applicable DTAA.

From 1 April 2026, corresponding non-resident TDS provisions are contained in Section 393(2) of the Income Tax Act, 2025, while Form 145 and Form 146 replace Forms 15CA and 15CB for the relevant remittances.

Last reviewed: October 2026

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