Published Jun 30, 2025 4 Min Read

What is Section 16A of the Income Tax Act?

Navigating tax laws can be challenging, especially when dealing with provisions that apply to specific payments or entities. One such provision is Section 16A of the Income Tax Act, which governs tax deductions on payments made to non-residents or foreign companies for services rendered or income earned in India. Understanding its applicability, provisions, and exceptions is crucial for businesses and individuals to ensure compliance and avoid penalties.

In this article, we will break down the key aspects of Section 16A, its implications, and how you can manage your finances effectively to stay compliant.

What is Section 16A of the Income Tax Act?

Section 16A of the Income Tax Act pertains to Tax Deducted at Source (TDS) on payments made to non-resident individuals or foreign companies for income earned in India. This section ensures that taxes are collected at the source itself, thereby simplifying the tax collection process and ensuring compliance with Indian tax laws.

For example, if a company in India pays Rs. 1 lakh to a foreign consultant for services rendered, it is required to deduct TDS under Section 16A before making the payment.

Applicability of Section 16A

Section 16A applies to payments made to:

  • Non-resident individuals who earn income in India.
  • Foreign companies providing services or generating income from Indian sources.

Common scenarios where Section 16A is applicable:

  1. Payments for professional or technical services rendered by non-residents.
  2. Royalties or fees for services provided by foreign entities.
  3. Payments for contracts or agreements involving non-residents.

Pro-Tip:

Ensure that you maintain proper documentation, such as contracts and invoices, for all payments made to non-residents to avoid disputes during audits.

Provisions of Section 16A

The key provisions of Section 16A include:

  • TDS Deduction: The payer is responsible for deducting tax at the prescribed rate before making any payment to non-residents.
  • Tax Rates: The rate of TDS depends on the nature of income and the applicable Double Taxation Avoidance Agreement (DTAA) between India and the non-resident’s country.
  • Due Date for Depositing TDS: The deducted tax must be deposited with the government within the stipulated time to avoid penalties.

For instance, if a payment of Rs. 50,000 is made to a foreign consultant, the applicable TDS must be deducted and deposited promptly.

Exceptions to Section 16A

While Section 16A applies broadly, there are certain exceptions:

  1. Income Exempt from Tax: If the income earned by the non-resident is exempt under Indian tax laws, TDS under Section 16A is not required.
  2. Lower or Nil TDS Certificate: Non-residents can apply for a certificate from the Income Tax Department to avail of a lower or nil TDS rate.
  3. Payments Below Threshold Limit: If the payment amount does not exceed the prescribed threshold limit, TDS may not be applicable.

Pro-Tip:

Consult a tax professional to determine if your payment qualifies for any exemptions under Section 16A.

Implications of Section 16A

Non-compliance with Section 16A can lead to:

  • Penalties: Failure to deduct or deposit TDS can attract penalties and interest.
  • Disallowance of Expenses: Payments made without TDS deduction may not be allowed as expenses while computing taxable income.
  • Legal Consequences: Persistent non-compliance can result in legal action by the Income Tax Department.

To stay compliant, ensure timely deduction and deposit of TDS, along with accurate filing of TDS returns.

Conclusion

Understanding the applicability and exceptions of Section 16A of the Income Tax Act is essential for businesses and individuals dealing with non-resident payments. Proper compliance can help you avoid penalties and ensure smooth financial operations.

If you are managing expenses like home loans alongside your tax obligations, consider exploring financial products that offer added benefits. For instance, Bajaj Finserv Home Loans provide competitive interest rates starting at 7.49%* p.a., along with repayment flexibility of up to 32 years. Additionally, you can save on taxes under Sections 80C and 24(b) of the Income Tax Act by claiming deductions on your home loan principal and interest.

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Frequently asked questions

What is section 16A of the Income Tax Act?

Section 16A mandates the deduction of TDS on payments made to non-residents or foreign companies for income earned in India.

 

Who is responsible for deducting tax at source under section 16A?

The payer, such as an individual or business making the payment to a non-resident, is responsible for deducting TDS under Section 16A.

 


 

What is the rate of tax deduction under section 16A?

The rate varies based on the nature of income and the applicable DTAA. For specific rates, consult the Income Tax Department or a tax professional.

 

Is there any threshold limit for tax deduction under section 16A?

Yes, if the payment amount does not exceed the prescribed threshold, TDS may not be applicable.

 

What is the due date for depositing tax deducted under section 16A?

TDS must be deposited with the government by the 7th of the following month in which the deduction was made.

 

Is it mandatory to deduct tax at source under section 16A for all payments made to contractors or subcontractors?

No, Section 16A specifically applies to payments made to non-residents or foreign companies, not to domestic contractors or subcontractors.

 

Can the contractor or sub-contractor claim a refund of tax deducted under section 16A?

Yes, the recipient can claim a refund by filing their income tax return if the TDS deducted exceeds their tax liability.

 

What is the penalty for non-compliance with section 16A?

Penalties include fines, interest on delayed payments, and possible legal action for persistent non-compliance.

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