What is Section 195 of the Income Tax Act: TDS on NRI Income

Are you a Non-Resident Indian (NRI) earning income in India? Or perhaps you're making payments to NRIs and wondering about your tax obligations? Section 195 of the Income Tax Act plays a crucial role in how India taxes non-resident income.

When NRIs earn money from Indian sources, the Indian tax system requires tax deduction at source (TDS) under Section 195 of the Income Tax Act. This ensures that proper taxes are collected on income flowing out of India.

This article will explain everything you need to know about Section 195 of the Income Tax Act, including who it applies to, how TDS works for NRIs, and what happens if you fail to comply.

Who is a non-resident?

For tax purposes in India, a non-resident is someone who doesn't meet the requirements to be considered a resident under the Income Tax Act. The definition hinges primarily on physical presence in India during the financial year.

You are considered a non-resident if you stay in India for less than 182 days in a financial year. Alternatively, if you stay for less than 60 days in the financial year and have been in India for less than 365 days in the previous four years, you're classified as a non-resident.

This classification determines how your income is taxed in India. Non-resident status affects which parts of your income are subject to Indian taxation and at what rates.

What is Section 195 of the Income Tax Act?

Section 195 of the Income Tax Act mandates the deduction of tax at source on payments made to non-residents. This provision ensures that India collects tax on income earned by non-residents within its borders before the money leaves the country.

Section 195 of the Income Tax Act applies to all persons (individuals, companies, or other entities) who are responsible for paying any sum to a non-resident. If such payment constitutes income chargeable under the Income Tax Act, the payer must deduct tax at the appropriate rate.

The scope of Section 195 of the Income Tax Act is broad and covers various types of payments including:

• Interest payments
• Royalty fees
• Technical service fees
• Professional fees
• Rent for property in India
• Capital gains from property sales

Section 195 of the Income Tax Act serves as a mechanism to ensure tax compliance for cross-border transactions. Wondering if your international transactions fall under Section 195?

Threshold limit to deduct TDS u/s 195

Unlike many other TDS provisions, Section 195 of the Income Tax Act does not specify any minimum threshold for tax deduction. This means tax must be deducted regardless of the payment amount if it qualifies as taxable income for a non-resident.

This zero-threshold approach under Section 195 of the Income Tax Act ensures comprehensive tax coverage on all outward remittances that qualify as income. Even small payments to non-residents require TDS deduction if they constitute income taxable in India.

The absence of a threshold limit makes compliance extremely important for all payers. If you're making payments to NRIs, you must understand your TDS obligations thoroughly under Section 195 of the Income Tax Act.

How TDS is deducted under Section 195

The process of deducting TDS under Section 195 of the Income Tax Act involves several specific steps that must be followed carefully:

• The payer must first determine if the payment constitutes income taxable in India
• Obtain the PAN of the non-resident recipient
• Apply the correct TDS rate based on income type
• Deduct the tax amount before making the payment
• Deposit the TDS with the government by the due date
• Issue Form 16A (TDS certificate) to the recipient

If the non-resident doesn't provide a PAN, TDS must be deducted at the higher of the applicable rate, rate specified in the relevant provisions, or at 20%. Unsure about TDS deduction under Section 195? Check your eligibility for professional guidance by providing your mobile number and OTP verification.

TDS rates under Section 195

Type of income	Standard TDS rate	DTAA rate*
Interest	20%	10-15%
Royalties	10%	10-15%
Technical services	10%	10-15%
Long-term capital gains	20%	As per DTAA
Short-term capital gains	30%	As per DTAA
Rent for property	30%	As per DTAA
Other income	30%	As per DTAA

*DTAA rates vary by country and may be lower than standard rates.

These rates under Section 195 of the Income Tax Act may be reduced if there's a Double Taxation Avoidance Agreement (DTAA) between India and the non-resident's home country.

Applicable situations for TDS under Section 195 of the Income Tax Act

Section 195 of the Income Tax Act applies to various situations involving payments to non-residents:

• When Indian companies pay dividends to non-resident shareholders
• When interest is paid on loans taken from foreign lenders
• When royalty is paid for using intellectual property owned by non-residents
• When fees are paid for technical services provided by non-residents
• When rent is paid for property in India to non-resident owners
• When payments are made for professional services rendered by non-residents
• When consideration is paid for transfer of capital assets located in India

Each situation requires careful assessment to determine the correct tax treatment. If you're involved in international transactions, ensure you understand your obligations under Section 195 of the Income Tax Act. Looking to finance property in India? Check your home loan eligibility by entering your mobile number and OTP – you may already qualify for attractive interest rates from Bajaj Housing Finance.

Consequences of not paying TDS under Section 195 of the Income Tax Act

Failing to comply with Section 195 of the Income Tax Act can lead to serious consequences:

• The payer becomes liable to pay the tax amount that should have been deducted
• Interest is charged at 1% per month on the unpaid tax amount
• Penalty up to the amount of tax not deducted can be imposed
• Disallowance of the expense in the payer's tax computation
• Potential prosecution for wilful attempts to evade tax

Additionally, non-compliance can lead to difficulties in future international transactions and potential legal proceedings. The Income Tax Department monitors cross-border payments closely, making compliance with Section 195 of the Income Tax Act essential.

Planning your financial future carefully is important, whether it's tax compliance or home financing. Speaking of planning, Bajaj Housing Finance offers excellent home loan options for those looking to invest in property.

How to apply for Bajaj Housing Finance Home Loan

Applying for a Bajaj Housing Finance Home Loan is simple and convenient:

• Click on "Apply" in the home loan section
• Enter your personal details including name, mobile number, and employment type
• Select the type of loan you want (fresh loan, balance transfer, or top-up)
• Provide additional details like monthly income and required loan amount
• Submit your date of birth, PAN number, and other requested information
• Complete the application and wait for approval

The entire process is streamlined for your convenience. Check your eligibility for a Bajaj Housing Finance Home Loan by entering your mobile number and verifying with an OTP – you may already qualify for attractive rates and flexible terms!

Eligibility criteria to get home loan from Bajaj Finserv

To qualify for a Bajaj Housing Finance Home Loan, you need to meet these eligibility requirements:

• Indian citizenship and residence in India
• Age between 23-67 years for salaried applicants and 23-70 years for self-employed professionals
• CIBIL score of 725 or higher for optimal home loan interest rates
• Stable employment as a salaried employee or self-employed professional
• Documents required for home loan include KYC documents, income proof, and 6 months of account statements
• Regular income source capable of supporting loan repayments

Meeting these criteria increases your chances of loan approval with favourable home loan interest rates. Bajaj Finserv also considers other factors like your existing obligations and property value when determining loan eligibility.

Secure your dream home with Bajaj Housing Finance Home Loan

When planning your financial future, whether understanding Section 195 of the Income Tax Act or purchasing property, choosing the right partners matters. Bajaj Finserv offers outstanding home loan options with interest rates starting at just 7.99%*  p.a..

With a Bajaj Housing Finance Home Loan, you can:

• Borrow up to Rs. 15 crore* based on your eligibility
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The combination of competitive interest rates, flexible terms, and customer-focused service makes Bajaj Finserv an excellent choice for home financing. Check your eligibility now by entering your mobile number and OTP – you might already qualify for their exceptional home loan offers!

Taking the right steps in both tax compliance and home financing can set you up for financial success. While Section 195 of the Income Tax Act handles your tax obligations as an NRI, Bajaj Finserv takes care of your home loan needs with expertise and efficiency.

*Terms and conditions apply

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