Tax Deducted at Source (TDS) is a method used by the government to collect tax at the time of payment. Under this system, the person making a payment must deduct tax before giving the remaining amount to the other party. Per Section 195 of the Income Tax Act, 1961, this rule applies when someone in India pays an amount (except salary) to a non-resident individual or foreign company.
Non-Resident Indians (NRIs) must also file tax returns for income earned in India. They can claim credit for TDS while filing their tax returns to avoid paying tax again on the same income.
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?
A person is considered a non-resident in India if they do not meet the conditions laid out in Section 6 of the Income Tax Act. A person qualifies as a resident in a financial year if:
- They have stayed in India for 182 days or more during that year, OR
- They have stayed for at least 60 days in the current year and 365 days or more in the last four financial years.
If neither condition is met, the individual is classified as a non-resident.
Exception for point (2)
There are two special cases where the 60-day stay rule (point 2) is changed:
- If an Indian citizen or person of Indian origin earns more than Rs. 15 lakhs (excluding foreign income) during the financial year, the 60-day limit becomes 120 days.
- If an Indian citizen leaves the country for employment or as a ship crew member, the 60-day rule changes to 182 days.
So, a citizen or PIO earning more than Rs. 15 lakhs (not from foreign sources) is considered a resident if they are not taxed in another country. Others are treated as non-residents.
Who should deduct tax under Section 195?
Anyone who makes a payment to a non-resident that is taxable in India (except for salary or interest under Sections 194LB, 194LC, or 194LD) must deduct TDS under Section 195. This includes both residents and non-residents. The person making the payment could be an individual, a Hindu Undivided Family (HUF), a partnership firm, a company, another non-resident, or even a government organisation. If the income being paid is taxable in India, TDS must be deducted before transferring the amount to the non-resident. This ensures proper tax collection from cross-border payments.
What is Section 195 of the Income Tax Act?
Section 195 of the Income Tax Act, 1961, explains how tax should be deducted at source on payments made to non-resident individuals or entities. It applies to many types of payments, except for salaries. This section helps prevent cases where income earned in India by non-residents goes untaxed. It also aims to avoid double taxation through tax treaties. Under Section 195, the government makes sure tax is collected on time when cross-border payments are made. Businesses or individuals making such payments must check the applicable tax rate and deduct the correct amount before remitting the funds abroad.
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%.
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TDS rates under Section 195
TDS is deducted at the rate that benefits the non-resident most — either the rate from the Finance Act or the rate given under a Double Taxation Avoidance Agreement (DTAA). If DTAA rates are used, no surcharge or cess needs to be added. But if Finance Act rates apply, surcharge and education cess of 4% are added.
The TDS rates for FY 2025 are:
Particulars |
TDS rate |
Investment income for NRIs (Interest/Dividend) |
20% |
Long-term capital gains under Section 115E |
12.5% |
LTCG on listed shares/securities (after 23/07/2024) |
12.5% |
LTCG on listed shares/securities (before 23/07/2024) |
10% |
Any other LTCG |
12.5% |
Short-term capital gains from FII/funds |
20% |
Interest from government or Indian entities on foreign loans |
20% |
Royalty and technical service fees |
20% |
Winnings from games, races, lotteries, etc. |
30% |
Any other income |
30% |
If the non-resident does not provide a valid PAN, TDS is applied at the higher rate under Section 206AA.
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.
Payment of TDS under Section 195
To deduct TDS under Section 195, the person making the payment must first get a Tax Deduction Account Number (TAN) as per Section 203A. Both the payer and the NRI must also have valid PANs. TDS must be deducted at the time of making the payment and deposited using Challan 281 by the 7th of the following month. Payment can be made online or through authorised banks. After paying, the payer must file Form 27Q every quarter. The due dates are 30th July, 31st October, 31st January, and 31st May. A TDS certificate (Form 16A) must be issued within 15 days.
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Application for nil or lower TDS Deduction Certificate by the non-resident (NR)
If a non-resident feels that either no tax or less tax should be deducted from a payment they receive in India (excluding salary), they can apply for a nil or lower TDS certificate. To do this, they must fill out and submit Form 13 to the Assessing Officer. If the officer approves, a certificate under Section 197 is issued. This allows the person making the payment to deduct TDS at a lower rate or not deduct it at all. This process helps avoid paying extra tax and needing to wait for a refund through income tax return filing.
Declaration of information on foreign payments
When a person or company in India makes a payment to a non-resident, they must submit full details of the transaction through the income tax e-filing portal using Forms 15CA and 15CB. This rule applies even if the income is not taxable in India. Banks will not process the payment unless these forms are submitted. Failure to provide the required information can lead to a penalty of Rs. 1 lakh under Section 271-I. These forms help the tax authorities track foreign payments and make sure tax laws are followed for international money transfers from India.Planning your financial future carefully is important, whether it's tax compliance or home financing. Speaking of planning, Bajaj Finserv offers excellent home loan options for those looking to invest in property.
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- Stable employment as a salaried employee or self-employed professional
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