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

Section 195 of the Income Tax Act deals with TDS (Tax Deducted at Source) for non-resident Indians. Non-resident Indians (NRIs) need to pay taxes on taxable income in India. The rate of TDS deduction varies based on the source of income and ranges between 10% and 30%.
Learn in detail about this section here to deduct applicable TDS from payments made by NRIs.

Who is a Non-Resident Indian?

Section 6 of the Income Tax Act defines a non-resident Indian as a citizen of the country residing abroad. On the flip side, a resident Indian is a person fulfilling the following conditions:

• A person staying in the Indian sub-continent for at least 182 days during a financial year.
• An individual stays in the Indian sub-continent for 60 days during a specific financial year and at least 365 days during the next 4 financial years.

There are specific exceptions for Indian citizens and Persons of Indian Origin (PIO):

• In case the total income is more than ₹15 lakhs during a financial year for 60 days. It might further be substituted with 120 days.
• Indian citizens who leave India for employment abroad for a period of 60 days will be substituted with 182 days.
• If an individual’s total income (excluding foreign income) exceeds ₹15 lakhs in a financial year, the 60-day threshold may be extended to 120 days.
• In the case of Indian citizens leaving India for employment or as crew members of an Indian ship, the 60-day requirement is replaced by 182 days, maintaining their resident status for a longer period.

What is Section 195 of the Income Tax Act?

Section 195 of the Income Tax Act deals with TDS (Tax Deducted at Source) deductions on the income of non-resident Indians or payments made by them. This section further highlights the applicable tax rate, wherein taxpayers can avoid double taxation. TDS deduction is applicable on the date of payment or the date of income credit for non-resident Indians.

Section 195 of the Income Tax Act Applicability

Section 195 mandates Tax Deducted at Source (TDS) on payments made to Non-Resident Indians (NRIs) or foreign entities, provided the income is taxable in India. Here are the persons or entities who deduct TDS:

• Any person (resident or non-resident) making a payment (other than interest covered under Sections 194LB, 194LC, or 194LD or salary) to a non-resident, where such payment is taxable in India.
• If you are making a remittance or payment to an NRI, you are required to deduct TDS under Section 195, regardless of your residential status (Indian resident or NRI).
• In addition, an individual, partnership firm, Hindu Undivided Families (HUF), NRI, or an artificial juridical person such as a corporation, non-profit organisation, government agency or foreign company can deduct tax.

Section 195 of the Income Tax Act Threshold Limit

Even though there is no specific threshold limit for TDS deduction under Section 195 of the Income Tax Act, deductors can deduct tax solely when the income of an NRI is taxable in the Indian sub-continent. The deductor cannot deduct TDS on exempt income or income that is non-taxable in India. However, if the government informs a deductor to deduct TDS, the deductor will have to abide by the norms. 

Rate of Tax Under Section 195

The TDS deduction rate under Section 195 for a payee is as follows:

• The rate stated under the Finance Act of the relevant financial year.
• The rate specified in the Double Taxation Avoidance Agreement (DTAA) between India and the country where the non-resident (payee) resides, whichever is more beneficial to the taxpayer.

Notably, a 4% surcharge and cess apply to the rate declared by the Finance Act. On the flip side, no surcharge or cess is applicable on the rates declared by DTAA.

The Finance Act declared the following rates:

Notably, if the payee cannot submit PAN card details, a higher rate of TDS applies.

TDS Payment Under Section 195 of the Income Tax Act

Here are the ways to deduct TDS under Section 195:

• The TDS deductor needs to have a TAN (Tax Deduction Account Number) under Section 203A of the Income Tax Act before they deduct TDS. Further, the deductor needs to have a PAN number. 
• TDS needs to be deducted while making the payment to NRIs.
• The buyer should deposit TDS using a challan for TDS payment within the 7^th of the following month's TDS deduction.
• You can deposit TDS online through government-authorised banks or the Income Tax Department of India using Challan 281 (to collect direct taxes).
• Once a buyer deposits TDS, he/ she need to file a TDS return electronically using Form 27Q. You need to file TDS returns quarterly within the dates below:

• Once TDS returns have been filed by the deductor, a TDS certificate (Form 16A) must be issued to the non-resident (NRI) to whom the payment was made. The deductor is required to issue Form 16A within 15 days from the due date of filing TDS returns for the relevant quarter.

Lower or Nil TDS Deduction Certificate by a Non-resident

If the non-resident Indian thinks that only a partial amount or no amount is taxable in India, excluding salary at a lower rate of tax or nil tax rate, he/ she has to apply under Form 13. This application needs to be submitted to the Assessing Officer (AO) to acquire the certificate of lower or nil deduction. Further, the assessing officer will issue a certificate under Section 197 allowing the deductor to deduct TDS at a lower rate.

Information Declaration on Foreign Payments

A non-resident Indian or a foreign company has to furnish accurate information in Form 15CA and Form 15CB. The details need to include payment proceedings and should be provided in the income tax e-filing portal. You need to provide the relevant information, irrespective of whether the paid amount is taxable in India. 

The concerned bank demands this information before remitting the necessary amount abroad. However, if you fail to comply with the regulations, a penalty of ₹1 lakh applies under Section 271-I.

TDS Return Certificate

Here are the provisions of Section 195:

• If you are paying a non-resident Indian, you need to have a TAN before you deduct applicable taxes at the relevant rates.
• For the concerned PAN, the payer has to deposit the applicable tax deducted within the stipulated due date.
• The payer additionally needs to furnish TDS returns in Form 27Q within the due date of the concerned quarter.
• A payer further has to issue the TDS certificate in Form 16A to the concerned non-resident. (Notably, Form 16 is a different form.)

Implications of Non-payment of TDS Under Section 195

Here are the implications of not complying with the provisions of Section 195:

• If the applicable TDS is not deducted or deposited within the due date, the related expense is disallowed as a business deduction under the Income Tax Act.
• In case a payer deducts TDS but does not submit it within the stipulated date, a 1.5% interest rate applies from the deduction date to the deposit date.
• Further, if there is no TDS payment following the TDS deduction, a penalty is imposed equivalent to the TDS amount.
• In case of a short deduction, a penalty may be levied equal to the difference between the required and the actual amount deducted.

Final Words

Section 195 of the Income Tax Act, dealing with TDS on payments made by NRIs, mandates a TAN for the deductor, followed by the PAN of the deductor as well as the payee. Ensure TDS is deducted and deposited within the stipulated time to avoid paying additional interest and penalties. This further ensures tax compliance with Indian tax laws, helping deductors and payees avoid adverse legal consequences. 

Notably, if you are a resident Indian, your interest income from a fixed deposit is further subject to TDS deduction. However, fixed deposits remain a secure and attractive investment option, offering interest rates of up to 9.10% per annum, allowing you to steadily grow your wealth over time.