Just like resident Indians, the taxation for NRI citizens also involves fine considerations. Section 195 of the Income Tax Act, 1961 (ITA) stands as a pivotal guide, specifically outlining the Tax Deducted at Source (TDS) procedures applicable to NRIs.
Non-Resident Indians (NRI) also have to file their tax returns for the income earned in India, just like the resident Indians. Therefore, the income tax payments for an NRI citizen are a bit complex compared to the resident Indians. The tax payment guideline for NRIs is listed in Section 195 of the Income Tax Act.
What is Section 195?
Section 195 of the Income Tax Act, 1961 (ITA) provides information on the Tax Deducted at Source (TDS) for all Non-Resident Indians (NRIs).
TDS is the primary way of gathering taxes. It is an efficient way of taking care of tax leakages by withdrawing the Tax at the time of payment and putting the responsibility of TDS on the individual making the payment.
Section 195 of the Income Tax Act provides information for TDS for NRI on payments made by NRI citizens. It highlights the tax rates and deductions involved in an NRI citizen’s business transactions. While making the payments, providing the certificate of remittance is compulsory. Section 195 also mentions the guidelines for avoiding a revenue loss from any NRI tax liability by deducting that amount from their source payments.
Who is a Non-resident?
To determine an individual’s resident status, Section 6 of the Income Tax Act, 1961 outlines the criteria as follows:
An individual will be categorized as a Resident in India during a previous year if they meet either of the following conditions:
- If the individual is present in India for 182 days or more during the previous year.
- If the individual is in India for 60 days or more during the previous year and for 365 days or more over the four years immediately preceding the previous year.
An individual failing to meet both conditions mentioned above will be classified as a Non-Resident for that specific previous year.
However, for an Indian citizen or a person of Indian origin visiting India within the year, the 60 days in condition (2) is replaced with 182 days. The same concession applies to an Indian citizen leaving India during a previous year as a crew member or for employment purposes outside India.
What are the Steps for Deducting TDS under Section 195?
If someone deducts TDS under section 195, they must consider the following conditions:
- The buyer should provide the TAN (Tax Deduction Account Number) number before deducting Section 195 TDS. You can get the TAN by providing the 4B form to the Income Tax Department. In addition, the buyer should have their PAN number and the PAN of the NRI seller as well for completing the submission of Form 49B.
- TDS should be deducted when making payments to the NRI. The transaction contract must include details like the TDS rate and amount.
- The TDS deducted by the buyer should be deposited through an authorized bank with a challan or a form number. This can be done online, and it should be done by the 7th of the upcoming month.
- The buyer should file their TDS returns after the TDS has been deposited. The filing should be done quarterly by providing form 27Q and through financial institutions authorized by the Government of India.
- After depositing the TDS, the buyer should file the TDS returns. The dates provided in the guidelines should be followed for a seamless process. The dates for filing in a particular quarter are June -July 15, September quarter – October 15, December quarter – January 15 and March quarter – May 15.
- Once the TDS has been filed, the buyer can provide a TDS certificate to the NRI seller. The buyer issues this certificate to the seller 15 days from the due date of filing the TDS must return for the quarter.
TDS Rates Under Section 195 of the Income Tax Act
Section 195 deals with Tax Deduction at Source (TDS) for payments made to non-resident Indians (NRIs) and foreign companies. The applicable TDS rate depends on the type of income and the PAN availability of the payee (recipient). Here is a breakdown:
Particulars
|
TDS rates
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Income in respect of investment made by an NRI
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20%
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Income by the way of long-term capital gains in Section 115E in case of an NRI
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10%
|
Income by way of long-term capital gains under Section 112 and 112A
|
10%
|
Short Term Capital gains under section 111A
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15%
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Any other income by way of long-term capital gains
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20%
|
Interest payable on money borrowed in Foreign Currency
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20%
|
Income by way of royalty payable by the Government or an Indian concern
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10%
|
Income by way of royalty, not being royalty of the nature referred to be payable by the Government or an Indian concern
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10%
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Income by way of fees for technical services payable by the Government or an Indian concern
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10%
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Any other income
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30%
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Who Should Deduct Tax under Section 195?
Any person who makes a payment to a non-resident that is taxable in India (other than a wage or interest as defined in sections 194LB, 194LC, and 194LD) is required to withhold tax per this section.
A resident or non-resident, a person, a Hindu Undivided Family (HUF), a partnership firm, another NRI, a foreign company, or an artificial juridical entity might be the payer, the one who pays the NRI or remits the payment (for example, a corporation, government agency or non-profit organization).
Proof of Tax Deducted Under Section 195
Any person making a payment to a non-resident must get a TAN and deduct tax at the appropriate rates in light of the provisions of section 195. Within the set deadlines, the payer must deposit the tax withheld with the government against the payee’s PAN. The payer must also provide the TDS return in Form 27Q by the quarterly deadlines and give the non-resident the TDS certificate in Form 16A.
Way Forward
Section 195 of the ITA provides the rates and deductions for Non-Resident Indians. It focuses primarily on the tax rates and deductions on business transactions with an NRI. The amount generated through these transactions is chargeable under the Income Tax Act. To deduct the TDS on Non-Residents, the steps provided under Section 195 should be followed.
Key Takeaways
- Section 195 of the Income Tax Act of 1961, provides vital information on TDS, emphasizing tax rates and deductions in NRI business transactions.
- Section 6 of the Income Tax Act outlines criteria, such as the presence in India for specific periods, to determine the residency status of an NRI.
- TDS rates range from 10% to 30%, covering various income categories, including investments, capital gains, interest, royalty, and fees for technical services.
- Any entity making taxable payments to non-residents, including residents, non-residents, Hindu Undivided Families (HUFs), partnerships, foreign companies, or other NRIs, is mandated to withhold tax under Section 195.
