What is Section 195 of the Income Tax Act? TDS on Non-Residents of India

Section 195 of the Income Tax Act ensures tax collection on certain payments made to non-residents by requiring the payer to deduct tax at source (TDS).

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Just like resident Indians, NRI citizens’ taxation 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 income earned in India, just like resident Indians. Therefore, the income tax payments for an NRI citizen are a bit more complex than those for 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 residence 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 365 days or more over the four years immediately preceding the previous year.

An individual failing to meet the above-mentioned conditions 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 outside India.

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) must 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).

Is there a Threshold Limit to Deduct TDS u/s 195?

As per Section 195 of the Income Tax Act, there is no threshold limit for deducting TDS. This means that TDS must be deducted from any sum paid to a non-resident, including a foreign company, if the income is taxable under the provisions of the Act, regardless of the amount. The payer is responsible for determining the taxability of the income and ensuring that TDS is deducted at the appropriate rate from the first rupee of the payment.

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 NRI seller’s PAN to complete the submission of Form 49B.
TDS on NRI payments is an important part of Section 195. 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 should be done by the 7th of the 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. For a seamless process, follow the filing dates provided in the guidelines. The filing dates for a particular quarter are June 15 -July 15, September 15 – October 15, December 15 – January 15, and March 15—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.

How TDS is Deducted Under Section 195?

TDS under Section 195 is deducted from payments made to non-residents or foreign companies if the income is chargeable under the provisions of the Income Tax Act. Here is the step-by-step process for deducting TDS under Section 195:

Determine Taxability

Assess whether the payment to the non-resident is taxable under Indian laws. Common taxable payments include interest, royalties, fees for technical services, and other sums chargeable under the Act.

Obtain TAN

The payer (deductor) must have a valid Tax Deduction and Collection Account Number (TAN). If the payer does not have a TAN, they must apply for one.

Determine TDS Rate

Refer to the relevant provisions of the Income Tax Act or applicable Double Taxation Avoidance Agreement (DTAA) to determine the correct TDS rate. If the DTAA rate is lower, it can be applied.

Submit Forms 15CA and 15CB

Form 15CA

This is a declaration by the payer that TDS has been deducted as per the applicable rates. It is filed electronically on the Income Tax Department’s website.

Form 15CB

This is a Chartered Accountant certificate certifying the payment details and the applicable TDS rate. This form is required for certain types of payments.

Deduct TDS

Calculate the TDS amount based on the applicable rate and deduct it from the payment made to the non-resident.

Deposit TDS

Use the appropriate challan (Challan No./ITNS 281) to deposit the TDS amount with the government within the specified due date.

File TDS Return

File the TDS return quarterly using Form 27Q, which contains details of the TDS deducted and deposited.

Issue TDS Certificate

Provide the non-resident payee with a TDS certificate (Form 16A) indicating the amount of TDS deducted and deposited to the government.

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
Income in respect of investment made by an NRI	20%
Income by way of long-term capital gains in Section 115E in case of an NRI	10%
Income by way of long-term capital gains under Section 112 and 112A	10%
Short Term Capital gains under section 111A	15%
Any other income by way of long-term capital gains	20%
Interest payable on money borrowed in Foreign Currency	20%
Income by way of royalty payable by the Government or an Indian concern	10%
Income by way of royalty, not being royalty of the nature referred to be payable by the Government or an Indian concern	10%
Income by way of fees for technical services payable by the Government or an Indian concern	10%
Any other income	30%

Application for NIL or Lower TDS Deduction Certificate by the Non-Resident (NRI)

Non-residents (NRIs) seeking a NIL or lower TDS deduction certificate can apply to the Income Tax Department of India under Section 195(3) of the Income Tax Act. This certificate allows NRIs to receive payments without or with reduced tax deductions. Here is the application process:

Form Submission

The NRI must submit Form 13 to the Assessing Officer (AO) with jurisdiction over the applicant.

Supporting Documents

Along with Form 13, applicants must provide supporting documents such as proof of income, details of payments, tax residency certificate (if applicable), and other relevant financial documents.

Assessment by AO

The Assessing Officer evaluates the application and documents to ensure that the income is not taxable or qualifies for a lower rate under the Income Tax Act or relevant Double Taxation Avoidance Agreement (DTAA).

Issuance of Certificate

If satisfied, the AO issues a certificate specifying the rate at which TDS should be deducted or stating that no TDS is required. This certificate is valid for the specified period and payments mentioned therein.

NRIs must ensure accurate and complete documentation to facilitate the smooth processing of their application for a NIL or lower TDS deduction certificate.

Applicable Situations for TDS Under Section 195 of the Income Tax Act

TDS under Section 195 applies to any payment made to a non-resident, including foreign companies, which is chargeable to tax under the Income Tax Act. This includes payments for interest, royalty, fees for technical services, and any other sum chargeable under the provisions of the Act. The payer, responsible for deducting the tax at source, must determine the taxability of the income and deduct TDS accordingly before making the payment.

Consequences of Not Paying TDS Under Section 195 of the Income Tax Act

Failure to deduct or pay TDS under Section 195 can result in several consequences:

Interest and Penalties

The payer may pay interest at 1% per month for non-deductions and 1.5% per month for non-payment of the deducted tax. Additionally, penalties may be imposed under Sections 201 and 271C of the Income Tax Act.

Disallowance of Expenses

The expenditure on which TDS was not deducted or paid may be disallowed as a deduction when computing the payer’s taxable income, leading to higher taxable income and tax liability.

Prosecution

In severe cases, the payer may face prosecution and imprisonment for three months to seven years, along with a fine.

Proof of Tax Deducted Under Section 195

Any person paying 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.

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, must withhold tax under Section 195.

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. The steps provided under Section 195 should be followed to deduct the TDS on Non-Residents.

FAQs on Section 195 of the Income Tax Act

How is a non-resident’s income determined for the purpose of Section 195?

A non-resident’s income is determined based on the income accrued or arising in India or received/deemed to be received in India. The payer must assess if the income is taxable under Indian law.

Can a non-resident claim relief under a Double Taxation Avoidance Agreement (DTAA)?

A non-resident can claim relief under the DTAA between India and their country of residence, potentially reducing or eliminating tax liability on certain incomes.

What forms need to be submitted for TDS deduction under Section 195?

Forms 15CA and 15CB must be submitted for TDS deduction under Section 195. Form 15CA is a declaration by the payer, and Form 15CB is a certificate from a Chartered Accountant.

Are there any exceptions to TDS under Section 195?

TDS under Section 195 is not required if the payment is not chargeable to tax under Indian laws or if the income is specifically exempted under the Income Tax Act or applicable DTAA.

What is the procedure for obtaining a Tax Residency Certificate (TRC)?

To obtain a TRC, the non-resident must apply to the tax authority of their country of residence, providing the necessary documentation to confirm their tax residency status per the respective country’s regulations.

How can errors in TDS deduction under Section 195 be rectified?

Errors in TDS deduction can be rectified by filing revised returns or correction statements through the TRACES portal, ensuring accurate reflection of the deducted amount and details.

Is there any penal interest for late payment of TDS under Section 195?

Yes, penal interest is charged for late payment of TDS under Section 195 at a rate of 1.5% per month or part thereof from the date the tax was deductible to the date it is paid.