Section 195 of the IT Act - TDS Applicability for Non-Residents

Tax deducted at source (TDS) is a tax collection mechanism by the government wherein the payer responsible for making the payment must deduct tax from the amount paid to another person or entity. 

In this regard, Section 195 of the Income-tax Act, 1961 specifies the TDS provision in the case of an individual making a payment by way of interest or any other amount other than salary to an NRI or a foreign company. 

Non-resident Indians (NRIs) also need to file their tax returns for the income earned in India. Similarly, they also can claim the tax deducted at source (TDS) when filing tax returns. 

Who is a Non-resident?

As per the said provisions, a person is said to be a non-resident in India if he is not a resident in India, as laid out in section 6 of the Act.

A person will be a resident of India in any financial year if they satisfy any of the following conditions: 

• If they stay in India for 182 days or more during the financial year, OR
• If they stay in India for 60 days or more during the financial year and 365 days or more during the immediately preceding four financial years.

Exception for point (2)

In the case of an Indian citizen or a person of Indian origin (PIO) whose total income, other than income from foreign sources:

• Exceeds Rs 15 lakhs during the relevant financial year – 60 days, as mentioned in point (2) above will get substituted with 120 days.
• If less than Rs 15 lakhs during the relevant financial year- 60 days, as mentioned in point (2) above will get substituted with 182 days. Similarly, for the Indian citizen who leaves India in any year as a crew member or for employment outside India, the period of 60 days in point (2) above will be substituted with 182 days.

Hence, an Indian citizen or PIO earning a total income over Rs 15 lakhs (other than from foreign sources) is deemed a resident in India if they are not taxed in any other country.

Therefore, any person not satisfying any of the above conditions will be treated as a non-resident Indian. 

Who should deduct tax under Section 195?

Any person who makes any payment (other than salary or interest referred to in sections 194LB, 194LC, and 194LD) that is taxable in India to a non-resident must deduct tax under this section. 

The payer, one who pays the NRI or remits the payment, can be a resident or a non-resident, an individual, Hindu Undivided Families (HUFs), partnership firms, other NRIs, foreign companies, or an artificial juridical person (for example, a corporation, government agency or non-profit organization).

Is there a threshold limit to deduct TDS u/s 195?

No, there is no threshold limit to deduct TDS under Section 195. However, the payer must deduct tax only when the payment made to a non-resident is taxable in India. Therefore, no tax is to be deducted in case of exempt income or any other income that is not taxable as per the Income Tax Act unless the government notifies explicitly.

At what rate is the tax deducted under section 195?

TDS is deducted at either of the following rates, whichever is  beneficial to the payee:

• Rates as per the Finance Act of the given year
• Rates contained in the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of such non-resident

Note:  The rates given under the Finance Act are to be increased by the applicable surcharge and education cess of 4%. However, surcharge and cess are not required to be added to the rates given under DTAA.

The TDS rates given under the Finance Act 2023 are as follows:

However, if the payee fails to furnish a valid PAN to the payer, the TDS shall be done at the higher of the following rates as per Section 206AA:

Payment of TDS under Section 195

Below are the ways to deduct TDS under Section 195:

• Person making payment to non resident (Deductor / Buyers)  should obtain a TAN (Tax Deduction Account Number) under section 203A of the Income Tax Act before deducting the TDS. Deductor should also have their PAN number and PAN number of the NRI.
• The deductor must deduct TDS at the time of making payment to NRIs. 
• TDS deducted by the buyer should be deposited through challan for TDS payment on or before the 7th of next month in which the TDS is deducted.
• TDS can be deposited online or through banks that are authorised by the government or the Income Tax Department to collect direct taxes using challan 281.
• After depositing the TDS, the buyer should electronically file a TDS return by filing Form 27Q. TDS returns are filed quarterly within the below due date. 

• After the TDS returns have been filed, the Deductor can issue the TDS certificates or Certificate of Deduction of Tax, i.e. Form 16A to NRI. The certificate should be issued to the seller within 15 days from the due date of TDS returns for the quarter.

Application for nil or lower TDS deduction certificate by the Non-Resident (NRI) 

When the recipient non-resident believes that no amount or only a partial amount (other than salary) is taxable in India or that TDS is to be done at a lower rate, then he may make an application under Form 13 to the Assessing Officer (AO) for obtaining a lower or nil deduction certificate. The assessing office will issue a lower withholding tax certificate u/s 197, which will enable the deductor or payer to deduct the TDS at a much lower rate.

Declaration of information on foreign payments

The payer responsible for paying any amount to a non-resident or a foreign company is required to furnish complete and accurate information regarding such payment in Form 15CA and Form 15CB via the income tax e-filing portal. Note that such information must be furnished even if the amount paid is not taxable under the Act. This is a necessity since the bank will request the same before remitting such an amount outside India. Failure to do such compliance shall attract a penalty of Rs 1 lakh under Section 271-I.

TDS return and certificates

In the backdrop of the provisions of section 195, any person making any payment to a non-resident is required to obtain TAN and deduct tax at the applicable rates. The payer must deposit the tax deducted from the government against the PAN of the payee within the applicable due dates. Further, the payer would also need to furnish the TDS return in Form 27Q within the quarterly due dates and issue the TDS certificate in Form 16A to the non-resident.

Consequences of Not Paying TDS Under Section 195

Following are the consequences when individuals do not fulfill the provisions of Section 195:

• In case the tax deducted is not withheld or submitted for a given time, the expenditure will be disallowed in case of business and will be allowed only in the year of such payment. 
• When the payer deducts the TDS but fails to submit it within the due date, he/she will be charged with a 1.5% interest from the date of deduction to the date of deposit.
• If TDS is deducted but not paid, a penalty equal to the TDS amount will be levied.
• In case of short tax deduction, a penalty equal to the difference between the actual amount deductible and actually deducted would be levied.