Section 195 of Income Tax Act - TDS Applicability for NRI

Section 195 of Income Tax Act, 1961 deals with Tax Deducted at Source (TDS) on payments made to Non-Resident Indians (NRIs) or foreign companies. Whenever an Indian resident makes a payment (other than salary) to an NRI that is taxable in India, TDS under Section 195 must be deducted. This provision ensures that income arising to non-residents in India is taxed at the source itself.

Key Highlights

• TDS Section 195 applies to payments like interest, royalty, capital gains, dividends, etc.
• No threshold exemption is available – TDS applies to all taxable payments.
• Rates depend on the Finance Act or DTAA, and credit for taxes paid in India will be available under DTAA provisions.

What is Section 195?

Section 195 mandates that any person making a payment to a non-resident (other than salary) must deduct TDS if such income is chargeable to tax in India.

• It applies to NRIs, foreign companies, or any non-resident entity.
• Covers payments such as interest, royalty, dividends, capital gains, or technical service fees

Who is a Non-resident?

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.
• Indian citizen leaving India for employment outside -  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 payment or income (other than salary or interest referred to in sections 194LB, 194LC, and 194LD) received by Non-Residents from any person (Payer) are responsible for deducting tax under this section. 

The payer, i.e., the person who makes the payment to the NRI or remits the amount, can be:

• A Resident or a Non-Resident
• An Individual
• Hindu Undivided Families (HUFs)
• Partnership Firms
• Foreign Companies
• Artificial Juridical Person (for example, a corporation, government agency or non-profit organization).

Section 195 TDS Rates for FY 2025–26

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 For NRIs as per Finance Act 2025 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.

TDS Payment And Compliance 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 Lower or Nil TDS (Form 13)

• A non-resident recipient can apply when they believe that the payment received (other than salary) is either not taxable in India, only partially taxable, or taxable at a lower rate.
• For this purpose, the non-resident must submit an application in Form 13 to the Assessing Officer (AO).
• The AO examines the application and verifies whether the lower or nil deduction is justified based on the facts.
• If satisfied, the AO issues a certificate under Section 197 allowing a lower or nil TDS deduction.
• This certificate authorises the payer/deductor to deduct TDS at the reduced or nil rate specified, instead of the standard prescribed rate.

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.

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 Non-Compliance With 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.

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