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.
Read on for more details on Section 195.
As per the said provisions, a person is said to be a non-resident in India if 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 the following conditions:
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:
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. For more details, read.
Any person who makes any payment (other than salary or interest referred to in sections 194LB, 194LC and 194LD) 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 organisation).
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.
TDS is deducted at either of the following rates, whichever is more beneficial to the payee:
Note that 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:
|Income from the investment made by an NRI (Interest/Dividend)||20%|
Long-term capital gains arising from the transfer of the following assets as per Section 115E:
|Long-term capital gain from listed shares and securities referred to in Section 112A||10%|
|Any other long-term capital gain||20%|
|Short-term capital gains under section 111A||15%|
|Interest payable by the Government or an Indian concern on the money borrowed in foreign currency||20%|
|Royalty and Fees for technical services payable by the Government or an Indian concern||20%|
|Any other income||30%|
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:
Below are the ways to deduct TDS under Section 195:
When the payer believes that no amount or only a partial amount (other than salary) is taxable in the hands of the non-resident in India or that TDS is to be done at a lower rate, then he may make an application under Form 15E to the Assessing Officer (AO) for obtaining a lower or nil deduction certificate.
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 with the AO. Note that such information must be furnished even if the amount paid is not taxable under the Act. Failure to do such compliance shall attract a penalty of Rs 1 lakh under Section 271-I.
To know how to e-file Form 15CA and Form 15CB, click here.
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 with 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.
Following are the consequences when individuals do not fulfil the provisions of Section 195:
Yes, the interest earned on an income tax refund is applicable for TDS deduction under Section 195.
No, TDS will be deducted from the reimbursement of expenses actually incurred by the foreign company or non-resident under Section 195.
Yes, the payer must obtain a TAN before making the tax payment. It is mandatory to provide the TAN of the deductor for the payment of tax.
The exchange rate of the Reserve Bank of India (RBI) on the day TDS is required to be deducted will be considered.