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Section 195 of the IT Act

Updated on :  

08 min read.

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.

Who is a Non-resident?

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: 

  • 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.
  • Is 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 get 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. For more details, read.

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) 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).

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 more 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 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 2022 are as follows:


Particulars

Rates

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:
Shares of an Indian Company
Debentures and deposits of a Public Company in India
Securities issued by the government

10%

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 Indian concern on the money borrowed in foreign currency

20%

Royalty and Fees for technical services payable by the Government or an Indian concern

10%

Winnings from:
Card games, lotteries, crossword puzzles, and other games of any sort
Horse races

30%

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:

Application for nil or lower TDS deduction certificate by the payer

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.

Declaration of information in relation to 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 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.

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 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.