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.
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:
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.
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).
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 beneficial to the payee:
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:
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:
| 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 from FII or specified fund on securities (other than units of UTI/MF) | 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% |
Winnings from:
| 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:
Below are the ways to deduct TDS under Section 195:
Quarter | Due date for filing TDS Return |
Q1 - April to June | 30th July |
Q2 - July to Sept | 31th Oct |
Q3- Oct to Dec | 31st Jan |
Q4 - Jan to Mar | 31th May |
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.
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.
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.
Following are the consequences when individuals do not fulfill the provisions of Section 195:
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