Section 195 – TDS on Non-Residents of India (NRI)

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  • By Taxmann
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  • Last Updated on 10 May, 2024

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TDS on Non-Residents of India

What is TDS on Non-Residents of India (NRI)?

Tax Deducted at Source (TDS) on Non-Residents of India (NRI) refers to the tax that is required to be deducted by the payer when making certain types of payments to NRIs. The Income Tax Act mandates this withholding of tax at the source to ensure tax collection from income that accrues or arises to NRIs in India.

Key points about TDS on NRIs include:
– Scope of Income: TDS on NRIs applies to various types of income that an NRI earns in India, such as interest from deposits, rental income from property, capital gains from the sale of assets, and fees for technical services.
– Rate of TDS: The rate at which TDS is deducted depends on the type of income and the provisions of the Income Tax Act or the Double Tax Avoidance Agreement (DTAA) between India and the NRI's country of residence. Rates can vary significantly.
– Duty of Payer: It is the responsibility of the payer (the person or entity making the payment to the NRI) to deduct the appropriate TDS before making the payment.
– Certificate for Lower or Nil TDS: NRIs can apply for a certificate from the Income Tax Department for deduction of TDS at a lower rate or no deduction if conditions are met under the law or DTAA.
– Tax Return Filing: NRIs must file an income tax return in India if their income exceeds the basic exemption limit after considering TDS. Filing a return can also allow them to claim a refund if excess TDS has been deducted.

Table of Contents

  1. Introduction
  2. Meaning of Non-Resident
  3. Section 195 – Applicability and Provision
  4. Who is eligible to deduct tax?
  5. Other provisions of Section 195
  6. Rate of TDS under Section 195
  7. Form 15 CA and 15 CB
  8. Consequences of Non-Compliance of Section 195
  9. Procedure of obtaining TDS exemption Certificate
  10. Conclusion

1. Introduction

Non-Resident (hereinafter called NR) are required to pay taxes and file their Income Tax Returns in India on the income earned within the country. Tax Deducted at Source (hereinafter called TDS) is a major source of revenue for the Government of India and an efficient way of managing any tax leakages in the system by withdrawing the tax at the time of payment itself, posing the liability of the same on the payer of the said remittance. Hence, Government of India has made provisions for deduction of tax on NRs before any payment is made to them. Tax related guidelines governing payments made to NRs are mentioned under Section 195 of the Income Tax Act, 1961 (hereinafter called the Act).

2. Meaning of Non-Resident

As per the provisions of Section 6 of the Act, NR is a person who is not residing in India. For an individual to be called as the resident of India following conditions need to be fulfilled-

  1. Must stay for 182 days or more in the particular financial year (or say, previous year),
  2. Must stay for 60 days or more for the specific financial year (or previous year) and for 365 days or more for the immediately preceding four financial years.

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2.1 Exceptions

  • In the case of an Indian citizen or a person of Indian origin (PIO) whose total income, other than income from foreign sources:
  1. Exceeds Rs 15 lakhs during the previous year– 60 days as mentioned in point (2) above will get substituted with 120 days.
  2. Is less than Rs 15 lakhs during the previous 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.

The Finance Act, 2020 has introduced Section 6(1A) to the Income-tax Act, 1961. The new provision provides that 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 not taxed in any other country.

3. Section 195 – Applicability and Provision

Section 195 of the Act lays down provisions for deducting tax on all the payments made by any person to NRs or to a foreign company, which are taxable in India except salary or interest as defined under Sections 194LB, 194LC and 194LD.

The provisions of Section 195 are applicable in the following cases:

  1. Payments made to a NR for services rendered or for sale of goods or merchandise.
  2. Interest, royalty, technical services fee or any other sum paid to a NR.
  3. Remittances to a NR outside India.

It is important to note that the provisions of Section 195 are not applicable in case of payments made to residents or to an Indian company.

NR in India has an option to choose between being taxed under the Indian Income-tax Act or the provisions of a Double Taxation Avoidance Agreement (DTAA), depending on which one offers better benefits. To avail the advantages provided by a DTAA, NR must provide a valid Tax Residency Certificate (TRC) from his home country and submit Form 10F as per Section 90 of the Income-tax Act through the Indian tax portal. This requirement applies regardless of whether the NR holds a PAN card.

4. Who is eligible to deduct tax?

Payer or deductor, for the purpose of this section, can be any person as mentioned herewith remitting the payment to a non-resident-

  • Individual
  • Hindu Undivided Family (HUF)
  • Firm or LLP
  • Company
  • AOP
  • BOI
  • Non-Resident
  • Foreign Company.

Similar to resident individuals, NRs can claim a TDS refund while filing their return of income in India.

5. Other Provisions of Section 195

Provisions related to TDS as prescribed under Section 195 of the Act are discussed below-

  • Tax Deduction Account Number (TAN) should be first obtained by the person deducting tax under Section 203A of the Act. In order to obtain the same, application in Form 49B (also available online) is required to be made to the Income Tax Department. For completing the submission of the form, the deductor should have his/her own PAN as well as the PAN of the NR deductee.
  • No Tax or Lower Tax order can be taken by applying to the Assessing Officer, if the deductor or the deductee is certain that the whole income is not chargeable to tax. Rate on which tax is to be deducted and the validity period are mentioned on the said order of the Assessing Officer.
  • TDS is required to be deducted at the time of payment to the NR or while crediting the account in the books of accounts by whatever name called, whichever is earlier.
  • The TDS amount deducted by the payer is to be deposited through banks authorized by the Government of India or Income Tax Department via a form number or challan for TDS payment on or before the 7th of subsequent month in which such TDS is deducted.
  • After depositing the TDS, the payer must electronically file TDS return by submitting Form 27Q within the stipulated time frame.
  • TDS returns are filed quarterly. Due dates for filing Form 27Q are 31st July, 31st October, 31st January and 31st May for Quarter 1, 2, 3 and 4 respectively.
  • On successful submission of TDS returns, the deductor is mandatorily required to issue TDS certificate to the NR deductee within 15 days from the due date of filing the TDS return for the respective quarter. The certificate of deduction of TDS is available in Form 16A.

6. Rate of TDS under Section 195

The rate of TDS under Section 195 depends on the nature of payment and the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the country of which the NR is a resident. In case there is no DTAA, the TDS rate shall be as per the provisions of the Income Tax Act, 1961. TDS rates as prescribed under Section 195 shall be increased by surcharge and education cess as applicable thereon.

If the payment to the NR is being made as per DTAA rates, then the surcharge and education cess are not to be included. The rates prescribed in respect of various nature of income for non-residents under the Income Tax Act are as follows:

Particulars TDS Rates (%)
Income in respect of investment made by NR

20
Income by way of long-term capital gains in Section 115E, Section 112 and 112A

10
Income by way of short-term capital gains under Section 111A

15
Any other income by way of long-term capital gains

20
Interest payable on money borrowed in Foreign Currency

20
Income by way of royalty and/or fees for technical services

20
Winnings from card games, horse races and online games

30
Any other income – Other than Company

– Company

30

40

7. Form 15 CA and 15 CB

A person responsible for making such remittance (payment) has to submit the form 15CA, before remitting the payment. In certain cases, a Certificate from Chartered Accountant in form 15CB is required before uploading the form 15CA online.

The furnishing of information for payment to NR in Form 15CA has been classified into 4 parts:

PART A: Where the remittance or the aggregate of such remittance does not exceed Rs. 5 lakh during the financial year.

PART B: Where remittance or the aggregate of such remittances exceeds Rs. 5 lakh during the financial year and an order/certificate u/s 195(2)/195(3)/197 of the Act has been obtained from the Assessing Officer.

PART C: Where the remittance or the aggregate of such remittance exceeds Rs. 5 lakh during the financial year and a certificate in Form No. 15CB from an accountant has been obtained.

PART D: Where the remittance is not chargeable to tax under the Act.

8. Consequences of Non-Compliance of Section 195

In case the TDS is not deducted or is not deducted in accordance with the provisions of the Income Tax Act, 1961, the person responsible for making the payment shall be liable to pay the tax so deductible, along with interest and penalty as may be imposed by the Income Tax Department. The consequences of non-compliance with the provisions of Section 195 of the Act can be iterated as below-

  • If TDS is not deducted, it will lead to disallowance of expense under Section 40(a)(i).
  • If tax has been deducted but not deposited within the due date, interest at the rate of 1.5% per month or part of the month shall be levied from the date of deduction to the date of deposit.
  • If tax has been deducted and not at all paid, penalty equivalent to the TDS amount shall be levied.
  • In case of short deduction of TDS, penalty equivalent to the difference between actual amount of TDS deductible and that actually deducted shall be levied.

9. Procedure of Obtaining TDS Exemption Certificate

If the whole of the income is not chargeable to tax, an application can be made for TDS exemption certificate.

  1. NR can voluntarily apply for a Lower TDS Certificate to the concerned Income Tax Authority, to seek relief in the TDS implication.
  2. To apply for the said certificate the NR is required to file Form 13 on the Income Tax Portal using the login credentials used to create their account on the portal.
  3. The applicant is also required to provide the supporting documents asked in the form for Lower TDS Certificate. The required documents are submitted with Form 13 Application online.
  4. On successful completion and submission of required documents, the application is forwarded to the Jurisdictional TDS Certificate Officer. The officer reviews the application and raises observations & further requirements if any.
  5. Once satisfied with the authentication of the application, the officer processes the certificate and allots the Lower TDS on Non-Residents of India/Foreign citizen in relation to the transaction.

10. Conclusion

Section 195 of the Income Tax Act, 1961 lays down the provisions regarding TDS on payments made to non-residents and is an important section for those making such payments to ensure compliance with the provisions of the Income Tax Act, 1961. It primarily focuses on the rates and deductions on the business transactions entered into with NRs and consequences of its non-compliance. It is also important to note that the primary responsibility for ensuring the collection and deposit of the tax due from the NR is placed on the deductor, and not the NR recipients.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

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