TDS on Payments to Non-Residents under Section 195 – Key Provisions and Guidelines

TDS on Payments to Non-Residents under Section 195 of the Income Tax Act mandates that any person responsible for paying a sum to a non-resident, excluding salary, must deduct tax at source if the income is chargeable to tax in India. This applies to payments such as interest, royalties, fees for technical services, or other payments. The tax must be deducted at the time of payment or credit, whichever is earlier. Section 195 ensures proper collection of taxes from non-residents, helping prevent tax evasion on income generated from India.

Table of Contents

1. Who Is Required To Deduct Tax Under Sections 194E, 195, And 196A?
2. Payment From Which Deduction Has To Be Made
3. When Tax Has To Be Deducted
4. Deposit of Tax to the Credit of Central Government
5. Issue of Certificate for Tax Deducted at Source
6. Quarterly Return to the Government
7. Consequences of Failure to Deduct or Pay Tax or Furnish Return

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1. Who Is Required To Deduct Tax Under Sections 194E, 195, And 196A?

Any person responsible for paying any income referred to in section 115BBA is required to deduct tax at source [Sec. 194E].

Any person responsible for paying to non-resident (not being a company), or to a foreign company any interest (not being interest on securities), or any other sum (not being salary) is required to deduct tax at source, if the amount payable is chargeable under the Act.

1.1 Payer/Principal officer is person responsible for tax deduction – For this purpose, the payer himself is treated as “person responsible for paying” such amount. If, however, the payer is a company, the company itself, including the principal officer thereof, is the person responsible for paying such amount.

1.2 In case of consideration for transfer of foreign exchange amount – Where the sum payable to a non-resident Indian represents consideration for the transfer of any foreign exchange asset (other than a short-term capital asset), the “authorised dealer” responsible for remitting such sum or crediting such sum to Non-resident (External) Account of the payee shall be the “person responsible for the paying”.

1-2a Non-resident Indian – For this purpose, “non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not resident. A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents was born in undivided India.

1.2b Foreign exchange asset – Foreign exchange asset means any of the following asset which the transferor has acquired/purchased with, or subscribed to in, convertible foreign exchange:

1. shares in Indian company;
2. debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 ;
3. deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 ;
4. any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944;
5. such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

2. Payment From Which Deduction Has To Be Made

Any payment to a non-resident/foreign company of interest (not being on securities) or amount referred to in section 115BBA or any other sum (not being salary) chargeable under the Act is subject to tax deduction.

Foreign or non-resident companies are also covered by sections 195 but where payments are to be made by head office of non-resident company, and not by its permanent establishment in India, to non-resident suppliers of technologies to be used by the company in India, no deduction of tax is to be made by company’s head office while making such payments as payments in question cannot be deemed to accrue or arise in India—Advance Ruling P. No. 13 of 1995, In re [1997] 94 Taxman 171/228 ITR 487 (AAR – New Delhi).

3. When Tax Has To Be Deducted

Tax shall be deducted as follows:

3.1 Payments referred to section 115BBA – In the case of payments referred to in section 115BBA, tax shall be deducted:

1. at the time of credit* of such income to the account of the payee, or
2. at the time of payment thereof in cash or by issue of cheque or draft or by any other mode,

whichever is earlier.

3.2 Interest of mutual fund payable to non-resident – Tax on interest of mutual fund under section 10(23D) or of specified company payable to a foreign company or a non-resident (other than a foreign company) shall be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by any mode, whichever is earlier. Where the aforesaid income is credited to any account (whether called “suspense account” or by any other name) in the books of account of the payer, such crediting shall be deemed to be credit of such income to the account of the payee.

3.3 Any other payments – The tax shall be deducted as follows:

1. at the time of credit* of income to the account of the payee; or
2. at the time of payment thereof in cash; or
3. at the time of payment thereof by issue of cheque or draft by any other mode,

whichever is earlier.

If deposit is made by a non-resident after March 31, 2005, tax is not deductible by an offshore banking unit [Sec. 197A(1D)].

3.4 Private arrangement of paying income tax-free cannot discharge obligation under sections 194E, 195 and 196A – The liability to deduct tax at source under sections 194E, 195 and 196A cannot be discharged merely because under a private contract the payee has undertaken to pay any interest (not being on securities) and any other sum (not being salary) tax-free.

4. Deposit of Tax to the Credit of Central Government

Tax has to be deposited to the credit of the Central Government as follows:

4.1 e-Payment of tax – After March 31, 2008, all corporate assessees and other assessees (who are subject to compulsory audit under section 44AB) will have to make electronic payment of tax through internet banking facility offered by authorized banks (irrespective of the assessment year or the financial year for which the payment of tax has to be made). Alternatively, these taxpayers can make electronic payment of tax through internet by way of credit or debit cards.

4.2 Time of deposit† – Rule 30 prescribes the following time limit applicable in respect of tax deducted on or after April 1, 2010 –

4.2a When tax is deducted by Government – Where tax is deducted by or on behalf of the Government tax should be deposited within the time-limit given below:

4.2b When tax is deducted by any other person – In any other case, tax should be deposited within one week from the last date of month in which tax is deducted. However, tax deducted in the month of March can be deposited on or before April 30 after the end of the financial year.

4.3 Payment through challan – The tax deducted at source is required to be deposited in Challan Form No. ITNS 281.

4.4 Claim for refund – A claim for refund for TDS paid to the credit of the Central Government under Chapter XVII-B shall be furnished by the deductor in Form No. 26B electronically under digital signature.

5. Issue of Certificate for Tax Deducted at Source

Every person deducting tax at source is required to issue a quarterly certificate in Form No. 16A.

It may be noted that the recipient of income must be given a certificate in Form No. 16A within the stipulated time even if tax is borne by the payer of the income—Circular No. 785, dated November 24, 1999.

5.1 Time-limit – TDS certificate in Form No. 16A shall be issued on quarterly basis as given below –

6. Quarterly Return to the Government

These returns are given below:

6.1 Quarterly return – The person deducting tax at source under sections 194E, 195, 196A, 196B, 196C and 196D is required to send a statement of tax deduction in Form No. 27Q. This statement is to be submitted only if the amount is paid to the following:

1. a person, not being a company, who is either non-resident or a resident but not ordinarily resident in India;
2. a non-Indian company which has not made the prescribed arrangement for the declaration and payments of dividend within India.

Due date of submission of quarterly return – Quarterly returns shall be submitted within the time-limit given below:

Mode of furnishing quarterly returns – The following persons shall submit quarterly TDS/TCS returns electronically (along with the verification of the statement in Form No. 27A):

1. When deductor or collector is an office of the Government.
2. When deductor/collector is the principal officer of a company.
3. When deductor/collector is a person who is required to get his account audited under section 44AB in the immediately preceding financial year.
4. When the number of deductee’s/collectee’s records in a statement for any quarter of the financial year are 20 or more.

Barring the cases given above, any other deductor/collector can submit quarterly TDS/TCS returns either in paper format or electronically.

Mode of uploading return – With effect from February 19, 2013, the aforesaid electronic return can be submitted/uploaded under any one of the following options:

Option 1 – Uploading quarterly returns with digital signature.

Option 2 – Furnishing quarterly return electronically along with the verification of the statement in Form No. 27A.

Option 3 – Furnishing quarterly return electronically along with electronic verification of the statement in Form No. 27A.

Other requirements – The deductor or collector at the time of preparation of quarterly statement of TDS/TCS shall –

1. quote his/its TAN;
2. quote his/its PAN (except in the case where deductor/collector is an office of the Government);
3. quote PAN of all deductees/collectees;
4. furnish particulars of tax paid to the Central Government including book identification number or challan identification number;
5. furnish particulars of amount paid or credited on which tax is not deducted in view of the issue of certificate of no deduction by the Assessing Officer under section 197; and
6. furnish particulars of amount paid or credited to the transport contractors (when PAN is submitted to the deductor and tax is not deducted under section 194C).

7. Consequences of Failure to Deduct or Pay Tax or Furnish Return

The following are consequences of different default:

7.1 Failure to deduct and/or pay tax

7.2 Failure to comply with the provisions of section 203A regarding tax deduction account number

7.3 Failure to issue certificate, or submit return

7.4 Forfeiture of deduction in respect of payment of annual charge, interest, royalty, fees, etc. – If tax is not deducted/paid under section 195, the following deductions are not permissible while computing taxable income of taxpayer.

7.4a Annual charge or interest deductible under section 24 [Sec. 25] – Any annual charge or interest chargeable under the Act, payable out of India, on which tax has not been paid or deducted at source and in respect of which there is no person who may be treated as an agent, is not deductible, by virtue of section 25, in computing income chargeable under the head “Income from house property”.

No deduction is available even if tax is deducted/paid in a subsequent year.

7.4b Interest, royalty, fees for technical services or any other sum payable outside India [Sec. 40(a)(i)] – Disallowance under section 40(a)(i) is attracted if the following conditions are satisfied:

1. the amount paid is interest (not being interest on any loan issued for public subscription before April 1, 1938), royalty, fees for technical services or other sum ;
2. the aforesaid amount is chargeable to tax under the Act in the hands of the recipient ;
3. the aforesaid amount is payable outside India (to a resident or non-resident) or such amount is paid in India to a non-resident (not being a company) or to a foreign company; and
4. on the aforesaid amount, tax is deductible at source but such tax has not been deducted or after deduction such tax has not been paid to the Government till the due date of submission of return of income under section 139(1).

Consequences if the above conditions are satisfied – If all the above conditions are satisfied, the aforesaid expenditure is not deductible.

Consequences if tax is deducted subsequently – If the above expenditure is not allowed in the current year, deduction will be available while computing the business income of a subsequent previous year in which such tax will be paid (i.e., in the year in which tax deducted by the assessee will be paid to the Government).

Illustrations

Illustration 1 – Consider the following cases pertaining to interest, royalty, technical fees or any other sum payable by X Ltd. (due date of submission of return of income for the assessment year 2025-26 : November 30, 2025) to a non-resident which is subject to the provisions of tax deduction at source under section 195 (in all cases liability is incurred during the previous year 2024-25)—

Amendment made by the Finance (No. 2) Act, 2019 –The above provisions have been amended by the Finance (No. 2) Act, 2019 with effect from the assessment year 2020-21. Under the amended provisions, a relief is given if tax is deductible in case of payment/credit to a non-resident/foreign company, but it is not deducted. In such a case, relief is available if the payer is not deemed to be an assessee-in-default under the first proviso to section 201(1), as the following conditions are satisfied –

1. the recipient has furnished his return of income under section 139;
2. the recipient has taken into account the above income in such return of income;
3. the recipient has paid the tax due on the income declared in such return of income, and
4. the payer furnishes a certificate to this effect from a chartered accountant in a prescribed form.

If the above conditions are satisfied, then for the purpose of section 40(a)(i) it shall be deemed that the payer has deducted and paid the tax on such amount on the date of the furnishing of return of income by the recipient.

Amendment applicable with retrospective effect or prospective effect – The aforesaid amendments are applicable with effect from the assessment year 2020-21. However, courts have been unanimous in holding that amendments, which are intended to remove unintended hardships, are declaratory in nature and, therefore, operate retrospectively – CIT v. Calcutta Export Company [2018] 255 Taxman 293 (SC), CIT v. Alom Extrusions Ltd. [2009] 185 Taxman 416 (SC), CIT v. Amrit Banaspati Co. Ltd. [2002] 123 Taxman 74 (SC), Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205 (SC).

Illustration 2 – X Ltd. pays a sum of Rs. 9,00,000 as commission to Y Inc. (a US company) on October 15, 2024. Tax is deductible under section 195 (read with Indo-US tax treaty) but it is not deducted by X Ltd. Y Inc. pays advance tax on the due dates on its income (including Rs. 9,00,000). Entire tax liability is paid by Y Inc. during the financial year 2024-25 by way of advance tax. Return of income of Y Inc. for the assessment year 2025-26 is submitted on December 20, 2025. X Ltd. has a certificate to this effect from a chartered accountant in the prescribed form.

In this case, tax is not deducted by X Ltd. in the financial year 2024-25. By virtue of section 40(a)(i), the payment of Rs. 9,00,000 will be disallowed in computing the income for the assessment year 2025-26. However, X Ltd. cannot be treated as an assessee-in-default under the amended provisions of first proviso to section 201(1), as the following conditions are satisfied –

1. Y Inc. has furnished its return of income under section 139;
2. Y Inc. has taken into account the above income in such return of income;
3. Y Inc. has paid the tax due on the income declared in such return of income, and
4. X Ltd. has a certificate to this effect from a chartered accountant in a prescribed form.

Under the amended provisions, it will be assumed that X Ltd. has deducted and paid tax on December 20, 2025. As a consequence, Rs. 45,000 will be allowed as deduction in the hands of X Ltd. for the financial year 2025-26 (i.e., assessment year 2026-27).

Illustration 3 – On December 8, 2024, Z Ltd. pays Rs. 4,00,000 as royalty to C (a non-resident individual) after deducting tax at the rate of 10 per cent under section 195, read with section 115A. The tax so deducted by Z Ltd. is not deposited till November 30, 2025. However, C submits his return of income on July 31, 2025 after including Rs. 4,00,000 in his income. As per his return of income, a refund of Rs. 82,000 is due to him.

In this case, the amended provisions are not applicable (the amended provisions are applicable only when the payer fails to deduct the whole or any part of tax). If tax is deducted but not paid, the amended provisions [as well as the first proviso to section 201(1)] are not applicable. Z Ltd. cannot claim any deduction for the previous year 2024-25 or 2025-26 in respect of royalty payment of Rs. 40,00,000.

7.4c Interest deductible under section 57 [Sec. 58] – By virtue of section 58, interest payable outside India (not being interest on loan issued for public subscription before April 1, 1938) on capital borrowed, which is deductible under section 57, is not allowed as deduction if tax is not deducted/paid under section 195.

No deduction is admissible if tax is deducted/paid in a subsequent year.

*Only at the time of payment thereof in cash or by issue of cheque/draft or by any other mode in the case of interest of Mutual Fund payable by the Government/public sector bank/or financial institution.

† Where the due date of deposit of TDS falls during March 20, 2020 and June 29, 2020 and such amount is paid on or before June 30, 2020, then for the period of delay interest will be chargeable at the rate of 0.75 per cent per month (or part thereof). However, no penalty shall be levied (or no prosecution shall be sanctioned) in respect of such payment for the period of delay.

†Now, TRACES Portal.