FAQ

Section195 of the Income Tax Act

What is Section 195?

Section 195 of the Income Tax Act requires any person responsible for making a payment to a non-resident (not being a company or to a foreign company) to deduct income tax at source (TDS) at the time of payment or credit, if the payment is chargeable to tax in India.

Who is liable to deduct TDS under Section 195?

Any person (resident or non-resident) making a remittance or crediting an amount to a non-resident or foreign company is liable to deduct tax under Section 195. This includes individuals, companies, LLPs, firms, or even HUFs making such payments from India.

What are the TDS rates applicable to non-residents?

Section 195 applies to a wide range of payments made to non-residents, including:           Interest
          Royalties
          Technical service fees
          Dividend income
          Professional services
         Sale proceeds from capital assets
          Commission or brokerage

Is TDS under Section 195 applicable to all remittances to non-residents?

No. TDS is applicable only if the income is chargeable to tax in India. If the income is not taxable in India(e.g., business income with no Permanent Establishment), then no TDS is required. However, Form 15CA/15CB may still be required unless exempt under Rule 37BB.

Can a remitter apply lower or nil tax deduction under Section 195?

Yes. The remitter can:
Apply the relevant DTAA rate, subject to obtaining a Tax Residency Certificate (TRC) and other documents (like Form 10F).
Obtain a certificate from the Assessing Officer under Section 195(2) or the recipient may apply under Section 195(3) or 197 for nil/lower TDS.

What is the role of a Tax Residency Certificate (TRC) under Section 195?

A valid TRC from the country of residence of the recipient is mandatory to apply DTAA rates for lower TDS. Without a TRC, the remitter must apply domestic tax rates, which are often higher.

When should the tax be deducted under Section 195?

TDS should be deducted at the earlier ofthe following:
At the time of credit of such income to the payee’s account.
At the time of actual payment (by cash, cheque, draft, etc.).

What happens if TDS is not deducted or incorrectly deducted under Section 195?

Non-compliance can lead to:
                 Disallowance of expenditure under Section 40(a)(i).
               Interest and penalty under Sections 201(1) and 201(1A).
            Penalty of ₹1 lakh under Section 271-I for non-filing of Form 15CA/CB, if applicable.

Is PAN of the non-resident mandatory for TDS under Section 195?

Yes, PAN is preferred. If the non-resident does not have a PAN, higher TDS at 20% may apply unless relevant Rule 37BCconditions are met and the necessary documents are furnished.

Is TDS under Section 195 applicable to payments in kind or through set-off?

Yes. TDS is applicable even if the payment is made in kind or through book entry, not necessarily in cash.

Is TDS applicable when a foreign company receives payment from an Indian client?

Yes, if the payment is chargeable to tax in India, such as:
           Royalty or technical service fees
          Software payments
         Business income attributable to a Permanent Establishment (PE) in India
TDS can be avoided or reduced via DTAA, subject to documentation.

Sample Scenarios Under Section 195

FAQ

Scenario 1: Professional Fee to a US Consultant

Situation: Indian company pays $10,000 to a US-based consultant for advisory services.
                Nature of Income: Fees for technical services (FTS)
             Applicable TDS: 10% under DTAA (India–USA), subject to TRC and Form 10F
                Action: File Form 15CB and upload Form 15CA (Part C)

Scenario 2: Purchase of Software from a Singapore Vendor

Situation: Indian buyer pays ₹5 lakh for off-the-shelf software download from a Singapore seller.
Nature of Income: May qualify as royalty (depending on usage rights) TDS: 10% or 20% (depending on treaty and nature)
If not taxable: No TDS, but Form 15CA Part D may be required

Scenario 3: Remittance of Interest on NRO Account to NRI

Situation:Bank remits ₹1.2 lakh interest to an NRI’s foreign account.
               Nature of Income: Interest earned in India (taxable)
              TDS: 30% under Income Tax Act
               Form: Form 15CA (Part A), no 15CB needed (as amount < ₹5 lakh)

Scenario4: Purchase of Property from a Non-Resident Seller

Situation: Resident Indian buys a flat from an NRI for ₹1 crore.
Nature of Income: Capital gains (taxable in India)
TDS: 20% (LTCG) or 30% (STCG) on capital gains amount (not sale value) Action: Buyer must obtain Form 15CB and file Form 15CA (Part C)

FAQ– Section 195 of the Income Tax Act (TDS on Payments to Non-Residents)

Section195 of the Income Tax Act

FAQ

Sample Scenarios Under Section 195

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