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Section 195 - TDS for Non-Residents

Section 195 of the Income Tax Act - TDS Applicability for Non-Residents

Tax Deducted at Source (TDS) is a mechanism used by the government to collect taxes at the source of income. The payer, who is responsible for making a payment, must deduct tax from the amount paid to another person or entity.

Section 195 of the Income Tax Act, 1961, outlines the TDS provisions for individuals making payments of interest or any other amount (excluding salary) to a Non-Resident Indian (NRI) or a foreign company.

NRIs must file tax returns for income earned in India and can claim TDS when filing these returns.

Who Should Deduct Tax Under Section 195?

Any person making a 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 can be a resident or non-resident individual, Hindu Undivided Family (HUF), partnership firm, another NRI, foreign company, or an artificial juridical person (e.g., corporation, government agency, or non-profit organization).

Is There a Threshold Limit to Deduct TDS Under Section 195?

No, there is no threshold limit for TDS deduction under Section 195. Tax must be deducted only when the payment made to a non-resident is taxable in India. No tax is to be deducted for exempt income or other non-taxable income under the Income Tax Act unless explicitly notified by the government.

At What Rate is the Tax Deducted Under Section 195?

TDS is deducted at 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 the non-resident

Note: The rates given under the Finance Act are increased by the applicable surcharge and education cess of 4%, but surcharge and cess are not required for rates given under DTAA.

The TDS rates as per the Finance Act 2023 are as follows:

Particulars	Rates
Income from investment made by an NRI (Interest/Dividend)	20%
Long-term capital gains from the transfer of assets per Section 115E (Shares of an Indian Company, etc.)	10%
Long-term capital gain from listed shares and securities under Section 112A	10%
Any other long-term capital gain	20%
Short-term capital gains under Section 111A	15%
Interest payable by the Government or an Indian concern on money borrowed in foreign currency	20%
Royalty and fees for technical services payable by the Government or an Indian concern	20%
Winnings from card games, lotteries, crossword puzzles, horse races, and online games	30%
Any other income	30%

If the payee fails to provide a valid PAN, TDS shall be deducted at the higher of the specified rates per Section 206AA.

Payment of TDS Under Section 195

The following steps should be followed to deduct TDS under Section 195:

Obtain TAN: The person making the payment (deductor/buyer) must obtain a TAN (Tax Deduction Account Number) under Section 203A of the Income Tax Act before deducting TDS. The deductor must also have their PAN and the PAN of the NRI.
Deduct TDS: TDS must be deducted at the time of making the payment to NRIs.
Deposit TDS: The deducted TDS should be deposited through a TDS payment challan on or before the 7th of the next month in which the TDS is deducted. This can be done online or through authorized banks using challan 281.
File TDS Return: After depositing the TDS, the deductor should file a TDS return electronically using Form 27Q.

This ensures compliance with the regulations regarding TDS on payments to non-residents, maintaining transparency and adherence to the Income Tax Act.