Section 195 of Income Tax Act -payments made to non-residents and TDS Rate
Updated: Oct 22
The government uses a technique known as "tax deducted at source," or TDS, to collect taxes from taxpayers. Under TDS, the payer is required to deduct taxes from the amount they pay to third parties. In this connection, the TDS provision is outlined in Section 195 of the Income-tax Act, 1961, in the event that an individual pays an NRI or a foreign firm interest or any other sum in addition to salary. To report their income earned in India, non-resident Indians (NRIs) must also file tax returns. Likewise, they are also eligible to claim tax deducted at source (TDS) on their tax returns. In this article, we will explain Section 195 of the Income Tax Act in detail.
Table Of Contents
What is Section 195 of Income Tax Act
Section 195 of the Income Tax Act in India pertains to the deduction of tax at source (TDS) on payments made to non-residents. The section outlines the obligations of a person responsible for making payments to a non-resident, requiring them to deduct tax at the applicable rates before making such payments.
This provision aims to ensure that the government can collect taxes on income earned by non-residents in India. The person making the payment is generally required to deduct tax at the rates specified in the Income Tax Act or under the Double Taxation Avoidance Agreements (DTAA), whichever is more beneficial to the non-resident.
Who is a Non-Resident?
According to the aforementioned provisions, a person who does not dwell in India is considered a non-resident of India, as defined under section 6 of the Act. If any of the following criteria are met, an individual will be considered a resident of India for any given fiscal year:
If they spend a minimum of 182 days in India throughout the fiscal year, OR
If they spend 60 days or more in India during the fiscal year and 365 days or more in the four fiscal years that come before it.
An exemption to point (2)
In case a person of Indian descent (PIO) or an Indian citizen has the following:
Total income, excluding income from overseas sources surpasses Rs 15 lakhs within the applicable fiscal year: the 60 days specified in point (2) above shall be replaced with 120 days.
Indian national departing India for work abroad: The 60-day period in point (2) above will be replaced by 182 days for any Indian national departing India in any given year, either as a crew member or for work abroad.
Therefore, if an Indian citizen or PIO is not subject to taxation in any other nation and their total income is greater than Rs 15 lakhs (other than from foreign sources), they are considered residents of India. As a result, anyone who does not meet any of the prerequisites will be regarded as an Indian who does not reside in the country.
Who is obligated to deduct TDS under Section 195?
Any person responsible for paying to a non-resident or to a foreign company any sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income-tax thereon at the rates given in the table.
However, in case of interest payable by the Government Or a public sector bank. or a public financial institution, deduction of tax shall be made only at the time of payment and shall not be made when such interest is credited to the account of a non-resident or foreign company.
The obligation to comply with section 195 and to make deduction thereunder applies to all persons, resident or non-resident, whether or not the non-resident person has-
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.
What is the rate of TDS u/s 195?
The rate of tax deduction under Section 195 will be lower of :
Specified in the Double Taxation Avoidance Agreements (DTAA) between India and the payee's country.
Specified in the Income Tax Act.
Surcharges and education cess are added to the rates specified by the Act at the relevant rates. However, if payments are made according to DTAA rates, there is no need to add a surcharge or education cess. The applicable rates depend on the specific provisions outlined in the DTAA or the Income Tax Act.
The rate of Income Tax considered for section 195
In case payment is made to a person who is not resident in India or to a foreign соmраny | Rates | |
A | on any Long Term Capital Gains referred to in section 112A in excess of 1,00,000 | 10% |
B | on income by way of long-term capital gains referred to in section 115E or Long Term Capital Gains on unlisted securities | 10% |
C | on income by way of short-term capital gains referred to in section 111A | 15% |
D | on other income by way of long-term capital gains | 20% |
E | on income by way of interest payable by the Government or an Indian concern on money borrowed or debt incurred by the Government or the Indian concern in foreign currency not being income by way of interest referred to in section 194LB or section 194LC or 194LD) | 20% |
F | on income by way of royalty payable by the Government Or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern, and where such agreement is with an Indian concern, the agreement is approved by the Central Government, or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy | 10% |
G | on income by way of fees for technical services payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy | 10% |
H | on income by way of winnings from lotteries, crossword puzzles, card games, and other games of any sort | 30% |
I | on income by way of winnings from horse races | 30% |
J | on income by way of dividend | 20% |
K | on investment income referred to in section 115E | 20% |
L | on the whole of the other income (40% in case of foreign company) | 30% |
If the payee doesn't provide a PAN (Permanent Account Number), the applicable TDS rate shall be the rate prescribed by the prevailing law or 20%, whichever is higher.
TDS Payment Under Section 195
The methods for deducting TDS under Section 195 are as follows:
Before deducting the TDS, the person making the payment to the non-resident (Deductor / Buyers) shall apply for a TAN (Tax Deduction Account Number) under section 203A of the Income Tax Act.
Both the NRI's and the deductor's PAN numbers should be provided.
When paying NRIs, the deductor is required to deduct TDS.
The buyer's TDS deduction must be deposited using a challan for TDS payment by the 7th of the following month, at the latest.
TDS may be deposited online or through banks that have been given permission by the government or the Income Tax Department to use challan 281 for the collection of direct taxes.
The buyer must electronically file a TDS refund by submitting Form 27Q after depositing the TDS. TDS returns must be submitted by the deadline listed below each quarter.
Other Compliances
For non-resident transactions, additional compliance requirements involve the submission of specific forms under Section 195 of the Income Tax Act. These forms include Form 15CA, Form 15CB, Form 15CC
Form 15CA is a declaration submitted online by the payer to ensure TDS compliance, and Form 15CB is a certificate provided by a Chartered Accountant certifying details related to the remittance. While Form 15CC was previously used for additional information, it is currently obsolete. To comply with these regulations, the remitter must obtain Form 15CB, fill out Form 15CA online, and submit both to the Income Tax Department's website. This process ensures proper documentation and adherence to TDS provisions for non-resident transactions.
TDS Return and Certificate
Anybody making any payment to a non-resident is obligated to obtain TAN and deduct tax at the applicable rates in light of the provisions of section 195. Within the relevant deadlines, the payer must deposit the tax withheld from the government against the payee's PAN. Additionally, the payer would have to provide the non-resident with the TDS certificate in Form 16A and the TDS return in Form 27Q before the quarterly deadlines.
What are the consequences of Non-compliance?
Non-compliance with Section 195 of the Income Tax Act can result in various consequences:
1. Non-deduction of TDS: If TDS is not deducted, the corresponding expense may be disallowed under Section 40(a)(i) of the Income Tax Act.
2. Delayed Payment of TDS: If TDS is deducted but not paid within the specified time limit, interest at the rate of 1.5% per month or part thereof may be levied. This interest accrues from the date of deduction to the date of deposit.
3. Non-payment of TDS: Failure to pay the deducted TDS can lead to a penalty equivalent to the TDS amount under Section 271C of the Income Tax Act.
4. Under-deduction of TDS: In cases where the TDS deducted is less than the required amount, a penalty may be imposed equal to the difference between the actual amount deductible and the amount deducted.
5. Non-deduction Interest: If TDS has not been deducted, interest charges may apply under Section 201(1A) of the Income Tax Act.
It is crucial for entities and individuals to adhere to Section 195 requirements, ensuring timely and accurate deduction, deposit, and payment of TDS to avoid these potential consequences. Seeking professional advice and staying informed about tax regulations can help mitigate risks associated with non-compliance.
FAQ
Q1. Who is considered a non-resident in India?
A person who is not a resident in India, either because of their non-residency or non-permanent residency status, is termed a non-resident.
Q2. Is it mandatory to obtain a TAN for making payments to non-residents?
Yes, obtaining a TAN (Tax Deduction and Collection Account Number) is mandatory for anyone making payments to non-residents. TAN is required for TDS compliance.
Q3. Is TDS deducted from interest earned on an income tax refund?
Yes, under Section 195, interest earned on an income tax refund is eligible for TDS deduction.
Q4. Is the reimbursement of actual expenses covered under Section 195?
No, under Section 195, TDS will be subtracted from the reimbursement of costs that the foreign company or non-resident really incurred.
Q5. What is the significance of Form 15CA in non-resident transactions?
Form 15CA is a declaration submitted online to ensure compliance with TDS provisions when making payments to non-residents. It is a crucial step in the documentation process.
Q6. Do all payments to non-residents require a certificate in Form 15CB?
Yes, Form 15CB, issued by a Chartered Accountant, is required for all payments made to non-residents. It certifies details related to the nature of the remittance and TDS applicability.
Q7. Can a non-resident apply for a TAN in India?
Yes, a non-resident can apply for a TAN in India if they are involved in business or economic activities that require TDS compliance.
Q8. What are the consequences of not deducting TDS on payments to non-residents?
Non-deduction of TDS can lead to disallowance of expenses, penalties, and other consequences as per the provisions of the Income Tax Act.
Q9. Can a lower TDS rate be applied for non-resident transactions under DTAA?
Yes, if the non-resident provides a Tax Residency Certificate and the transaction qualifies under the Double Taxation Avoidance Agreement (DTAA), a lower TDS rate may be applicable.
Q10. What is the process for rectifying errors in TDS returns for non-resident transactions?
Errors in TDS returns can be rectified by filing a correction statement online using the TDS correction facility provided by the income tax department.
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