In India, a system called Tax Deducted at Source (TDS) applies when one party (payer) makes a payment to another (payee). Under this system, the payer withholds a certain amount of tax from the payment before giving it to the payee.
Section 195 of the Income Tax Act of 1961 deals with TDS for Non-Resident Indians (NRIs) and foreign businesses. This section applies when you, as an Indian resident, pay NRIs or foreign businesses for various things like interest income, fees, or anything besides salary.
What does Section 195 mean?
TDS deductions on payments or income of non-resident Indians are covered under Section 195 of the Income Tax Act of 1961. The laws included in this section prevent double taxation and emphasise tax deductions and related rates that apply to commercial transactions with non-resident Indians (NRIs). TDS is withheld from non-residents either on the day of payment or upon crediting the relevant party.
Read More About Income Tax for NRI
Who Is Responsible for TDS on NRI Payments in India?
Any individual who pays a non-resident any taxable amount in India (except from salary or interest mentioned in sections 194LB, 194LC, and 194LD) must deduct tax under this provision.
The payer, or the person who makes the payment to the Non-Resident Indian (NRI), maybe a resident or a non-resident, an individual, a partnership firm, an NRI, other NRIs, a foreign company, or an artificial juridical entity (such as a corporation, government agency, or non-profit organisation).
It is also important to remember that the kind of income or payment made determines the rate of TDS under Section 195.
Methods for Section 195 TDS Deduction
TDS can be deducted in compliance with the following provisions:
1. Before you can deduct TDS, you’ll need a Tax Deduction Account Number (TAN). This is like a unique ID for tax purposes. You can easily get one online or offline by submitting Form 49B. Remember, you’ll need your PAN (Permanent Account Number) and the NRI’s PAN to fill out the form.
2. The provision stipulates that when money is given to a Non-Resident Indian, TDS must be withheld at the source. This information (TDS amount) should be clearly mentioned in the sale agreement for the transaction.
3. Once you deduct the TDS, you need to deposit it with the government. The deadline is the 7th of next month. You can do this through a challan form or a TDS payment form at authorised banks or the Income Tax Department.
4. Every quarter, you must file a TDS return electronically using Form 27Q. Here’s a quick guide on the deadlines:
- Quarter 1 (1st April-30thJune): File by July 15th
- Quarter 2 (1st July-30th September): File by October 15th
- Quarter 3 (1st October-31st December): File by January 15th
- Quarter 4 (1st January-31st March): File by May 15th
5. After filing your TDS return, you can provide the NRI seller with a TDS certificate. This is called Form 16A or the Certificate of Deduction of Tax. It’s important to issue this certificate within 15 days of the filing deadline for that quarter.
Also Read More About What Is Form 16?
TDS Rate Under Income Tax Act Section 195
It is important to remember that there is no minimum restriction on deductions regarding the TDS rate under Section 195. TDS must be subtracted regardless of the amount of money.
View the table below for important details regarding TDS deductions under Section 195.
| Income Type | TDS Rate |
| Income, payments, or transactions resulting from investments | 20% |
| Income from long-term capital gains | 10% |
| Income received under Section 115E from long-term capital gains | 10% |
| Other avenues of long-term capital gains | 20% |
| Profits from short-term capital gains obtained in accordance with Section 111A provisions | 15% |
| Interest due on the amount borrowed in foreign currency | 20% |
| Earnings received in exchange for technical services rendered and paid for by the government or an Indian concern | 10% |
| Earnings from the royalty that the government or an Indian company pays | 10% |
| Royalties received from sources other than the government or an Indian concern | 10% |
| Other income sources | 30% |
Knowing the TDS rate under Section 195 is important, but there’s more. Understanding what happens if you miss the deadline to pay the deducted tax (TDS) to the government is also crucial. Why? Because if you’re late, you could face penalties and other legal troubles.
Consequences of Failing to Pay TDS Under Section 195
There are significant repercussions for failing to adhere to the regulations outlined in Section 195 of the Income Tax Act (ITA) regarding TDS (Tax Deducted at Source) on payments made to Non-Resident Indians (NRIs). Here’s a breakdown of the potential penalties:
- Disallowance of Expense: If an individual or entity neglects to deduct or deposit the TDS within the stipulated time frame, the corresponding expense incurred during the transaction might be disallowed for tax purposes in the payment year. This means the expense cannot be used to reduce taxable income.
- Interest on Late Deposit: When the TDS is deducted but not deposited by the due date, the payer will be liable to pay interest on the delayed amount. This interest accrues at a rate of 1.5% per month, calculated from the date of deduction until the actual deposit date.
- Penalty for Non-Deposit: If the TDS is deducted from the NRI’s payment but not deposited with the government, a penalty equivalent to the entire TDS amount will be levied under Section 221 of the ITA. This penalty serves as a deterrent for deliberate non-compliance.
- Penalty for Partial Deduction/Deposit: In cases where the TDS is deducted at a lower rate than mandated or only a portion of the deducted amount is deposited, the payer will be subject to a penalty under Section 271C of the ITA. This penalty is calculated as the difference between the actual TDS deducted and the amount that should have been deducted based on the applicable rate.
Conclusion
Understanding TDS for NRIs can seem complex, but it doesn’t have to be. As a payer in India, you withhold a portion of the payment as tax before giving it to an NRI. There are specific rules and deadlines for deducting, depositing, and reporting TDS. Missing these can lead to penalties. Consulting a tax advisor can ensure a smooth process.
FAQs
Will interest received on an income tax refund be subject to TDS deductions?
Yes, under Section 195, interest earned on an income tax refund is eligible for TDS deduction.
Does Section 195 cover the payment of actual expenses incurred?
Under Section 195, TDS will be subtracted from the reimbursement of costs incurred by the foreign firm or non-resident.
What is the non-resident TDS exchange rate?
The Reserve Bank of India’s (RBI) exchange rate on that particular day when TDS must be withheld would be considered.
On my Form 26AS, I can see that TDS is subtracted under section 195. How can I tell what nature is?
For non-residents, Section 195 applies to various income, including dividends, capital gains, interest, and rental income from real estate. As a result, any of the above might be the reason for the reduction listed under 195.
