Section 195 – TDS on Non-Residents

Section 195 of the Income Tax Act, 1961, is basically concerned about the Tax Deducted at Source (TDS) for the non-resident people of India. This section basically highlights the tax rates and deductions related to all business transactions.

Tax Deducted at Source is the first way of collecting taxes. Section 195 of the Income Tax Act is a section that covers the TDS on Non-resident payments. This section identifies the tax rates and deductions on business transaction with a non-resident from a day –to-day basis.

Under Section 195, the income is chargeable under Income Tax Act. Any sum is charged and the certificate for remittance is mandatory. Any sum chargeable to tax is the amount that is paid which bears the character of income and gross amount, the whole of which may or may not represent income or profits.

The Act lays out a provision to avoid a revenue loss as a result of tax liability in the hands of a foreign resident, by deducting the same amount from payments made to them at source.

Payer is the person who is remitting the payment to a non-resident payee. The payer can be individuals, Hindu Undivided Family, firms, non-residents, foreign companies, persons having exempt income in India and any juristic person irrespective of whether that person has income chargeable to tax in India or not. Payee is a non-resident whose residential status is as per Section 6 of the Act.

TDS under section 195

The following are the ways to be followed to deduct TDS under Section 195:

  • TAN (Tax Deduction Account Number): Buyer should first obtain TAN under section 203A of the Income Tax Act, 1961 before deducting TDS. TAN can be obtained by applying buy filling up the Form 49B. This form is also available online. Buyer should also have his own PAN number and PAN number of the NRI seller.
  • TDS must be deducted at the time of making the payment to the NRI. The information about the TDS being deducted and the rate at which it was deducted should be mentioned in the sale deed between the NRI seller and the buyer.
  • The TDS deducted by the buyer should be deposited through Form number or challan for TDS payment on or before the 7th of next month in which the TDS is deducted.
  • The TDS can be deposited through banks that are authorised by government of India or the Income Tax Department to collect Direct Taxes. The deposit has to be made by the buyer.
  • After the TDS has been deposited, the buyer has to electronically file TDS return by submitting Form 27Q. TDS returns are filed quarterly. TDS deducted during the first quarter from 1st April to 30th June must be filed on 15th July. TDS deducted during the second quarter from 1st July to 30th September must be filed on 15th October. TDS deducted during the third quarter from 1st October to 31st December must be filed on 15th January. TDS deducted during the fourth quarter from 1st January to 31st March must be filed on 15th May.
  • After the TDS returns have been filed, buyer can issue TDS certificate or Certificate of Deduction of Tax which is Form 16A to NRI seller. This certificate should be issued to the seller within 15 days from the due date of TDS returns for the quarter.

Rate of TDS under Section 195

Rates prescribed under the Act has to be increased by surcharge and education cess at the prescribed rate. If the payment is being made as per DTAA rates, then there is no need to add surcharge and education cess. The rates are as follows:

Particulars TDS rates
Income in respect of investment made by a NRI 20%
Income by the way of long term capital gains in Section 115E in case of a NRI 10%
Income by way of long-term capital gains 10%
Short Term Capital gains under section 111A 15%
Any other income by way of long-term capital gains 20%
Interest payable on money borrowed in Foreign Currency 20%
Income by way of royalty payable by Government or an Indian concern 10%
Income by way of royalty, not being royalty of the nature referred to be payable by Government or an Indian concern 10%
Income by way of fees for technical services payable by Government or an Indian concern 10%
Any other income 30%

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