Section 195 of the Income Tax Act - TDS Applicability for NRI

Introduction

Sending money outside India sounds simple—until tax rules step in.

Many people only realize this after making a payment and then discovering compliance issues. That’s where Section 195 of Income Tax Act quietly becomes important. It doesn’t just add a rule; it puts responsibility on the person making the payment.

If you’re dealing with international transactions, even occasionally, this is something you need to understand properly.

What is Section 195?

Section 195 of Income Tax Act, 1961 pertains to deductions in tax deducted at source (TDS) in payments to non-residents."

 it means that when you pay interest, royalties, technical charges, or any other amount, other than salaries, to a non-resident, then you have to find out whether such an income can be taxed in India."

If it can be taxed, then you have to deduct TDS. And that is why it is called 195. Other amounts because it relates to various types of amounts."

Who is a Non-resident?

A non-resident is a person who fails to satisfy the criteria for being a resident as per the Indian income tax law.

It may be an individual residing overseas, a foreign company, or even a Non-Resident Indian. Despite their absence from the country, if they earn income that is connected to India, taxation rules still apply.

That’s the gap Section 195 is designed to cover.

Who Should Deduct Tax Under Section 195?

One important thing to understand is that this rule is not limited to large companies.

Section 195 casts an obligation on the person who is making any payment to a non-resident.

So whether you are:

• An individual hiring a foreign consultant
• A freelancer paying for international services
• A business making overseas payments

You are responsible for deducting TDS if the payment is taxable.

Section 195 TDS Rates for FY 2025–26

There isn’t a single fixed rate under this section, which is where people often get confused.

In many cases, the rate comes to around 20% plus surcharge & cess, but the actual rate can change depending on the nature of the payment & applicable tax treaties.

This is why blindly applying a standard rate can lead to errors. It’s always better to understand the type of income first.

TDS Payment & Compliance Under Section 195

The timing of deduction matters just as much as the deduction itself.

Under this section, TDS needs to be deducted at the earlier of:

• When the payment is made, or
• When it is credited

Once deducted, it must be deposited with the government within the prescribed timeline, & proper filings should follow.

Delays or mistakes here don’t go unnoticed—they can lead to penalties, interest, & even disallowance of expenses.

Application for Lower or Nil TDS (Form 13)

There are situations where deducting TDS at standard rates doesn’t make sense.

For example, if the actual tax liability is lower, deducting a higher amount only creates unnecessary complications.

That’s why the law allows you to apply for a lower or nil TDS certificate using Form 13.

Once approved, you can deduct TDS at a reduced rate or not at all, depending on the case. This helps avoid excess deductions & keeps cash flow smoother.

Is There a Threshold Limit to Deduct TDS u/s 195?

This is where Section 195 becomes stricter than most other TDS provisions.

There is no minimum threshold limit.

This means even small payments can attract TDS, as long as the income is taxable in India. It doesn’t matter whether the amount is large or small—the rule applies based on taxability, not size.

A Common Misunderstanding

A lot of people assume that every foreign payment automatically requires TDS.

That’s not correct.

The real condition is simple: the income must be taxable in India. If it is not taxable, then TDS may not be required.

Getting this wrong is one of the most common compliance mistakes.

Why Section 195 Matters

This section plays a bigger role than it appears.

It ensures that tax is collected before money leaves the country. Without it, tracking international payments & collecting tax would become much more difficult.

For taxpayers, it’s less about complexity & more about responsibility.

Final Thought

At first glance, Section 195 of Income Tax Act may seem technical. But once you break it down, the idea is straightforward.

If you’re paying a non-resident and that income is taxable in India, tax needs to be deducted at the source.

Understanding this early can save you from penalties, delays, and unnecessary stress later.

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