Living in a globally connected world means many individuals and businesses in India make payments to foreign entities, be it for consultancy, software, rent, technical services, or even property purchases from NRIs.
But here’s a common mistake: assuming that such international transactions are tax-free.
That’s where Section 195 of the Income Tax Act comes in. It specifies the TDS provision in the case of an individual making a payment other than salary to an NRI or a foreign company. If you’ve ever wondered who deducts TDS on these payments, when it should be deducted, and how much, this article will make it crystal clear.
What Is Section 195?
Section 195 of the Income Tax Act, 1961 deals with TDS deductions on payments or income of non-resident Indians (NRIs) or foreign companies. In simple terms, if any person in India is making a payment to a non-resident, TDS may be applicable, regardless of whether the payer is an individual or a business.
This section ensures that the government collects tax on income that is earned in India but received by foreign individuals or entities.
Who Must Deduct TDS?
You don’t have to be a company to deduct TDS under this section. Even individuals are responsible.
Let’s say you are an Indian citizen buying a property from an NRI. You must deduct TDS before making the payment.
That’s why Section 195 specifies the TDS provision in the case of an individual making a payment other than salary to an NRI or a foreign company. This includes payments for:
- Technical or professional services
- Rent
- Interest or royalty
- Software or digital tools
- Purchase of property from an NRI
Even freelance payments to a non-resident service provider are covered.
What Is the TDS Rate Under Section 195?
The TDS rate under Section 195 of the Income Tax Act varies based on the nature of the payment. Some standard rates include:
- Interest: 20%
- Royalties: 10%
- Fees for technical services: 10%
- Other income: 30%
- Capital gains: Based on slab or flat rates (e.g., 20% for long-term capital gains)
To this, surcharge and cess are also applicable. So, if you’re making a large payment, don't forget to calculate the Section 195 TDS rate, surcharge and cess combined.
You can also refer to Double Taxation Avoidance Agreements (DTAs) between India and the recipient’s country to determine if a lower rate is available.
What Payments Are Covered?
Here’s where it gets practical. Some common situations where TDS on foreign payments is applicable:
- TDS on payment to a foreign company for licensing software
- TDS on payment to a non-resident for consultation
- TDS on payment to a non-resident for technical services
- TDS on purchase of property from NRI Section 195
In all these cases, the payer must deduct TDS before transferring funds to the non-resident's bank account.
What If the Non-Resident Is Visiting India?
If the non-resident is physically present in India, tax rules still apply. However, the definition of residency is key.
According to tax law, a person is considered a resident if they stay 60 days or more for the specific financial year. So, if the foreign national is here for less than that, they’re still treated as a non-resident, and TDS under Section 195 applies.
How and When to Deduct TDS?
The process is straightforward but must be followed carefully:
- Determine if the payee is a non-resident.
- Evaluate if the payment is taxable in India.
- If yes, calculate TDS based on the Section 195 TDS rate or the DTAA rate.
- Deduct TDS before making the payment.
- Deposit TDS with the government and file Form 15CA and 15CB.
Form 15CB must be issued by a Chartered Accountant confirming that tax has been properly deducted. Form 15CA is the declaration filed by the payer.
Consequences of Non-Compliance
Failing to deduct or deposit TDS under Section 195 can have serious consequences:
- Penalty equal to the amount of tax not deducted
- Interest on delayed payments
- Disallowance of the expense on your tax return
In short, ignorance is no excuse when it comes to foreign payments and tax compliance.
Final Thoughts
As international transactions become more frequent, understanding Section 195 is critical. It not only relates to the TDS (Tax deducted at Source) deductions on income or payments to non-residents but also specifies the TDS provision in the case of an individual making a payment other than salary to an NRI or a foreign company.
Whether you’re paying for foreign software, consultancy, or buying a house from an NRI, make sure to calculate and deduct TDS properly.
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