TDS On Payment To Non-Resident Sec 195: In India, the Income Tax Act divides the taxpayers into two groups namely residents and non-residents of India. Thus the income tax rates and provisions vary from residents and non-residents of India. For the non-residents of India, the Income Tax Government India provides various provisions such as tax rates on royalties, interest, dividends, and capital gains earned in India. However, the officials of the income tax department also collect the Income Tax. The provisions of tax deduction at source (TDS) for any sum paid to non-residents come under Section 195 of the Income Tax Act.
In this article, let’s understand everything about TDS on payment to non-residents with & without PAN under Section 195 in detail.
- What Is Section 195?
- Who Is Liable To Deduct TDS Under Section 195?
- Payment Type On Which TDS Is Deducted
- Time Of TDS Deduction for Non-Residents
- How TDS Under Section 195 Is Deducted?
- Rate of TDS Under Section 195 For Non-Residents
- Section 206AA
- FAQs on TDS On Payment To Non-Resident Under Section 195
What Is Section 195?
The Income Tax Act of 1961, Section 195, is mainly concerned with Tax Deducted at Source (TDS) for non-resident Indians. This section focuses on the tax rates and deductions that apply to all types of company transactions.
The first method of collecting taxes is through tax deductions at the source. The TDS on non-resident payments is covered by Section 195 of the Income Tax Act. On a day-to-day basis, this section identifies the tax rates and deductions on business transactions with non-residents.
The income is taxable under Section 195 of the Income Tax Act. Any amount is charged, and a remittance certificate is required. Any amount paid that has the character of income and gross amount, the total of which may or may not represent income or profits, is referred to be a sum subject to tax.
The Act enables a provision to avoid a revenue loss due to a foreign resident’s tax liability by deducting the equivalent amount from payments given to them at the source.
Who Is Liable To Deduct TDS Under Section 195?
Any person who falls under the following category will have to liable to deduct TDS under Section 195:
- Non-Resident
- Foreign Country
Payment Type On Which TDS Is Deducted
Non-Residents or Foreign countries are liable to deduct TDS on the following payments:
- Interest excluding interest covered by sections 194LB, 194LC, or 194LD, or
- Royalties, or
- Any other sum chargeable under the provisions of the Income Tax Act
Time Of TDS Deduction for Non-Residents
The person responsible to deduct TDS must deduct TDS when one of the following scenarios happens:
- At the moment of payment in cash, cheque, drafts, or any other manner, or
- When income is credited to the deductee’s account
How TDS Under Section 195 Is Deducted?
The procedures for deducting TDS under Section 195 are as follows:
- TAN: Before deducting TDS, the buyer must first get a TAN under section 203A of the Income Tax Act, 1961. A TAN can be obtained by submitting a Form 49B application. Also, the form can be downloaded from the official website of the Income Tax Department. The buyer should also have his own PAN number as well as the NRI seller’s PAN number.
- TDS must be deducted when making a payment to a non-resident. In the sales contract between the NRI seller and the buyer, the number of TDS deducted and the rate at which it was deducted should be mentioned.
- The buyer’s TDS shall be deposited via Form number or challan for TDS payment on or before the 7th of the next month in which the TDS was deducted.
- TDS can be deposited in banks that are authorised to collect Direct Taxes by the Indian government or the Income Tax Department. The buyer is responsible for the deposit.
- The buyer must electronically file a TDS refund by completing Form 27Q after the TDS has been deposited.TDS returns are filed every three months.
- TDS deducted in the first quarter, from April 1 to June 30, must be filed by July 15th.
- TDS must be filed on the 15th of October for the second quarter, which covers from July 1 to September 30.
- TDS deducted in the third quarter, from October 1 to December 31, must be filed by January 15th.
- TDS deducted in the fourth quarter, from January 1 to March 31, must be filed by May 15th.
- Buyer can offer TDS certificate or Certificate of Deduction of Tax (Form 16A) to NRI seller after TDS returns have been filed. Within 15 days of the due date for TDS returns for the quarter, this certificate should be issued to the seller.
Rate of TDS Under Section 195 For Non-Residents
Surcharge and education cess at the prescribed rate must be included in the rates prescribed by the Income Tax Act. There is no need to add a surcharge or education cess if the payment is done according to DTAA rates. The following are the TDS rate for Non Residents under section 195:
| Details | TDS rates |
|---|---|
| Income from a non-resident Indian’s investment | 20% |
| In the case of an NRI, income from long-term capital gains is taxed under Section 115E | 10% |
| Long-term capital gains are a source of income | 10% |
| Section 111A short-term capital gains | 15% |
| Any other income from long-term capital gains | 20% |
| Interest on money borrowed in a foreign currency is due | 20% |
| Income from royalties paid by the government or an Indian company | 10% |
| Income from royalties, but not the kind of royalties referred to as being payable by the government or an Indian enterprise | 10% |
| Fees for technical services paid by the government or an Indian company | 10% |
| Any other sources of income | 30% |
Section 206AA
The payee must provide his PAN to the payer under Section 206AA (deductor). The payer will be liable to deduct TDS at higher rates if the payee fails to provide the PAN. Non-residents and foreign corporations, on the other hand, were having difficulties since they lack a PAN in India.
The Finance Act of 2016 made section 206AA lesser applicable to payments to non-residents in the form of interest, royalties, fees for technical services, and payments on the transfer of any capital asset. If the following information is provided to the deductor, Section 206AA will not apply to such non-residents:
- Name, email address, and phone numbers must be provided by the payee (deductee).
- The deductee must provide the address of his residence in the country/specified territory outside of India.
- If the law of that nation or specified territory allows for the issuance of such a certificate, the deductee must present a Tax Residency Certificate stating that he is a resident of that country or specified territory.
FAQs on TDS On Payment To Non-Resident Under Section 195
Question 1.
Is TDS deducted on foreign payments?
Answer:
Yes, TDS is deducted on foreign payments.
Question 2.
What is the TDS on payment to non-resident for an immovable property?
Answer:
TDS is deducted at 1% at the time of depositing such sum to the transferor’s account or at the time of payment of such sum, whichever comes first, on the sale of immovable property.
Question 3.
How much TDS to be deducted on the purchase of property from NRI?
Answer:
When an NRI sells the property, the buyer must deduct TDS at a rate of 20%. A TDS of 30% will be applied if the property is sold within two years of purchase (reduced from the date of purchase).