Section 195 of  Income Tax Act, 1961 is a critical provision aimed at ensuring tax compliance on payments made to non-residents. It mandates the deduction of tds on non resident payment on certain payments made to foreign entities or individuals. This section is particularly relevant for businesses and individuals making payments like royalty, interest, or technical fees to non-residents.

In this guide, we’ll explore the provisions, applicability, rates, exemptions, and compliance requirements of Section 195 of Income Tax Act to ensure you stay informed and compliant.

On payments made to non-residents,TDS on nri payment must be deducted in accordance with Section 195 of Income Tax Act. To guarantee compliance with tax rules, the payer has to deduct TDS at the appropriate rates prior to making the payment.

What is Section 195 of Income Tax Act?

Section 195 of Income Tax Act governs the deduction of TDS on payments made to non-residents or foreign companies. It ensures that taxes are deducted on any income accruing to a non-resident in India, thus preventing tax evasion.

Key Features of Section Section 195 of Income Tax Act:

1. Applicable to payments made by residents to non-residents.
2. Covers a wide range of payments, including:
   • Interest
   • Royalty
   • Fees for technical services
   • Capital gains
   • Dividends
3. Mandates deduction at the source before remitting payments abroad.

Applicability of Section 195 of Income Tax Act

Section 195 of Income Tax Act applies to any payment made to a non-resident that is chargeable to tax under the Income Tax Act, 1961. Here’s a closer look at when it applies:

1. Who needs to deduct TDS on nri payment?
   • Any person (individual, company, partnership, etc.) making a payment to a non-resident.
2. What payments are covered?
   • Payments taxable under the Income Tax Act, such as:
     • Interest on loans taken from foreign institutions.
     • Royalty payments for intellectual property.
     • Fees for technical or professional services.
     • Capital gains earned by a non-resident from the sale of Indian assets.
3. Who is excluded?
   • Payments made by non-residents to other non-residents.
   • Payments exempted under tax treaties or DTAA (Double Taxation Avoidance Agreement).

Rates of TDS on NRI payment Under Section Section 195 of Income Tax Act

The rate of TDS on NRI payment depends on the nature of the payment and the applicable tax treaty (DTAA). Below are the common TDS rates:

Note:

• A surcharge and health & education cess may also be applicable.
• Lower rates can apply if a Tax Residency Certificate (TRC) is submitted by the non-resident.

Steps for Deduction Under Section 195 of Income Tax Act

To comply with Section Section 195 of Income Tax Act, follow these steps:

1. Determine Taxability:
   Confirm whether the payment is taxable in India under the Income Tax Act.
2. Apply for Certificate of Lower Deduction (Optional):
   The payer or recipient can apply to the Assessing Officer for a lower TDS deduction rate.
3. Deduct TDS on non resident payment:
   Deduct TDS on non resident payment at the applicable rate before making the payment to the non-resident.
4. Deposit TDS:
   Deposit the deducted TDS with the government within the due date using Challan ITNS 281.
5. File Form 15CA and 15CB:
   • Form 15CA: Declaration of TDS on NRI payment.
   • Form 15CB: Certificate from a Chartered Accountant confirming the deduction.
6. Issue Form 16A:
   Provide the non-resident with a TDS certificate for their records.