Section 195 of the Income Tax Act is applicable to all Non-residents or Foreign companies whose income has been accrued or arise in India. Also, If any payment is being made by any person to a non-resident then tax needs to be deducted under this section irrespective of the amount.
What is Section 195?
Section 195 is concerned with the deduction of tax on payments or income of non-resident indian. Under this section, if any payment is being made in the nature of Interest or any other sum which is chargeable to tax in India except Salary then tax needs to be deducted at specified rates.
Also, there is no threshold limit to deduct TDS u/s 195 and the payer must deduct tax only when the payment made to a non-resident is taxable in India.
Who is a Payer under section 195?
A payer is a person who is making a payment to a non-resident. The payer can be:
- Foreign companies
- Persons having exempt income in India
- Juristic individual
TDS rates for NRI under section 195 of the Income Tax Act:
|Nature of Payment||TDS Rates|
|Income from the investment made by an NRI||20%|
|Income by way of LTCG referred to in u/s 115E in case of an NRI||10%|
|Income by way of LTCG u/s 112 or 112A||10%|
|Short Term Capital Gain income from shares and securities referred to in Section 111A||15%|
|Any other income by way of LTCG||20%|
|Income by way of fees for Technical services payable by Govt. or an Indian concern||10%|
|Interest payable on money borrowed in Foreign currency||20%|
|Income by way of Royalty payable by the Government or an Indian concern||10%|
|Income by way of Royalty other than the nature of the royalty payable by the Government or an Indian concern.||10%|
|Any other income||30%|
Note: Furthermore, Health & Education cess is to be added to the above rate.
EXAMPLE: Ram is an NRI and invests in the stock market. He earned INR 5,00,000 as Long Term capital gains on the sale of stock, what will be the TDS amount in this case?
In this case, the payer will deduct TDS at the rate of 20% plus Health& Education cess on the total amount of gain. The total amount of TDS that needs to be deducted is INR 1,00,400 i.e ( INR 5,00,000*20.08) and also the payer should only credit INR 3,99,600 to Ram’s account after deducting the tax amount.
Disclosures in relation to Foreign payment
If the payer is responsible to make any payment to the NR or Foreign company then they are required to furnish such information and payment in Form 15CA & Form 15CB. Also, If the amount paid is exempt under the Income Tax Act the payer is required to furnish such information in Part D of 15CA.
The payer/deductor should obtain a TAN for deducting the tax. Also, they should file quarterly TDS returns in Form 27Q within the respective due date.
To decide the residential status of a person under income tax, we need to check the basic and additional conditions and other criteria prescribed under section 6 of the Income Tax Act 1961. Only non-residents are covered under this section, Resident but not Ordinary Residents ( RNOR) are not covered in this section.
TDS is deducted at the time of payment to the payee or at the time of credit of income to the payee account, whichever is earlier.
Yes, the payee can claim a refund of the tax which is being deducted while filling out the income tax return.
Yes, as per RBI norms every time a payment is to be made, the payer of that amount is duty-bound to deduct tax at source under section 195 of the Income Tax Act even if your total taxable income in India is below INR 2.5 lacs.