TDS on payments to Non-Residents- Section 195
Introduction:
Income Tax Act, 1961 categorizes the taxpayers into two categories- Resident & Non-Resident assesses. Separate provisions and tax rates have been prescribed for non-resident in the Act. Where non-residents have been allowed preferential tax rates in respect of their income from royalties, interest, dividend and capital gains etc. as earned in India, at the same time, the Government also need to assure a proper mechanism of tax collection from non-residents. Section 195 of the Income Tax Act prescribes the provisions of tax deduction at source (TDS) with regard to any sum paid to non-residents. In this article, we will summarize the provisions of section 195 in simple language so that the layman might take benefit of the same. We will also give a detailed analysis of section 195 in another article later.
Section-195: TDS on payment to non-residents
Any person responsible for making payment to:
(a) Non-Resident or
(b) Foreign company
shall be liable to deduct TDS on the following payments: -
(i) Any Interest (except interest covered under sections 194LB or section 194LC or 194LD) or
(ii) Royalty or
(iii) Any other sum chargeable under the provisions of Income Tax Act (except income chargeable under the head “salary”)
|
Note:
|
Time of deduction of TDS:
The person liable to deduct TDS (Deductor) shall deduct TDS at the earlier of the following:
- At the time of payment in cash/ cheque/ draft or any other mode or
- At the time of credit of income to the account of the deductee
|
Exception: If interest is paid by Government or a public sector bank or a public financial institution to a non-resident, TDS shall be deducted only at the time of payment and not at the time of crediting interest to the account of non-resident or foreign company. |
Rates of tax deduction in respect of non-residents or foreign companies
|
Particulars |
Rate of TDS* |
|
Income with respect of investment made by the non-resident |
20% |
|
Income by way of Long-Term Capital Gain (LTCG) referred in section 115E |
10% |
|
Income by way of Long-Term Capital Gain (LTCG) referred in section 112(1)(c)(iii) [LTCG on unlisted securities] |
10% |
|
Income by way of Long-Term Capital Gain (LTCG) referred to in section 112A in excess of Rs. 1 Lakh Note: NRI shall not be allowed to take benefit of Rs. 1 Lakh threshold if they opt for section 115E special provisions. |
10% |
|
Income by way of Short-Term Capital Gain (STCG) referred to in section 111A |
15% |
|
Any other Long-Term Capital Gains |
20% |
|
Income by way of interest payable by the Government or an Indian concern against money borrowed/ debt incurred by Government or Indian concern in foreign currency [other than interest referred in section 194LB or 194LC] |
20% |
|
Income by way of royalty payable by the Government or an Indian concern in pursuance of an agreement where such royalty is in consideration for the transfer of all or any rights (including the granting of license) in respect of copyright in any book on the subject referred in section 115(1A) of the Act, to the Indian concern, or in respect of any computer software referred in second proviso to section 115A(1A), to a person resident in India. |
10% |
|
Income by way of royalty payable by the Government or an Indian concern in pursuance of an agreement approved by the Central Government or where the agreement is in pursuance with the prevailing Industrial Policy. |
10% |
|
Income by way of Fees for Technical Services (FTS) payable by the Government or an Indian concern in pursuance of an agreement made with the Government or Indian concern and where such agreement is approved by the Central Government or is in accordance with the prevailing Industrial Policy. |
10% |
|
Income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort |
30% |
|
Income by way of winnings from horse races |
30% |
|
Income by way of dividend |
20% |
|
Any other Income |
Non-Resident (other than foreign company): 30% Foreign company: 40% |
|
Note: The above rates of TDS shall be increased by surcharge and cess as prescribed from time to time. Presently, the rates of surcharge vary from 2% to 37% depending on the income and the nature of taxpayer. The rates of Health and Education Cess is 4%. |
TDS Return & TDS Certificates Due dates:
The person deducting TDS is required to file TDS return in Form No. 27Q in respect of payments to non-residents (including foreign company)
|
Due date of Filing TDS return |
Due date of issuing TDS certificate |
|
|
Applicability of Section 206AA
Section 206AA requires the payee to furnish his PAN to the payer (deductor). If the payee fails to furnish the PAN, the payer shall be liable to deduct TDS at higher rates. However, non-residents & foreign companies were facing genuine difficulties as they were not having PAN in India.
Finance Act 2016 relaxed the applicability of section 206AA in case of payment to non-residents which is in the nature of interest, royalties, fees for technical services and payment on transfer of any capital asset. Section 206AA would not apply to such non-residents if the following details are furnished to the deductor:
- The payee (deductee) shall furnish details like name, email-id, contact numbers
- The deductee shall provide the address of the country/ specified territory outside India in which he is resident
- The deductee shall furnish Tax Residency Certificate of his being resident in any country or specified territory outside India if the law of that country or specified territory provides for the issuance of such certificate.
