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Section 195

Section 195 – TDS on Payments to Non-Residents

Introduction

Section 195 of the Income-tax Act, 1961 mandates Tax Deduction at Source (TDS) on payments made to non-residents, where such payments are chargeable to tax in India. This provision ensures that tax is collected on foreign remittances at the earliest point of income generation.

Who Qualifies as a Non-Resident?

As defined under Section 6, a non-resident is:

  • An individual or entity not meeting the residency criteria in India,
  • Typically having no place of business or residence in India.

If any payment is taxable in India and made to such a person, TDS under Section 195 becomes applicable.

Applicability

  • Universal Coverage: TDS must be deducted on all taxable payments to non-residents without any threshold limit.
  • Mandatory Deduction: The obligation exists regardless of payment size—even small amounts must be taxed if chargeable under the Act.

✅ Key Points

  • No Minimum Limit: TDS applies to all taxable payments.
  • Type of Income: TDS is levied on interest, royalties, fees for technical services, capital gains, and more.
  • Rate Determination: The TDS rate depends on the nature of payment and any applicable Double Taxation Avoidance Agreement (DTAA).

📊 General TDS Rates under Section 195 (FY 2024-25)

Type of PaymentTDS Rate (plus surcharge & cess)
Interest (non-Govt. securities)20%
Interest on Govt. securities20%
Interest to NRIs (e.g., NRO a/c)20% or 10% (under DTAA)
Royalties (patents, copyrights, trademarks)10%
Fees for Technical Services (FTS)10%
Dividends20% (lower under DTAA possible)
Rent on Immovable Property30%
Short-Term Capital Gains (listed shares)15%
Long-Term Capital Gains (listed shares)10% (conditions apply)
Other Income (e.g., consultancy, commissions)20% (unless DTAA provides lower rate)

DTAA Consideration

Where India has signed a Double Taxation Avoidance Agreement with the payee’s country, the beneficial rate (whichever is lower between DTAA and the Act) applies. To avail this, the non-resident must furnish:

  • Tax Residency Certificate (TRC),
  • Form 10F,
  • PAN or prescribed alternate documents.

Conclusion

Section 195 ensures fair taxation of cross-border payments. While the rates can be high under domestic law, DTAA provisions can significantly reduce the tax burden. Hence, due diligence is essential before making any payment to a non-resident to avoid penalties and ensure compliance.