With globalization, foreign payments have become routine—payments to foreign consultants, overseas software vendors, purchase of property from NRIs, royalty, dividends, interest, or even online services.
However, one small mistake in TDS compliance under Section 195 can lead to serious consequences, such as:
❌ Heavy penalties
❌ Disallowance of business expenses
❌ Blocked foreign remittances
❌ Income-tax scrutiny & notices
Let’s understand Section 195 simply and practically.
🔍 Why is TDS on Non-Resident Payments Required?
Whenever any person makes a payment to a Non-Resident (NRI) or Foreign Company, tax must be deducted before remitting money abroad, if the income is taxable in India.
👉 The objective is tax collection at source, ensuring income earned in India does not escape taxation.
⭐ Key Highlights of Section 195
✅ Applicable to Non-Residents & Foreign Companies
✅ No minimum limit – even ₹1 of taxable payment attracts TDS
✅ TDS rate = Income-tax Act or DTAA, whichever is beneficial
✅ TAN mandatory, along with quarterly TDS returns
⚠️ PAN not furnished? Higher TDS applies under Section 206AA
❓ Who is a Non-Resident? (Section 6)
A person is treated as a Non-Resident if they do not satisfy the residency conditions under the Income-tax Act.
A person is Resident if:
📍 Stayed in India ≥ 182 days in a financial year, OR
📍 Stayed ≥ 60 days in the year + 365 days in the last 4 years
Special rules for Indian Citizens / PIOs:
🔹 Income > ₹15 lakh (excluding foreign income): 120-day rule
🔹 Leaving India for employment or as ship crew: 182-day rule
➡️ If these conditions are not met → Non-Resident
❓ Who Must Deduct TDS under Section 195?
Any person making payment (other than salary) to a Non-Resident:
👤 Individual
👨👩👧 HUF
🏢 Firm / LLP
🏭 Company
🏛 Government / PSU
👉 Even non-business or personal payments are covered.
👉 Even non-business or personal payments are covered.
💰 TDS Rates for FY 2025–26 (As per Finance Act)
|
Nature of
Income |
TDS Rate |
|
Interest /
Dividend |
20% |
|
LTCG u/s 115E |
12.5% |
|
LTCG on
listed shares u/s 112A |
12.5% (after
23-07-2024) |
|
Other LTCG |
12.5% |
|
STCG (FII /
funds) |
20% |
|
Interest on
foreign currency loans |
20% |
|
Royalty /
Technical fees |
20% |
|
Lottery /
Games / Horse races / Online games |
30% |
|
Any other
income |
30% |
📌 DTAA provisions can substantially reduce the TDS rate, subject to documentation.
🛠 Step-by-Step TDS Compliance under Section 195
1️⃣ Obtain TAN
TAN is mandatory for every deductor.
2️⃣ Deduct TDS
At the time of payment or credit, whichever is earlier.
3️⃣ Deposit TDS
🧾 Challan ITNS 281
📅 On or before 7th of the next month
4️⃣ File TDS Return – Form 27Q
|
Quarter |
Due Date |
|
Q1 (Apr–Jun) |
30 July |
|
Q2 (Jul–Sep) |
31 October |
|
Q3 (Oct–Dec) |
31 January |
|
Q4 (Jan–Mar) |
31 May |
5️⃣ Issue TDS Certificate
📄 Form 16A – within 15 days of filing return
📝 Lower or NIL TDS Certificate (Form 13)
A Non-Resident can apply to the Assessing Officer under Section 197 for:
✔️ Lower TDS
✔️ NIL TDS
Once approved, the deductor can deduct tax at the reduced rate mentioned in the certificate.
🌍 Foreign Remittance Compliance – Form 15CA & 15CB
Before making any foreign remittance, the payer must submit:
📄 Form 15CA
📄 Form 15CB (CA Certificate)
👉 Required even if the income is not taxable, unless specifically exempted.
❓ Why are Form 15CA & 15CB Mandatory?
✔️ Proper reporting of foreign payments
✔️ Enables banks to process remittance
✔️ Tracks cross-border tax compliance
✔️ Prevents tax leakage
🚫 Penalty for Wrong or Non-Filing of Forms 15CA / 15CB
💥 Penalty of ₹1,00,000 under Section 271-I
❗ No maximum limit prescribed
⚠️ Consequences of Non-Compliance
❌ Business expenditure may be disallowed
❌ Interest @ 1.5% per month
❌ Penalty equal to TDS amount
❌ Penalty for short deduction
❌ Bank may block foreign remittance
🚨 Important Checklist for Taxpayers
Before paying a Non-Resident, ensure:
1️⃣ Taxability in India is checked
2️⃣ Correct TDS rate / DTAA benefit applied
3️⃣ TDS deducted and deposited on time
4️⃣ Form 27Q filed
5️⃣ TDS certificate issued
✅ Proper compliance means no penalties, no notices, and smooth remittances.
✍️ Final Word from Tax Manthan
Section 195 is one of the most litigated and misunderstood provisions of the Income-tax Act.
A single wrong assumption can result in significant financial exposure.
📌 When in doubt, always seek professional advice before making foreign remittances.
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