Section 195 of Income Tax Act - TDS for NRIs

Section 195 of the Income Tax Act relates to the TDS (Tax deducted at Source) deductions on income or payments belonging to Non-Resident Indians (NRIs). Section 195 lays down provisions to avoid double taxation on the amount and focuses on the tax rates and deductions over business transactions with non-residents. Any amount made through these business transactions is chargeable under the Income Tax Act of 1961. In this article, we look at Section 195 of the Income Tax Act, which consists of provisions pertaining to the TDS tax deductions.

Who is a Non-Resident?

A Non-Resident Indian (NRI) is an individual who does not qualify as a resident of India under Section 6 of the Income Tax Act. To be considered a resident, a person must stay in India for at least 182 days in a financial year, or for 60 days in that year and 365 days over the preceding four financial years. Those who do not meet these conditions are classified as NRIs. While NRIs hold an Indian passport, they reside and work in another country, which distinguishes them from residents of India.

What is Section 195 of the Income Tax Act?

Section 195 of the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on certain payments made to non-residents, including Non-Resident Indians (NRIs). It applies to payments such as interest, royalty, fees for technical services, and other sums chargeable to tax in India. The tax must be deducted either at the time of crediting the concerned party or on the actual payment date. Individuals, Hindu Undivided Families (HUFs), firms, and foreign companies making these payments are responsible for TDS compliance. Additionally, Section 195 helps avoid double taxation by ensuring tax is collected before payment is made to non-residents in alignment with their residential status under Section 6 of the Act.

Who should deduct under Section 195?

The following are the payers who pay non-residents or remit payments as per Section 195 of the Income Tax Act, 1961.

An individual
HUF (Hindu Undivided Family)
Partnership Firms
Non-Resident Indians (NRIs)
Foreign Companies
Persons having exempt income in India
Juristic person (regardless of the income is chargeable to tax in India or not)
Under Section 195, the NRIs (as per Section 6 of the Income Tax Act) whose sum is chargeable under this section are considered as a payee.

TDS under section 195 needs to be deducted as follows:

At the time of crediting a Party
On the actual date of payment

How does the TDS deduction work under Section 195?

The following are the methods for TDS deduction as per Section 195 of Income Tax Act, 1961:

Firstly, the buyer must obtain the Tax Deduction Account Number (TAN), as per Section 203A of the Income Tax Act, before claiming for the TDS tax deductions. Upon the submission of Form 49B, it can be obtained which is available both online and offline. The buyer must hold his/her own PAN card as well as the PAN number of the NRI seller for the completing of the Form 49B submission process.
As per Section 195, the TDS must be deducted from the source during the payment process to the NRI. The details that are related to the TDS deductions and the rates that are applicable to be specified in the sale deed of the transactions that are made between the buyer and the NRI seller.
The TDS deducted by the buyer under Section 195 has to be deposited via challan or Form number for the TDS payment on or before the 7th of the subsequent month in which the TDS deductions have been made.
As per Section 195, the TDS can be deposited by the buyer via banks that have been authorised by the Government, or the Income Tax Department to collect the Direct Taxes.
After the process of TDS deposition as per Section 195, the buyer has to file the TDS return through the computerised medium by submitting the Form 27Q.
Upon filing the TDS returns under Section 195, the buyer can issue a TDS certificate, referred to as the Certificate of Tax Deduction or Form 16A, to the NRI seller. It is mandatory for the buyer to issue this certificate to the seller within 15 days from the due date of filing for TDS returns for that quarter.

Threshold limit for TDS under Section 195

Under Section 195 of the Income Tax Act, there is no threshold limit for deducting TDS on payments made to non-residents. However, TDS is required only if the payment is taxable in India. If the payment qualifies as exempt income or is not taxable under the provisions of the Act, no TDS needs to be deducted unless explicitly notified by the government. This ensures that tax is deducted only on income subject to taxation in India

TDS rates under Section 195

The below tabulation is the TDS deduction charges that are applicable under Section 195 of Income-tax Act, 1961:

Particulars	TDS Rates
Income/payments/transactions from the investments done by an NRI	20%
Income from the long-term capital gains for an NRI under Section 115E	10%
Income from the long-term capital gains	10%
Income from the short-term capital gains under Section 111A	15%
Any other source of income from the long-term capital gains	20%
The interest that is payable on borrowed money in foreign currency	20%
The income from the royalty payable by the Government or an Indian concern	10%
The income from the royalty other than that which is payable by the Government or an Indian concern	10%
The income from the fees for technical services that are payable by the Government or an Indian concern	10%
Any other source of income	30%

Applicable Situations for TDS deductions under Section 195

TDS under Section 195 must be deducted in two key situations: when the income is credited to the payee’s account or at the time of the transaction, whichever occurs first. Income credited to suspense accounts, interest payable accounts, or similar accounts is also credited to the payee’s account. For income earned by the government or public sector banks, TDS is deducted only at the time of payment through cash, cheque, or draft. As per Section 5(2)(b) of the Income Tax Act, the total income of an NRI includes all income that accrues, arises, or is deemed to accrue in India. Therefore, TDS must be deducted from all such taxable income as required under Section 195.

Penalties under Section 195

If any person tries to break or violates the rules under Section 195, then the following consequences to be faced.
If withholding tax is not deducted or submitted at the specified time, then as per Section 40a(i), the allowances will be cancelled, deduction in the year of payments.
If the payer deducts the TDS, but that is not submitted at the specified time, then the interest at 1.50 per month or part of the month from the date of deduction to date of deposit (Section 201(1A)) will be charged.
If a payer deducts the TDS and is not paid, then the penalty equivalent to the TDS amount is charged under Section 221.
The TDS deducted partial or a part of TDS is submitted and rest is withheld the penalty faced is equivalent to the difference between the actual deductible and deducted amount Section 271C that is not exceeding the amount of the TDS.