As per the Income Tax Act, 1961, any earnings generated through business transactions with NRIs come under the purview Income Tax Act and are subject to TDS rate under Section 195. To understand this provision better, entities need to gather more details about this particular section.
What is Section 195?
Section 195 of Income Tax Act, 1961 is concerned with TDS deductions on payments or income of non-resident Indians. This section enumerates provisions that help avoid double taxation and further focus on tax deductions and accompanying rates applicable to business transactions concerning NRIs. TDS on non-residents is deducted either when crediting the concerned party or on the actual payment date.
Who Deducts TDS on Non-Residents?
These pointers offer valuable insight as to which entities are responsible for paying or remitting payments under Section 195 –
- Individuals
- HUFs
- Non-resident Indians
- Partnership firms
- Individuals with exempted income in India
- Foreign companies
- Juristic individuals
Further, non-resident Indians with chargeable income under Section 195 are deemed as the payee. One must also note that the rate of TDS under Section 195 is determined based on the type of income or payment made.
Ways to Deduct Section 195 TDS
Here’s how TDS is deducted under this provision –
- Before claiming TDS deductions, buyer entities are required to get their TAN or Tax Deduction Account Number. They can easily avail of it by submitting Form 49B online or offline. However, they must furnish their as well as the NRI’s PAN to submit form 49B successfully.
- This provision directs that TDS has to be deducted from the source when payment is made to the non-resident Indian. Notably, TDS oriented details must be mentioned in the sale deed of concerned transactions between an NRI seller and a prospective buyer.
- The deducted TDS has to be deposited either through a challan or TDS payment form by 7th of the next month, in which the TDS deduction will be removed. One must note that the buyers can deposit the TDS through Government authorised banking institutions or the Income Tax Department of India to collect direct taxes.
- Once TDS is deposited, entities have to file returns quarterly through an electronic medium by submitting Form 27Q. The following highlights the dates for filing a TDS return –
- For the first quarter, deductions between 1st April and 30th June: Refund has to be made by 15th July of that year.
- For the second quarter deductions made between 1st July and 30th September: One must file the refund on 15th October.
- For the third quarter ranging from 1st October and 31st December: It has to be filed on 15th January.
- For the fourth quarter ranging from 1st January and 31st March: The refund has to be filed on 15th May.
- After TDS has been filed, the buyer can offer a TDS Certificate to an NRI seller. Such a certificate is also known as – Form 16A or the Certificate of Deduction of Tax. One must note that it is mandatory to issue Form 16A within 15 days of the TDS returns filing due date of a given quarter.
TDS Rate under Sec 195 of Income Tax Act
When it comes to the TDS rate under Section 195, one must note that there is no such threshold limit on deductions. In other words, irrespective of the sum of money, TDS has to be deducted.
Regardless, take a look at this table below to gain valuable information about TDS deductions under Section 195 –
| Type of income |
TDS rate |
| Payments, income, or transactions arising from investments |
20% |
| Income accrued from long term capital gains |
10% |
| Income accrued from capital gains acquired in the long term under Section 115E |
10% |
| Other sources of long-term capital gains |
20% |
| Earnings generated from capital gains acquired in the short term under the provision of Section 111A |
15% |
| Interest to be paid on the sum of money availed in a foreign currency |
20% |
| Earnings arising in the form of technical services that are paid either by the government or by an Indian concern |
10% |
| Earnings from the royalty that is paid either by and Indian concern or the government |
10% |
| Income from royalty arising from sources other than an Indian concern or the government |
10% |
| Other income sources |
30% |
Besides becoming familiar with TDS rate under Section 195, it is essential to note the implications of delaying or missing out on TDS payments. This will allow entities to avoid penalties and other legal repercussions successfully.
Implications of Not Paying TDS Under Section 195
In case individuals fail to meet the provisions of Section 195, they are subject to the following consequences –
- In case the deducted tax is not submitted or withheld for a given time, then the allowance will be cancelled in the year of payment.
- In a situation where the payer deducts the TDS but fails to submit it within the due date, he/she will be charged with a 1.5% interest from the date of deduction to date until deposit.
- When the payer deducts TDS but does not deposit it, an amount equivalent to the TDS is charged as a penalty under Section 221 of ITA.
- When TDS has been deducted partially, or only a part of it is deposited, the payer is subject to a penalty that amounts to the difference between the original deductible and deducted amount as per Section 271C.