Section 195 of the Income Tax Act pertains to the deduction of tax at source (TDS) on payments made to non-residents (including foreign companies) in India. It outlines the obligations of the person responsible for making the payment to deduct tax and remit it to the Indian government.
Continue reading this blog to learn more about Section 195 of the Income Tax in detail.
Understanding Section 195
Under Section 195, if a person (referred to as the “payer”) is making any payment to a non-resident that is taxable in India, they are required to deduct the applicable tax at source before making the payment. The purpose of this provision is to ensure that the tax liability of non-residents is fulfilled in India, even if they do not have a physical presence in the country.
The types of payments covered under Section 195 can include but are not limited to, interest, royalty, fees for technical services, dividends, capital gains, and any other sum chargeable under the Income Tax Act. The payer must determine the appropriate rate of tax to be deducted based on the provisions of the Income Tax Act and relevant tax treaties, if applicable.
Once the tax is deducted, the payer is responsible for depositing it with the Indian government within the specified time frame. Additionally, they need to file a TDS return, providing details of the payment and the tax deducted.
Non-residents may also apply for a lower or nil withholding tax rate by obtaining a certificate from the Indian tax authorities, such as a Tax Residency Certificate or a Lower Withholding Tax Certificate, based on their eligibility under applicable tax treaties.
Who is an NRI?
NRI stands for Non-Resident Indian. It is a term used to refer to Indian citizens or people of Indian origin who reside outside India. The exact definition of an NRI may vary based on the context and the specific laws or regulations being referred to.
In general, for the purpose of taxation and legal matters in India, the term NRI typically includes the following categories:
- Indian Citizens Living Abroad: Indian citizens who stay outside India for employment, business, or any other purpose with an intention to stay abroad for an uncertain duration are considered NRIs.
- Persons of Indian Origin (PIO): Individuals who are citizens of other countries but can trace their ancestry back to India are often considered PIOs. They may or may not hold Indian citizenship.
The exact criteria and definitions may vary depending on specific laws and regulations. For instance, the Income Tax Act in India provides its own criteria to determine the residential status of an individual for tax purposes.
NRIs may have certain legal and tax implications, including rules related to taxation, investments, and property ownership in India. These implications can vary based on factors such as the duration of stay abroad, the purpose of stay, and the specific regulations of the country of residence.
TDS Under Section 195 of the Income Tax Act
To ensure proper adherence to TDS regulations in transactions involving NRIs, buyers are advised to follow these steps:
- Obtain TAN (Tax Deduction Account Number): Before initiating TDS deduction, buyers must obtain a TAN as mandated by section 203A of the Income Tax Act. Additionally, both the buyer’s PAN number and the NRI seller’s PAN number are required.
- Deduct TDS During Payment: Buyers are required to deduct TDS at the time of making payments to NRIs.
- Timely TDS Deposit: TDS deducted must be promptly deposited through a designated challan for TDS payment. The deposit should be made on or before the 7th of the following month in which the TDS was deducted.
- Authorized Banks for TDS Deposit: The TDS amount can be deposited through banks authorized by the government or the Income Tax Department to collect direct taxes. It is the responsibility of the buyer to facilitate this deposit.
- File TDS Return Electronically: After TDS deposit, buyers should electronically file TDS returns using Form 27Q. These returns are filed quarterly, with specific due dates:
- First quarter (1st April to 30th June): File by 15th July
- Second quarter (1st July to 30th September): File by 15th October
- Third quarter (1st October to 31st December): File by 15th January
- Fourth quarter (1st January to 31st March): File by 15th May
- Issuance of TDS Certificates: Once TDS returns are filed, buyers are authorized to issue TDS certificates, also known as Form 16A, to the NRI seller. These certificates must be provided within 15 days from the due date of TDS returns for the respective quarter.
Rate of TDS under Section 195
The rate of TDS under Section 195 increases by adding the applicable education cess and surcharge. However, for payments made according to the DTAA rates, no educational cess or surcharge is applied.
TDS deduction rates applied under Section 195 are explained below-
|Income from investment made by an NRI (Interest/Dividend)||20%|
|Long-term capital gains (Section 115E)Shares of an Indian CompanyDebentures and deposits of a Public Company in IndiaSecurities issued by the government||10%|
|Long-term capital gain from listed shares and securities (Section 112A)||10%|
|Any other long-term capital gain||20%|
|Short-term capital gains (Section 111A)||15%|
|Interest payable on foreign currency borrowings (Government/Indian concern)||20%|
|Royalty and Fees for technical services (Government/Indian concern)||20%|
|Winnings from: Horse racesOnline gamesCard games, lotteries, crossword puzzles, and other games||30%|
|Any other income||30%|
*LTCG stands for Long Term Capital Gains and STCG stands for Short Term Capital Gains
Who should Deduct Tax under Section 195?
Under Section 195 of the Income Tax Act, the responsibility to deduct tax at source (TDS) lies with the person responsible for making a payment to a non-resident that is taxable in India. This person is often referred to as the “payer.”
The term “payer” can include various entities or individuals, such as:
- Individuals: Any resident individual who is making a payment to a non-resident that is subject to tax in India should deduct TDS under Section 195.
- Companies: Domestic companies that are making payments to non-residents, including foreign companies, that are taxable in India are required to deduct TDS under Section 195.
- Partnerships and LLPs: Partnership firms and Limited Liability Partnerships (LLPs) that make payments to non-residents, which are subject to tax in India, are responsible for deducting TDS under Section 195.
- Trusts and other entities: Trusts, organizations, or any other entity that makes payments to non-residents that attract tax liability in India should comply with the provisions of Section 195 and deduct TDS accordingly.
It’s important for the payer to correctly determine whether the payment made to the non-resident is taxable in India and if TDS is applicable. If the payment is taxable, the payer should deduct the appropriate TDS amount and remit it to the Indian government within the specified time frame.
Consequences of Non-Compliance with Section 195 TDS Payment
Failing to adhere to the stipulations outlined in Section 195 can lead to various repercussions:
- Non-withholding or non-submission of the required tax deduction within the stipulated timeframe will result in the revocation of the entitlement in the year of disbursement.
- When the obligated entity deducts the TDS but neglects to remit it by the designated deadline, a 1.5% interest will be imposed, calculated from the date of deduction to the date of deposit.
- Failure to pay the deducted TDS amount will result in the imposition of a penalty equivalent to the total TDS sum.
- In instances of insufficient tax deduction, a penalty will be levied equal to the disparity between the actual deductible amount and the amount actually deducted.
In conclusion, Section 195 of the Income Tax Act holds significant importance when it comes to the taxation of payments made to non-residents, including NRIs, in India. It outlines the obligation of the payer to deduct tax at source (TDS) on such payments that are subject to tax in India. This provision ensures that the tax liability of non-residents is fulfilled, even in the absence of their physical presence in the country.
It is crucial for payers to understand their responsibilities under Section 195, including depositing the TDS amount with the government within the prescribed time frame and filing the necessary TDS returns. Non-residents can also avail themselves of the opportunity to apply for lower or nil withholding tax rates through certificates obtained from the Indian tax authorities.