Section 195 of the Income Tax Act requires the deduction of Tax Deducted at Source (TDS) on payments made to non-residents (excluding companies) or foreign companies if these payments are taxable under Indian law. Transactions involving such payments must be reported in Form 15CA before any remittance. Depending on the nature of the transaction, a Chartered Accountant’s certificate in Form 15CB may also be required.
This guide explores the scope, compliance, and implications of Section 195 to help you understand its significance.
What is Section 195 of the Income Tax Act?
Section 195 of the Income Tax Act, 1961, governs the deduction of TDS on payments to non-resident Indians (NRIs). Its primary objective is to prevent double taxation and ensure appropriate tax rates are applied to business transactions involving NRIs. TDS is deducted when the payment is credited to the non-resident’s account or when the payment is made.
Scope and Importance of Section 195
- Applicable to various payments to non-residents, including interest, dividends, royalties, and technical fees.
- Critical for regulating cross-border transactions involving NRIs and foreign companies.
- TDS rates depend on the type of income and provisions under applicable Double Taxation Avoidance Agreements (DTAAs).
Compliance and Reporting Under Section 195
- Deduction of TDS at prescribed rates before making payments to non-residents is mandatory.
- Taxpayers can approach the Assessing Officer under Section 195(2) to clarify the portion of income subject to TDS and applicable rates.
- Filing Form 15CA is mandatory for payments, and in certain cases, Form 15CB must also be filed.
Unique Features of Section 195
- International Focus: Specifically addresses payments to non-residents, streamlining the tax collection process for cross-border financial transactions.
- Tax Compliance: Ensures tax is collected on income earned in India by non-residents.
- Real Estate Provisions: Includes requirements for TDS deduction on property sale proceeds paid to non-residents.
Practical Illustration of Section 195
Consider a situation where an Indian resident conducts business with an NRI. If the payment is taxable in India, the Indian resident must deduct TDS before remitting funds. This ensures the NRI can meet their Indian tax obligations.
Deducted TDS must be deposited with the government within the prescribed timeframe. NRIs can apply for certificates to avail lower or nil withholding tax rates.
Who Qualifies as a Non-Resident?
Under Section 6 of the Income Tax Act, a person qualifies as a non-resident if:
- They are present in India for less than 182 days during the financial year, OR
- They are present in India for less than 60 days in the financial year and less than 365 days in the preceding four financial years.
Exceptions for Indian Citizens and Persons of Indian Origin (PIOs):
- For individuals with income (excluding foreign sources) exceeding ₹15 lakhs:
- The 60-day threshold is extended to 120 days.
- If leaving India for employment, the threshold increases to 182 days.
Entities Responsible for Deducting TDS
The following entities are required to deduct TDS under Section 195:
- Individuals
- Hindu Undivided Families (HUFs)
- Partnership Firms
- Limited Liability Partnerships (LLPs)
- Companies
- Foreign Companies
- Non-resident Indians with taxable income in India
TDS Deduction Process Under Section 195
- Obtain TAN: Acquire a Tax Deduction Account Number (TAN) by submitting the necessary documents.
- Deduct TDS: Deduct TDS from the payment amount and record it in the sale deed for property-related transactions.
- Deposit TDS: Deposit the deducted TDS with the government via authorized banks or online platforms before the 7th of the next month.
- Issue Certificate: Provide a TDS certificate (Form 16A) to the NRI within 15 days of filing the TDS return.
TDS Rates Under Section 195
|
Type of Income |
TDS Rate |
|
Payments from investments |
20% |
|
Interest on foreign currency loans |
20% |
|
Long-term capital gains |
10% |
|
Capital gains under Section 115E |
10% |
|
Other long-term capital gains |
20% |
|
Short-term capital gains under Section 111A |
15% |
|
Payments for technical services |
10% |
|
Royalties paid by Indian citizens |
10% |
|
Royalties from other sources |
10% |
|
Other sources of income |
30% |
Compliance Requirements
- Timely Deduction: TDS must be deducted at the time of crediting the payment or actual payment.
- Deposit Deadline: Deducted TDS should be deposited before the 7th of the following month.
- Quarterly Filing: File Form 27Q quarterly within specified due dates.
- Certificate Issuance: Provide Form 16A within 15 days after filing the TDS return.
Penalties for Non-Compliance
Failure to deduct and deposit TDS under Section 195 may result in:
- Disallowance of Expenses: Expenses may not be allowed as deductions in the year of payment.
- Interest Penalty: 1.5% per month on late deposits.
- Additional Penalties:
- Penalty under Section 221 for failure to deposit TDS.
- Penalty under Section 271C for partial or non-deduction.
Conclusion
Section 195 ensures compliance with Indian tax laws by governing payments made to non-residents. Adhering to its provisions is essential to avoid penalties and legal complications. Professional guidance can help simplify the process and ensure compliance.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.