Section 195 of Income Tax Act

What is Section 195?

Section 195 of the income tax act mandates deduction of tax at source before making payments to a non-resident. It provides for deduction of tax on payments such as interest or any other sum chargeable to tax.

Under the provisions of section 195, any person who is responsible for paying any interest or any other sum chargeable to tax is liable to deduct tax at source. This is applicable in a case where the payment is being to a non-resident(excluding company) or a foreign company.

Furthermore, a person is a resident or a non-resident is required to deduct the tax at source before making the payment to a non-resident, only if the payment is chargeable to tax in India in the hands of the non-resident. This helps to avoid revenue loss by deducting the amount before making the payment to the non-resident.

Payer, for the purpose of this section, is a person who is making the payment to a non-resident. The payer can be:

• Individual
• Hindu Undivided Family
• Firms
• Non-residents
• Foreign Companies

The payee is a non-resident whose residential status is arrived at as per Section 6 of the Act.

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TDS under Section 195 Of Income Tax Act

Below are a few important points to be considered while considering deduction under section 195 of the Income Tax Act, 1961:

1. The payer needs to obtain a tax deduction account number (TAN) before making the tax payment. This can be done by filing form 49B and is covered under section 203A of the income tax act. It is mandatory to provide the TAN of the deductor for the purpose of tax payment.
2. The remitter needs to obtain the form 15 CB from a Chartered Accountant and needs to file form 15CA online through the income tax website. This needs to be done for each remittance to be made.
3. Tax needs to be deducted at the source at the time of making the payment to the non-resident. It is important to quote the PAN of the non-resident. 
4. The tax deducted at source by the payer should be deposited through a challan on or before the 7th of the next month in which it was deducted.
5. The tax can be deposited through the banks that are authorized by the government or the income tax department.
6. After the tax has been deposited, the payer needs to file a TDS return on a quarterly basis. For example, the TDS return for the tax deducted during the first quarter from 1st April to 30th June must be filed by 15th July.
7. After the filing of the TDS return, a TDS certificate can be issued by the payer.

Learn: How to Check TDS Refund Status Online?

Rate of TDS under section 195 of Income Tax Act

Particulars	Rate of Tax
Income in respect of investment made by an NRI	20%
Income by the way of long term capital gains in Section 115E in case of an NRI	10%
Income by way of long-term capital gains	10%
Short Term Capital gains under section 111A	15%
Any other income by way of long-term capital gains	20%
Interest payable on money borrowed in Foreign Currency	20%
Income by way of royalty payable by Government or an Indian concern	10%
Income by way of royalty, not being royalty of nature referred to be payable by Government or an Indian concern	10%
Income by way of fees for technical services payable by Government or an Indian concern	10%
Any other income	30%

What will be the consequences of non-complying Section 195 of Income Tax Act?

Below are the consequences of non-compliance with the provisions of section 195 of Income Tax Act, 1961:

1. In case the tax is not deducted at the source, it will lead to disallowance of the particular expense under section 40(a)(i).
2. In case tax has been deducted but not paid within the time limits, interest @ 1.5% per month or part of the month will be levied from the date of the deduction to the date of deposit.
3. If TDS is deducted but not paid at all, a penalty equivalent to the TDS amount will be levied.
4. In case of short deduction of tax, a penalty equivalent to the difference between the actual amount deductible and actually deducted would be levied.

You can explore our article on TDS on Rent

Due date of payment of TDS?

Month of deduction	Quarter ending	The due date for payment of TDS through challan
April	30th June	7th May
May	7th June
June	7th July
July	30th September	7th August
August	7th September
September	7th October
October	31st December	7th November
November	7th December
December	7th January
January	31st March	7th February
February	7th March
March	30th April

Due date of filing of TDS return?

Month of deduction	Quarter ending	Due date of filing TDS return
April	30th June	31st July
May
June
July	30th September	31st October
August
September
October	31st December	31st January
November
December
January	31st March	31st May
February
March

It is to be noted that the above table depicts the normal provisions as per the income tax act. Due to the COVID 19 pandemic, the due date of filing the income tax return was revised by the department.

Read more about TDS Payment Due Date

What is the meaning of Non-resident?

Non-resident” means a person who is not a “resident”, and includes a person who is not ordinarily resident within the meaning of clause (6) of section 6.

Is TDS applicable to NRI?

Section 195 of the income tax act mandates deduction of tax at source before making payments to a non-resident. It provides for deduction of tax on payments such as interest or any other sum chargeable to tax.

Under the provisions of section 195, any person who is responsible for paying any interest or any other sum chargeable to tax is liable to deduct tax at source. This is applicable in a case where the payment is being to a non-resident(excluding company) or a foreign company.

You can explore our article on Section 43B of Income Tax Act

What is the TDS rate for payment to non-residents?

Below are the TDS rates applicable to a non-resident. It is also to be noted that the provisions of DTAA(double tax avoidance agreement) also needs to be considered as per the country. In a case the payee fulfills all the conditions mentioned in the DTAA, the rate as per the agreement will be levied.

Particulars	Rate of Tax
Income in respect of investment made by an NRI	20%
Income by the way of long term capital gains in Section 115E in case of a an NRI	10%
Income by way of long-term capital gains	10%
Short Term Capital gains under section 111A	15%
Any other income by way of long-term capital gains	20%
Interest payable on money borrowed in Foreign Currency	20%
Income by way of royalty payable by Government or an Indian concern	10%
Income by way of royalty, not being royalty of nature referred to be payable by Government or an Indian concern	10%
Income by way of fees for technical services payable by Government or an Indian concern	10%
Any other income	30%

Whether Non-residents are eligible for getting a Nil deduction certificate?

A non-resident can make an application for a nil deduction certificate provided the below conditions are satisfied:

• The non-resident is not in default in respect of any tax, interest, penalty.
• The non-resident is carrying on business in India continuously for at least 5 years and the value of the fixed assets in India exceeds Rs.50 Lakhs
• The assessee has been regularly assessed to tax and has filed all returns of income due as of the date of filing of an application
• The non-resident is not subject to any penalty under section 271(1)(iii)

What about the Salary & Dividend payment to Non-residents, Is TDS applicable?

The provisions of section 195 specifically exclude salary and dividend payments to a non-resident. The provisions relating to a tax deduction on salary are covered under section 192. This is applicable to non-resident employees as well. The dividend is taxable in the hands of the recipient w.e.f from the financial year 2021, any person,  qualifying as a non-resident in India (NRI) will have a dividend income taxed at 20% plus applicable surcharge and 4% health and education cess (maximum marginal rate of 28.5%) on a gross basis. In case a shareholder qualifies as a resident in India, dividend income is taxable at applicable slab rates.

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