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Section 195 – TDS for NRIs, mandates tax deduction at source for payments made to non-residents, ensuring taxation of their income from India. Find out more!
The most important section regarding international taxation under the Income Tax Act 1961 is Section 195. Tax deduction at source on payments made by Indian residents to NRIs is mandated by this provision.
This ensures that NRIs’ incomes from within India are taxed at source so as to avoid tax avoidance. Every business and individual undertaking financial transactions with NRIs should pay attention to section 195.
Must read: What is TDS? A complete overview of TDS in income tax
Who qualifies as a non-resident?
When an individual is liable for tax in India, it depends on his residential status under Indian income-tax laws. The Income-Tax Act provides for certain situations where a person will not be considered a resident.
Failing these conditions means that you will be labelled as a non-resident indian (NRI). Thus, for purposes of this act, an individual will become an Indian resident if:
- Over 182 days were spent in India by the individual
- The person remained in India for at least sixty days at any time during the previous four financial years immediately preceding the year of assessment, and also for four hundred and sixty-five days or above over the last four years.
In case both of these are not met, one is classified as non-resident during that year of assessment.
For Indian nationals and people of Indian descent, travelling to India, the mandatory 60-day stay has been extended to 182 days. The same consideration also applies to crew members leaving India or Indians being employed outside the country.
However, this rule was changed by the Finance Act, of 2020 when total income (excluding foreign income) exceeded ₹15 lakh during the previous year. Consequently, it now persists for 120 days instead of 60.
Additionally, according to new section 6(1A), an Indian citizen earning more than ₹15 lakh (excluding foreign income) is considered a resident in India if there are no taxes payable in any other country on him/her.
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Analysis of Section 195 of the Income Tax Act
In April 2024, NRIs invested $1 billion in various NRI deposit schemes instead of routing out approximately $150 million seen during the same month last year.
The Reserve Bank of India (RBI) recently disclosed data showing that there are $153 billion in outstanding NRI deposits. This clear indication of financial interest states how crucial it is for businesses to understand and abide by tax regulations contained in Section 195.
The TDS section – section 195 of the Income Tax Act, of 1961 imposes an obligation on payers to withhold TDS when paying NRIs. This ensures that income tax is collected at source rather than allowing its evasions hence maintaining due compliance with tax regulations regarding non-resident’s income within India.
Section 195(2) of the Income Tax Act deals with payments made by responsible persons doing so to non-residents. Under this section, any person deducting such sums may seek a determination from the Assessing Officer on whether all the sum paid is chargeable income for that recipient.
No threshold limit for TDS under Section 195 of the Income Tax Act
While considering TDS, under section 195, it differs significantly from other provisions of TDS in that one is not required to meet any minimum threshold for paying taxes. In simple terms whatsoever, even if this may seem like a tiny one, any payment made to an NRI has to undergo TDS.
Whether it is rent, royalties, fees connected with technical services or even any other form of remittance; the payer has to take out TDS.
For instance, say you are renting out your property in India to an NRI. Even though the amount being paid as rent could be small, the issue of TDS arises. The absence of a threshold ensures that tax compliance remains consistent irrespective of the payment size.
Special rates of TDS for non-residents as per the 195th section of the Income Tax Act
Here are the TDS rates applicable to various income categories for NRIs:
| Income category | TDS rate |
| Income from investments made by an NRI | 20% |
| Long-term capital gains under Section 115E (specific to NRIs) | 10% |
| Profits made on listed shares over the long term (Section 112A) | 10% |
| Profits from short-term investments, as defined in Section 111A | 15% |
| Additional income derived from long-term investments | 20% |
| Payable interest in foreign currency by the government or Indian Concern. | 20% |
| Royalties and technical service fees (which the government or an Indian entity must pay) | 10% |
| Winnings from online gaming, lotteries, and horse races | 30% |
| Any other income | 30% |
Source: Income Tax Department
Also read: Understanding GST: The tax superhero of India
Bottomline
As NRIs keep showing substantial financial stake in the economy of India by way of huge deposits in NRI accounts; it becomes even more important to comprehend and comply with section 195. To ensure seamless and compliant financial operations and obligations, both individuals and businesses need to stay informed about these tax policies.
FAQs
To pay TDS on payments to non-residents, follow these steps:
Get TAN: Ensure you hold a valid Tax Deduction and Collection Account Number (TAN).
Determine TDS Rate: See Section 195 of the Income Tax Act to determine the applicable TDS rate considering any Double Taxation Avoidance Agreement (DTAA) benefits.
Make TDS Payment: Use Challan No./ITNS 281 to deposit the TDS online through the NSDL website or authorised banks.
File Form 27Q: Quarterly, fill in Form 27Q for TDS returns giving particulars of non-resident payment and TD deducted.
However, TDS is not usually applicable for import freights paid to a non-resident if the payment is made directly to the foreign shipper or his agent as laid down in section 172 of the Income Tax Act dealing with taxation of shipping income earned by non-resident persons. However, where such remittance is being made to a non-resident person other than the shipping company; tax may be deducted at source under Section 195. For clarity, it is better to refer to relevant DTAA provisions.
The Income Tax Act requires that payments made concerning the repurchase or buyback of the units that are held by unitholders of a mutual fund or Unit Trust of India (UTI) should attract TDS under section 194F. The rate being at 20% and payable at the earliest of making a payment or crediting such amount ensures this. This will aid in ensuring that taxes are adhered to and enable government tracking of mutual fund investment income.
Section 194D of the Income-tax Act provides for TDS on insurance commissions. If an individual pays a commission to an insurance agent/broker and its amount exceeds ₹15000 in one financial year, they will have to deduct tax at source @5%. Consequently, taxes on income generated through insurance commissions are collected from their sources of origin thereby enhancing revenue mobilisation efforts by promoting voluntary compliance while minimising possibilities for avoiding tax liability.
Section 194-IA of the Income-tax Act provides for TDS on the transfer of immovable property from residents/nonresidents excluding agricultural land. In case a non-resident acquires such property, then he/she will have to deduct tax at source @1% provided sale consideration exceeds ₹50 lakhs. Thus this deduction shall be effected while making payment or crediting that amount therefore ensure proper reporting and following up on property transactions especially involving nonresidents.