TDS on Payments to NRIs under Section 393(2) ITA 2025 (formerly Section 195): Who Deducts, At What Rate, and What Happens If You Miss It

Any person — resident or non-resident — who pays a non-resident (other than a company) or a foreign company any sum chargeable to tax in India must deduct TDS. This was Section 195 of the Income-tax Act, 1961; from 1 April 2026 it is Section 393(2) Table Sl. No. 17 of the Income-tax Act, 2025. The table row sets no threshold, and the obligation applies even if the payer has no presence in India. A payer who fails to deduct or deposit is deemed an "assessee in default" under s.398(1) ITA 2025 and faces interest, disallowance of the expense and possible penalty.

Legal basis: Income-tax Act, 1961 s.195 / Income-tax Act, 2025 s.393(2) Table Sl. No. 17 (ITA 2025 in force from 1 April 2026; the 1961 Act still governs earlier years).

Who is required to deduct TDS on NRI payments?

The payer bears the deduction obligation — and this is broader than most people assume.

Under Note 3(b) to Section 393(2) ITA 2025, "the obligation to deduct tax at source and comply with the provisions of this serial number extend to all persons resident or non-resident, whether or not, the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India."

In plain terms: a resident individual buying property from an NRI must deduct TDS; a company paying fees or royalties to a foreign entity must deduct TDS; a non-resident paying another non-resident a sum chargeable in India must deduct TDS. Sl. No. 17 has no threshold limit.

NRI seller vs resident seller — a critical distinction: The 1% property TDS (old Section 194-IA, now s.393(1) Table Sl. No. 3(i) ITA 2025) applies only to payments "to a resident". When an NRI sells property, the buyer deducts under s.393(2) Sl. No. 17 at the rates in force — not 1%.

What payments does s.393(2) Sl. No. 17 (old Section 195) cover?

Section 393(2) Sl. No. 17 covers "any interest (not being interest referred to against serial numbers 2, 3, 4 and 5) or any other sum chargeable under the provisions of this Act, not being income chargeable under the head 'Salaries'." The scope is intentionally wide. Common payments: property sale consideration (NRI seller), interest on NRO accounts, professional or technical service fees, royalties, dividends from Indian companies. Salary to NRI employees is outside Sl. No. 17; employer TDS on salary is under s.392 ITA 2025 (s.192 of the 1961 Act).

At what rate must TDS be deducted?

Sl. No. 17 says "Rates in force". For a non-resident Indian, Part II of the First Schedule to the Finance Act, 2026 sets these rates, among others:

• Investment income (as defined in s.212 ITA 2025): 20%. This means only income from a "foreign exchange asset", a specified asset bought with convertible foreign exchange (s.212(a), (b)). Interest on an NRO account is not investment income: it falls under "the whole of the other income" below, at 30%.
• Long-term capital gains on listed equity/equity-fund units (s.198 ITA 2025) exceeding ₹1,25,000: 12.5%
• Other long-term capital gains (including on property): 12.5%
• Short-term capital gains under s.196 ITA 2025: 20% (only the gains that section covers; short-term gains on property fall under "the whole of the other income", 30%)
• Interest on foreign-currency borrowings by Government or an Indian concern: 20%
• Royalty and fees for technical services under government-approved or industrial-policy agreements with an Indian concern: 20%
• Dividend referred to in s.207(1) Table Sl. No. 2: 10%
• Other dividend: 20%
• The whole of the other income: 30%

These rates are increased by applicable surcharge and 4% Health and Education Cess (Finance Act, 2026, s.3(7) for surcharge and s.3(16) for cess). DTAA override: where a tax treaty applies and the payee furnishes a tax residency certificate (s.159(8) ITA 2025) with the information in Form No. 41 (Income-tax Rules, 2026, formerly Form 10F), the treaty rate can be applied if lower.

Lower or nil deduction: Section 395 (old Sections 195(2) and 197)

Two routes exist under s.395 ITA 2025, both made before payment:

• Payee route (s.395(1)): the NRI applies to the Assessing Officer; if satisfied that the NRI's total income justifies it, the AO issues a certificate, and the payer deducts at the certified rate (or not at all) "till its validity".
• Payer route (s.395(2)): the payer, if it considers that the whole sum would not be chargeable in the recipient's hands, applies to the AO to determine the chargeable proportion. TDS is then deducted only on that proportion.

Payer vs payee responsibilities

Payer: deduct TDS; deposit it with the government; file the TDS statement under s.397 ITA 2025; furnish Form No. 145 (formerly Form 15CA) for the payment; where payments exceed ₹5,00,000 and no s.395 certificate or order has been obtained, furnish Part C of Form No. 145 backed by an accountant's certificate in Form No. 146 (formerly Form 15CB) (Rule 220(1)(c), Income-tax Rules, 2026). Payee (NRI): claim TDS credit in the Indian return; apply for a s.395(1) certificate before the transaction if TDS will exceed the actual tax; furnish the tax residency certificate and Form No. 41 information for treaty benefit.

Consequences of non-deduction

Under Section 398 ITA 2025 (old Section 201):

• The payer is deemed an assessee in default (s.398(1)).
• Interest at 1% per month or part from the date TDS was deductible to the date of deduction, and 1.5% per month or part from deduction to actual payment (s.398(3)(a)).
• The payment is disallowed as a business deduction under s.35 ITA 2025 (old s.40(a)(i)) if TDS is not deducted, or not paid by the return due date; it is allowed in the year the tax is paid.
• No order treating the payer as in default can be made after six years from the end of the tax year in which tax was deductible, or two years from the end of the tax year in which a correction statement is delivered, whichever is later (s.398(5)).
• Penalty under s.412 ITA 2025 (old s.221) cannot be levied unless the Assessing Officer is satisfied that the payer failed to deduct and pay "without good and sufficient reasons" (s.398(7)).

Form 145 and Form 146 (old 15CA and 15CB)

Rule 220 of the Income-tax Rules, 2026 requires the payer to furnish Form No. 145: Part A where payments in the tax year do not exceed ₹5,00,000; Part B where they exceed ₹5,00,000 and a s.395 certificate or order has been obtained; Part C where they exceed ₹5,00,000 and a Form No. 146 certificate from an accountant has been obtained. Part D applies to sums not chargeable to tax.

Sources

• Income-tax Act, 2025, s.393(1) Table Sl. No. 3, s.393(2) Table Sl. No. 17 and Note 3, s.395, s.398, s.35, s.412
• Finance Act, 2026, s.3(7), s.3(16) and First Schedule Part II (rates for deduction of tax at source)
• Income-tax Rules, 2026, Rule 220 (Forms 145 and 146) and Form No. 41

Harun Raaj & Associates | Chartered Accountants

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