Section 195 TDS on NRI Payments

Section 195(1) of the Income Tax Act 1961 requires any person responsible for paying to a non-resident (or a foreign company) any sum chargeable to tax in India to deduct income tax at the rates in force at the time of credit or payment, whichever is earlier. The obligation arises even if the payer is a non-resident making payment to another non-resident, provided the income has a source in India. Critically, TDS is required only where the payment is chargeable to tax in India — if the income is not taxable in India (for example, because of a beneficial DTAA provision or because the income does not arise in India), no TDS obligation arises. The Supreme Court affirmed this principle in GE India Technology Centre Pvt. Ltd. v. CIT (2010) 327 ITR 456.

The rate of TDS under Section 195 of the Income Tax Act 1961 is the lower of the rate prescribed in the Finance Act for the relevant assessment year or the rate provided in the applicable Double Taxation Avoidance Agreement (DTAA) under Section 90. To apply the DTAA rate, the non-resident payee must furnish a Tax Residency Certificate (TRC) issued by the tax authority of its country of residence under Section 90(4) and Form 10F if the TRC does not contain all prescribed particulars under Rule 21AB of the Income Tax Rules 1962. Where the applicable DTAA rate is lower than the domestic rate — such as the 10% concessional rate on royalties under Article 12 of many of India's DTAAs — the lower rate applies. The payer must obtain the TRC and Form 10F before applying the reduced DTAA rate.

A non-resident payee or the resident payer may apply to the Assessing Officer for a certificate authorising lower or nil deduction of TDS under Section 195(2) or Section 195(3) of the Income Tax Act 1961. The application must be filed online on the income tax portal in Form 15E under Rule 29BA of the Income Tax Rules 1962, along with supporting documents establishing the nature of income, DTAA eligibility, and the expected quantum of income. Separately, the payer may seek determination under Section 195(2) by making a specific application to the Assessing Officer before remittance where doubt exists about the taxability or the portion subject to tax. Where no certificate is obtained, TDS must be deducted on the gross amount at the applicable rate, even if only a portion of the remittance represents income.

Form 15CA is an online declaration filed by the remitter (payer) on the income tax portal before making a remittance to a non-resident, as required under Rule 37BB of the Income Tax Rules 1962 read with Section 195(6) of the Income Tax Act 1961. Form 15CB is a certificate obtained from a Chartered Accountant under Rule 37BB certifying the nature of remittance, applicable DTAA provisions, TDS rates, and the amount of TDS deducted. Form 15CB is required only for payments that are taxable in India and exceed Rs 5 lakh in aggregate during the financial year (for Part C of Form 15CA); for smaller or exempt remittances, only the relevant Part of Form 15CA (A or B or D) is required without Form 15CB. CBDT amended Rule 37BB through Notification No. 93/2020 to update the list of exempt remittances that do not require Form 15CA/15CB.

Failure to deduct TDS under Section 195 of the Income Tax Act 1961 before making a remittance to a non-resident renders the payer an 'assessee-in-default' under Section 201(1), and the undeducted tax is recoverable from the payer directly. Interest is charged at 1% per month for the period from the date on which TDS was deductible to the actual date of deduction, and at 1.5% per month from the date of deduction to the date of deposit, under Section 201(1A). The payment made without TDS is also treated as expenditure incurred in respect of which tax has not been deducted at source, making it disallowable under Section 40(a)(i) of the Income Tax Act 1961 in computing the payer's business income. Additionally, banks are required under Rule 37BB to collect Form 15CA before processing foreign remittances, and remittances made without compliance attract penal scrutiny.