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What is Section 195 of the Income Tax Act: TDS on NRI Income
Editorial Team - Oct 31 - 9 min. read
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Section 195 of the Income Tax Act, 1961 controls TDS deductions on non-resident Indian income and payments. This section lists provisions that help avoid double taxation and focus on NRI business tax deductions and rates.
Section 195 of the Income Tax Act deals with the provisions related to tax deducted at source (TDS) for non-resident Indians (NRI). This section is vital for any person responsible to pay specified sums, such as interest, royalty, and fees for technical services. It helps deduct tax at the mentioned rates.
NRIs have to file tax returns for the income they earn in India. They may also claim the withheld tax or TDS when filing tax returns. For more on this, continue reading this article about Section 195 TDS.
Who is a Non-Resident?
NRI’s full form is Non-Resident Indian. It is a term applied to a person who is not a resident of India as defined under Section 6 of the Income Tax Act. A person shall be a resident of India if they stay in India for 182 days and above in any financial year, 60 days and above in that year and 365 days and above in the four preceding financial years. Anyone not complying with these criteria is an NRI or non-resident Indian. NRIs hold an Indian passport but have migrated to another country and work there.
What is Section 195 of the Income Tax Act?
Under Section 195 of the Income Tax Act, TDS must be deducted at the time of credit or payment on certain payments made to non-residents. It applies to interest, royalty, fees for technical services, and other sums chargeable for tax in India. People making such payments deduct tax before making the payment. This includes individuals, HUFs, firms, non-residents, and foreign companies.
The payee must be a non-resident per their residential status under Section 6. Section 195 TDS helps ensure tax is collected before payment is made to non-residents.
Threshold Limit to Deduct TDS u/s 195
There is no threshold limit under Section 195 of the Income Tax Act to deduct TDS. However, the payer must deduct tax only when the payment made to a NRI is taxable in India. No TDS is required if the payment is exempt from tax in India.
How TDS is Deducted Under Section 195
- Buyers must obtain a TAN number by filing Form 49B online or physically, along with the buyer and NRI seller's PAN details.
- TDS must be deducted from payments made to NRIs as per section 195 and details provided in the sale deed.
- The deducted TDS must be deposited by the 7th of the next month via challan/form to authorized banks or income tax department.
- Quarterly TDS returns must be filed electronically using Form 27Q by the 15th of the month - July, October, January, and May.
- Periods for various quarters are as follows:
Quarter |
Period of Deductions |
TDS Return Filing Date |
First Quarter |
1st April to 30th June |
15th July |
Second Quarter |
1st July to 30th September |
15th October |
Third Quarter |
1st October to 31st December |
15th January |
Fourth Quarter |
1st January to 31st March |
15th May |
After filing TDS returns, buyers must issue Form 16A/TDS certificate to the NRI seller within 15 days of the return due date for the quarter.
TDS Rates Under Section 195
Particulars |
TDS Rates |
NRI income from investments |
20% |
Under Section 115E, income from long-term capital gains for a NRI |
10% |
Long-term capital gains income |
10% |
Short-term capital gains (under Section 111A) |
15% |
Other sources of long-term capital gains |
20% |
Payable interest on borrowed money in foreign currency |
20% |
Royalty payable income by the Government or an Indian concern |
10% |
Royalty income other than that which is payable by the Government or an Indian concern |
10% |
Technical services income payable by the Government or an Indian concern |
10% |
Any other income source |
30% |
Applicable Situations for TDS Under Section 195 of the Income Tax Act
- There are two times when Section 195 TDS needs to be deducted. That’s when the income is credited to the payee’s account or during the transaction. Whichever comes first.
- Income that is credited to either interest payable, suspense accounts, or other accounts is considered to be credited to the payee's account.
- Regarding government or public sector bank income, TDS should only be deducted at the time of cash/cheque/draft payment.
- According to section 5(2)(b), an NRI’s total income includes all income accrued/arisen/deemed accrued in India.
- Tax must be deducted for everything that accrues or arises according to section 195 of the Income Tax Act.
Consequences of Not Paying TDS Under Section 195 of the Income Tax Act
- Any allowance or deduction for that year will be cancelled if you don't submit the deducted tax on time.
- At an interest rate of 1.5% from the date of deduction until deposit, you’ll be charged if TDS is deducted but not submitted by its due date.
- A penalty will also come your way by deducting an equal TDS amount if not deposited.
- If partial TDS is deducted/deposited, a penalty will equal out the difference between original and deductible amounts.
Conclusion
Section 195 of the Income Tax Act ensures that non-resident Indians pay their taxes in India. To make it easier for taxpayers and tax authorities, it mandates the deduction of money from specified payments made to NRIs. It doesn’t matter if they must carry the burden of compliance. If there’s fairness and a way to prevent tax leaks, then we’re on the right path. Ultimately, this makes collecting taxes from nonresident taxpayers more efficient.
