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What is Section 195 of the Income Tax Act: TDS on NRI Income

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.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Is there a deduction for foreign companies or non-resident reimbursements under Section 195?

There is no deduction for foreign companies or non-resident reimbursements under Section 195.

What happens when TDS is deducted and the contract gets cancelled?

You can claim TDS from the income tax department if it debited after an advanced payment to non-residents that went towards cancelling a contract.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed1 issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.