TDS Compliance for Non-Residents Under Section 195 of the Income Tax Act
Section 195 of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on payments made to non-residents when such income is taxable in India. This provision ensures tax collection at the source, preventing revenue leakage and facilitating compliance for cross-border transactions.[1][2]
Understanding Who Qualifies as a Non-Resident
A person is treated as a non-resident under the Income-tax Act if they do not meet the residency conditions specified under Section 6. Specifically, an individual is a resident if they stay in India for 182 days or more in the financial year, or 60 days or more in that year and 365 days or more in the four preceding years. Those not meeting these criteria are non-residents, including Non-Resident Indians (NRIs) who hold Indian passports but reside abroad.[1][2][5]
Under FEMA, an NRI is an Indian citizen or Person of Indian Origin residing outside India for 182 days or more in the preceding year, with exceptions for high-income earners liable to tax abroad.[3]
Key Differences Between Income Tax and FEMA Definitions
- Income Tax Act focuses on stay duration and tax liability.
- FEMA emphasizes physical presence and citizenship/origin.
- Non-compliance with either results in NRI status for TDS purposes.[3][5]
Obligations and Applicability of Section 195
Section 195 requires any person—including individuals, HUFs, firms, companies, and foreign entities—making payments to non-residents (other than salary) to deduct TDS if the sum is chargeable to tax in India. Payments include interest, royalties, fees for technical services, and property sale proceeds.[1][2][4]
There is no threshold limit; TDS applies whenever the payment is taxable, even if below standard slabs. Payers must assess taxability before remittance.[1][2]
Payers Responsible for TDS Deduction
- Individuals and HUFs
- Partnership firms and LLPs
- Indian and foreign companies
- Government bodies and banks[4][5]
For remittances abroad, payers must file Form 15CA and, in many cases, obtain a CA-certified Form 15CB, regardless of taxability, to enable bank transfers. Non-compliance attracts a Rs. 1 lakh penalty under Section 271-I.[2]
TDS Rates, Deduction Process, and Compliance Steps
TDS rates under Section 195 are the higher of rates in the Finance Act or DTAA between India and the non-resident’s country. For property sales by NRIs, it’s typically 20% (plus surcharge/cess).[3][7]
Deduction occurs at credit or payment, whichever is earlier. Payers need a TAN, deposit TDS via Challan 281 by the 7th of the next month, file quarterly Form 27Q, and issue Form 16A within 15 days of the return due date.[2][3][5]
Quarterly TDS Return Due Dates
- Q1 (Apr-Jun): 31st July
- Q2 (Jul-Sep): 31st October
- Q3 (Oct-Dec): 31st January
- Q4 (Jan-Mar): 31st May[3][5]
Non-residents can apply for lower/nil TDS via Form 13 under Section 197. Failure to deduct or deposit invites penalties under Sections 221 and 271C.[4]
Special Considerations for Property Transactions
Buyers purchasing property from NRIs must deduct 20% TDS on the full sale consideration under Section 195. Rule 37BC exempts higher rates under Section 206AA if PAN-equivalent details are provided.[6][7]
Section 195 promotes transparency in international transactions, avoids double taxation via DTAA benefits, and ensures NRIs contribute to Indian tax revenues on sourced income. Payers should consult CAs for precise rates and filings to mitigate risks.[1][4]