Budget 2025 Updates
- The threshold for TDS on rent has been increased from Rs.2.4 lakhs per year to Rs.6 lakhs per year.
- The threshold for TDS on senior citizen interest income has been increased from Rs.50,000 to Rs.1,00,000.
These changes will be effective from 1 April 2025 i.e. for FY 2025-26
Section 195: TDS on Payments to NRIs & Foreign Companies
Section 195 of the Income Tax Act, 1961 (ITA) outlines the provisions for Tax Deducted at Source (TDS) applicable to Non-Resident Indians (NRIs).
TDS is a key mechanism for collecting taxes, ensuring that taxes are deducted at the time of payment. This system helps discourage tax evasion by placing the responsibility of TDS on the individual or entity making the payment.
Section 195 specifically addresses TDS on payments made to NRIs, detailing the applicable tax rates and deductions for business transactions involving NRI citizens. It mandates the provision of a certificate of remittance when making such payments. Furthermore, the section includes guidelines to prevent revenue loss due to NRI tax liabilities by ensuring the appropriate tax is deducted at source during payments.
Who is required to deduct TDS u/s 195?
Any person (resident or non-resident) who pays any sum other than salary to a non-resident not being a company or to a foreign company is required to deduct tax under this section. The payer can be any individual, HUF, Partnership Firm, other NRIs, a foreign company, firms, or any juridical person, irrespective of whether that person has income chargeable to tax in India or not.
Applicable Situations for TDS Under Section 195 of the Income Tax Act
TDS under Section 195 must be deducted in two scenarios:
- When the income is credited to the payee’s account.
- During the actual payment transaction.
The deduction should occur at whichever event happens earlier. Income credited to interest payable, suspense accounts, or other accounts is considered credited to the payee’s account.
For government or public sector bank income, TDS should only be deducted at the time of actual payment, whether through cash, cheque, or draft.
As per Section 5(2)(b), the total income of a Non-Resident Indian (NRI) includes all income accrued, arisen, or deemed to have accrued or arisen in India.
Tax must be deducted on all amounts accruing or arising as specified under Section 195 of the Income Tax Act.
What is the Threshold Limit to Deduct TDS u/s195?
There is no threshold limit to deduct TDS under section 195. The payer is responsible for deducting tax only when such payment is made to the non-resident of India. Hence, tax deduction is not required for income that is exempt or falls outside the scope of taxation under the Income Tax Act unless explicitly notified by the government.
What is the rate of TDS u/s 195?
The rate of tax deduction u/s 195 TDS shall be either of the below rates, whichever is beneficial to you:
Surcharges and education cess must be added to the rates provided by the Act at the relevant rate. There is no need to add a surcharge or education cess if the payment is made according to DTAA rates. The following are the rates:
| Particulars |
Section 195 TDS rates |
| Income in respect of investment made by an NRI |
20% |
| Income by way of long-term capital gains in Section 115E in case of an NRI |
10% |
| Income from long-term capital gains from listed shares specified u/s 112A |
10% |
| Short Term Capital gains under section 111A |
15% |
| Other income from long-term capital gains |
20% |
| Interest payable by the government or Indian Concern on money borrowed in Foreign Currency |
20% |
| Royalty & fees for technical services payable by the Government or an Indian entity |
10% |
| Winnings from lotteries, online games, and horse races |
30% |
| Any other income |
30% |
Further, if the payee doesn’t have a PAN, then the rate could be based on the law in force or 20%, whichever is higher.
Penalties for Non-Compliance with Section 195
- If TDS is not deducted, then expense will be disallowed under section 40 (a)(i)
- If TDS is deducted but not paid within the time limit, then interest @ 1.5% per month or part of the month will be levied from the date of the deduction to the date of deposit.
- If TDS is deducted but not paid at all, then a penalty is implied equivalent to the TDS amount u/s 271C of the Income Tax Act.
- For the cases where the TDS deducted is less, a penalty equal to the difference between the actual amount deductible and the actually deducted would be levied.
- Where TDS has not been deducted, interest will be charged u/s 201(1A) of the Income Tax Act.
Ways to Deduct Section 195 TDS
Payment of Section 195 TDS involves several steps:
- Obtain a TAN (Tax Deduction Account Number) under section 203A before deducting TDS, ensuring PAN details for both the buyer and NRI seller.
- Deduct TDS at the time of payment to NRIs.
- Deposit TDS through an authorized bank on or before the 7th of the following month.
- Electronically file quarterly TDS returns (Form 27Q) by specified due dates.
- Issue TDS certificates (Form 16A) to NRI sellers within 15 days from the due date of TDS returns.
Additionally:
- Apply for a nil or lower TDS deduction certificate using Form 15E when needed.
- Submit complete payment information to the Assessing Officer via Form 15CA and Form 15CB.
- Ensure compliance with TDS return and certificate issuance obligations to avoid penalties under Section 271-I.
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