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What Is Section 195 Under the Income Tax Act?

Updated on: 10 Mar, 2023 02:45 PM

The Tax Deducted at Source (TDS) for non-resident nationals of India is governed by section 195 of the Income Tax Act, 1961. This section focuses on the tax deductions and rates that are involved in a non-resident citizen of India's day-to-day business dealings. Section 195 of the Income Tax Act applies to all types of income other than salary. The legislation creates a mechanism to offset revenue loss owing to a foreign resident's tax burden by deducting an equal amount from their payments at the source.

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 companyis required to deduct TDS tax under this section. The payer can be any individual, HUF, Partnership Firms, other NRI’s, a foreign company, firms, and any juridical person irrespective of whether that person has income chargeable to tax in India or not.

What is the rate of TDS u/s 195?

The rate of tax deduction u/s 195 shall be either of the below rates, whichever is beneficial to you:

  • Specified in the Double Taxation Avoidance Agreements between India and the country of the payee.
  • Specified in the Income Tax Act.

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 done according to DTAA rates. The following are the rates:

Particulars 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 Government or an Indian entity 10%
Any other income 30%

Further, if the payee doesn’t have a PAN then rate could be rate as per the law in force or 20% whichever is higher.

What are the consequences of non-complying 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.

Frequently Asked Questions

Q- What are the conditions & procedures to avail DTAA benefits by NRI?

DTAA is an agreement between the 2 countries. This agreement provides a benefit that the income is taxed once. The assessee has to file form 10F and self-declaration to the person responsible for deducting tax.

Q- Section 195 An IT company has to pay professional fees to a company based in the USA that doesn't have any permanent establishments in India nor a PAN card, at what rate TDS should be deducted?

As per section 195 where the payee does not have a valid PAN then the TDS rate is the rate prescribed under chapter XVII B or 20% whichever is higher.

Q- Can I pay 1% TDS under section 194IA for purchasing a immovable property from an NRI?

TDS on purchase of immovable property from non-resident is deducted in section 195. When immovable property is purchased from non-resident then TDS is deducted on capital gains, not on the sale prices.

Q- Under which section is tax withheld on sitting fees to a non-resident director of an Indian company?

Section 194J for resident payee and Section 195 for non-resident payee

Q- What will be the head under which the income from dance performance will be shown as per the Income Tax Act, 1961?

If the main income is from dance performance then income is shown in the profession and if main income is other than dance performance then income is shown in other sources.

Q- What is a tax residency certificate and how & where to get that?

Tax residency certificate is required from the resident country tax authorities to claim relief under DTAA

Q- Do I need a TAN to pay TDS under Section 195 while buying a property from an NRI?

Yes, TAN is necessary to deduct TDS. You must apply for the TAN.

Q- What details should be included in TRC?

The following details must be there in TRC

  • Name of assessee
  • Status of assessee
  • Nationality of assessee
  • Residential status
  • Period for which the certificate is applicable
  • Address of applicant for the period for which the certificate is applicable
  • Tax Identification Number of taxpayer

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.