In the complex landscape of taxation, Section 195 of the Income Tax Act, 1961 stands as a cornerstone for ensuring that tax deducted at source (TDS) is appropriately applied to payments made to non-residents. This section is a critical component in maintaining fiscal discipline and adhering to the legal framework when engaging in financial transactions with non-resident individuals or foreign companies.
Deduction of Tax at Source:
Any person responsible for making payments to non-residents must deduct income tax at the time of payment or credit, whichever occurs earlier. The applicable TDS rates are determined annually by the Finance Act or Rates contained in the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of such non-resident, whichever is more beneficial to the taxpayer:
- TDS Rates as per Finance Act, 2023:
| Situation | Rate of TDS |
| Income from investment made by an NRI | 20 per cent |
| Long-term capital gains (Section 115E) Shares of an Indian Company Debentures and deposits of a Public Company in Indian Securities issued by the government | 10 per cent |
| Long-term capital gain from listed shares and securities (Section 112A) | 10 per cent |
| Any other long-term capital gain | 20 per cent |
| Short-term capital gains (Section 111A) | 15 per cent |
| Interest payable on foreign currency borrowings (Government/Indian concern) | 20 per cent |
| Royalty and Fees for technical services (Government/Indian concern) | 20 per cent |
| Winnings from: Horse races Online games, Card games, lotteries, crossword puzzles, and other games | 30 per cent |
| Any other income | 30 per cent |
Note: i) The above rates shall be increased by surcharge rates and educational cess in force.
ii) However, for payments made according to the DTAA rates, no educational cess or surcharge is applied.
Compliance Requirements:
1. Payment of TDS: TDS deducted by the buyer should be deposited through challan for TDS payment on or before the 7th of next month in which the TDS is deducted.
2. Quarterly Return Submission: The person responsible for TDS must submit a quarterly return using Form 27Q for the respective quarter.
3. TAN Requirement: Deducting TDS under Section 195 requires a Tax Deduction and Collection Account Number (TAN).
4. Proportional Deduction Option: If there is a belief that the entire sum may not be fully taxable in the hands of the recipient, an application can be made to the Assessing Officer. This allows for a proportional deduction of income tax. The applicable form for this purpose is Form 15E.
5. Lower TDS Certificate: Section 195 allows individuals entitled to receive interest or other sums to apply for a certificate from the Assessing Officer for lower or no deduction of TDS. Once approved, the payer must adhere to the specified lower deduction or no deduction of tax. The recipient must submit Form 13 for this application.
6. Declaration of information in relation to foreign payments: Form No. 15CA must be filled based on transaction specifics. For payments up to five lakh rupees, Part A is used. Larger payments require Part B or C. Part C additionally needs a certificate (Form No. 15CB) from a qualified accountant. If the payment is not taxable under the Act, Part D is used, ensuring compliance and transparency in cross-border transactions.
Conclusion:
In conclusion, mastering Section 195 is imperative for individuals and entities involved in transactions with non-residents. A thorough understanding of TDS rates, compliance steps, and strategic applications for proportional deduction or lower TDS certificates can optimize financial dealings. This article serves as a comprehensive guide, empowering readers to navigate the intricacies of Section 195 and ensuring smooth, compliant transactions in the ever-evolving landscape of taxation. Stay informed, stay tax-savvy!
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What is the surcharge on tds under section 195. pls clarify
Well-articulated and informative article; It’s quite helpful.