I’m Paying a Foreign Freelancer INR 8 Lakh. Do I Have to Deduct TDS – and What Happened to Form 15CA and 15CB?
Summary: Under Section 393(2) of the Income-tax Act, 2025, payments to non-residents or foreign companies that are chargeable to tax in India attract tax deduction at source at the rates in force, subject to the applicable treaty provisions. The article explains the withholding framework for Tax Year 2026-27, including the absence of a minimum threshold, the applicability to all payers, the consequences of non-deduction, and the need to determine taxability under Section 9 and the relevant tax treaty. It also discusses treaty-rate documentation, including a Tax Residency Certificate, Form 41, PAN or alternative particulars and a no-permanent-establishment declaration. For foreign remittances, Forms 145 and 146 replace Forms 15CA and 15CB, with the article explaining the remittance certification workflow. Using an INR 8,00,000 payment to a Singapore resident as an illustration, it compares domestic and treaty withholding rates and explains the gross-up consequence where the contract requires payment net of Indian taxes. The article concludes with practical steps for handling foreign invoices, including obtaining the required documents, Form 146, filing Form 145, deducting and depositing TDS, and reporting the payment.
- Withholding on Payments to Non-Residents Under Section 393(2)
- The Obligation Is on the Payer, Not the Foreign Vendor
- Not Every Foreign Payment Is Taxable in India
- Common Foreign Payments — Is Indian Withholding Likely?
- The Rate: This Is Where the Money Is
- INR 8,00,000 FTS Payment to a Singapore Resident — Rate Comparison
- The Documents Your Foreign Vendor Must Give You
- And the Forms Your Bank Will Ask For
- Remittance and TDS Forms: Old vs New
- The Gross-Up Trap
- What I'd Do if I Were the Founder
Withholding on Payments to Non-Residents Under Section 393(2)
“It’s a small payment to a designer in Singapore. He’s not Indian, he’s never set foot in India, and he raised a plain invoice. Why on earth would I deduct Indian TDS?” — a Pune SaaS founder, two days before his bank refused the remittance
I hear a version of this every month, and the founder is always genuinely surprised. Then the bank asks for a form he has never heard of, the remittance stalls, and a routine INR 8 lakh payment turns into a three-week problem.
Here is the framework, cleanly, for Tax Year 2026-27 under the Income-tax Act, 2025.
The Obligation Is on the Payer, Not the Foreign Vendor
Under Section 393(2) of the Income-tax Act, 2025 (entry at Sl. No. 17 of the withholding table), any person paying a non-resident or foreign company any sum chargeable to tax in India must deduct tax at source at the rates in force — at the time of credit to the account or payment, whichever is earlier.
This is the provision that replaces the old Section 195 of the 1961 Act with effect from 1 April 2026. Three features of it catch people out:
- There is no minimum threshold. Unlike domestic TDS sections, a INR 15,000 payment abroad triggers the same obligation as a INR 15 crore one.
- The obligation applies to every payer — companies, LLPs, partnerships, and individuals. There is no small-business exemption.
- If you fail to deduct, the expenditure can be disallowed in computing your business income, and you can be treated as an assessee-in-default for the tax plus interest. The cost lands on you, not on the foreign vendor.
Not Every Foreign Payment Is Taxable in India
This is the part that gets missed. Section 393(2) applies only to sums chargeable to tax in India. Whether a payment is chargeable is decided by Section 9 (income deemed to accrue or arise in India) read with the relevant tax treaty under Section 159.
Rough working rules I apply:
Common Foreign Payments — Is Indian Withholding Likely?
| What you are paying for | Usual position | Why |
|---|---|---|
| Fees for technical/professional services delivered from abroad | Generally taxable | Deemed to accrue under Sec 9; FTS article of the treaty applies |
| Royalty/licence for use of software, IP, database | Generally taxable | Royalty article of the treaty |
| Interest on a foreign loan | Taxable | Interest article; concessional treaty rates often available |
| Purchase of goods imported from abroad | Usually not taxable | Business profits, no permanent establishment in India |
| Standard off-the-shelf software bought as a copyrighted article | Often not royalty | Sale of a copyrighted article is not the same as a licence of copyright |
| Reimbursement of actual out-of-pocket cost, no mark-up | Often not taxable | No income element — but keep documentary proof |
These are starting points, not conclusions. The treaty article, the make-available clause (in treaties such as India–US, India–UK and India–Singapore) and the presence of a permanent establishment can all flip the answer.
The make-available condition is worth knowing about. In several treaties, technical services are taxable in India only if the service transfers the underlying skill or knowledge to you, so you can apply it independently in future. A one-off design deliverable often does not meet that test. A training programme that leaves your team able to do the work themselves usually does.
The Rate: This Is Where the Money Is
Take the Pune founder’s actual case — INR 8,00,000 of fees for technical services to a Singapore-resident individual.
INR 8,00,000 FTS Payment to a Singapore Resident — Rate Comparison
| Scenario | Rate applied | TDS (INR) | Net received abroad (INR) |
|---|---|---|---|
| No treaty documents furnished — domestic rate under the Act | 20% + 4% cess = 20.8% | 1,66,400 | 6,33,600 |
| Treaty rate claimed with valid TRC + Form 41 | 10% (FTS article) | 80,000 | 7,20,000 |
| No PAN and no alternative particulars furnished | Higher rate for non-furnishing of PAN | 1,66,400 or more | 6,33,600 or less |
Difference between row 1 and row 2 on a single invoice: INR 86,400. On a recurring monthly engagement, that is over INR 10 lakh a year of avoidable withholding.
Section 159(4) of the Income-tax Act, 2025 preserves the old principle: the taxpayer gets the treaty rate or the Act rate, whichever is more beneficial. But under Section 159(8), the treaty rate is a documentation-driven entitlement. No documents, no treaty rate.
The Documents Your Foreign Vendor Must Give You
1. Tax Residency Certificate (TRC) issued by his own country’s tax authority for the relevant period. This is mandatory and non-negotiable.
2. Form 41 — the self-declaration that replaces the old Form 10F from 1 April 2026, filed on the Indian income-tax portal. (For an Indian resident needing a TRC from India, the application is Form 42 and the certificate issued is Form 43 — the successors to Forms 10FA and 10FB.)
3. PAN, or, if he has none, the alternative particulars — name, email, contact number, full address in his country of residence, and his tax identification number there — which allow relief from the higher no-PAN rate for specified payments such as interest, royalty, FTS, dividends and capital gains.
4. A no-permanent-establishment declaration, confirming he has no fixed place of business in India. If he does have a PE, treaty rate protection on FTS falls away and the income is taxed as business profits.
And the Forms Your Bank Will Ask For
The remittance certification workflow has been renumbered too. Same process, new names:
Remittance and TDS Forms: Old vs New
| Purpose | Old form (1961 Act) | New form (2025 Act) |
|---|---|---|
| Remitter’s own declaration before remittance | Form 15CA | Form 145 |
| Chartered Accountant’s certificate of taxability | Form 15CB | Form 146 |
| Quarterly TDS return for non-resident payments | Form 27Q | Form 144 |
| TDS certificate issued to the payee | Form 16A | Form 131 |
| Non-resident’s treaty self-declaration | Form 10F | Form 41 |
In practice: for a taxable remittance above INR 5 lakh in the financial year, your bank will want Form 145 supported by a CA’s Form 146. Get the Form 146 issued before you initiate the transfer, not after the bank bounces it.
The Gross-Up Trap
One last thing, and it is expensive. If your contract says the vendor is to receive INR 8,00,000 net of all Indian taxes, you have agreed to bear the tax — and the law requires you to gross up. At 20.8%, the deemed gross becomes INR 8,00,000 ÷ 0.792 = INR 10,10,101, and the TDS you must deposit is INR 2,10,101 — not INR 1,66,400. Your INR 8 lakh contract has quietly become an INR 10.1 lakh cost.
Fix this at the contracting stage. One clause — “all payments are subject to applicable withholding taxes, and the payee shall furnish a valid TRC and Form 41” — saves the argument and the money.
What I’d Do if I Were the Founder
Before the next foreign invoice: build a one-page vendor pack (TRC, Form 41, PAN or alternative particulars, no-PE declaration), get a Form 146 from your CA, and file Form 145. Deduct at the treaty rate, deposit by the 7th of the following month, and report it in Form 144 for the quarter. Done properly, it is a two-day process. Done reactively, at the bank counter, it takes three weeks.
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About the Author: CA Sonia Dawar is a practicing Chartered Accountant and the founder of Dawar & Co. She advises Indian businesses on withholding tax on foreign remittances, treaty entitlement, transfer pricing documentation and cross-border structuring, and certifies foreign remittances for clients across technology, manufacturing and professional services. Write to her at [email protected] or visit www.dawarandco.com.
