Section 195 TDS on Share Purchase from Non-Resident: Complete LTCG Guide

Purchase of private limited company share by Resident from Non Resident – Complete Guide for TDS on Long Term Capital Gain under Section 195 of the Income Tax Act, 1961

This transaction is governed mainly by:

• Foreign Exchange Management Act, 1999 (FEMA)
• Reserve Bank of India regulations
• Companies Act, 2013
• Income Tax Act, 1961

Types of Capital Gain and applicability:

Long term capital gain if the shares are un listed and holding period is more than 24 months.

Short term capital gain if the shares are un listed and holding period is less than or equal to 24 months.

Long tem capital gain from transfer of unlisted securities or shares of a closely held company to be computed as per section 112(1)( c )(iii)

Whether Cost of Indexation benefit available to Non Resident: – No Indexation benefits are generally not available for unlisted shares for FY’2025-26.

TDS from payment to non resident – Section 195:

Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC ) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under thehead “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque ordraft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

This provision ensures that income arising to non-residents in India is taxed at the source itself.

TDS Section 195 applies to payments like interest, royalty, capital gains, dividends, etc., and no threshold exemption is available and TDS applies to all taxable payments.

 Who is a Non-resident?

A person is said to be a non-resident in India if he is not a resident in India as per section 6 of the Income Tax Act, 1961.

Who is responsible to deduct TDS :

The payer of the amount (the person who makes the payment to the Non resident or remits the amount). Here the resident who is making payment to Non Resident is responsible to deduc the TDS.

TDS Rate under Section 195:

Rates as per the Finance Act (FY’25-26)

Rates contained in the DTAA between India and the country of residence of such non-resident
(whichever is  beneficial to the payee and applicale by virtue of the provisions of section 90)

Rates as per the Finance Act (FY’25-26) for long term capital gain is 12.50% (Transfer on or after 23.07.2024). The rates given under the Finance Act are to be increased by the applicable surcharge and education cess of 4%.

Whether base rate to be applied or surchage and Education cess also applied along with base rate?

Surcharge and education cess should be applied along with base rate of 12.50% as TDS rate

How surcharge to be applied since various rate involved

Check aggregate payment and apply surcharge

Rate break up and computation with Example :

Mr Remo a non resident share holder holding 45,000 shares of Private Limited Company in India and Transfer the shares to Indian Individual share holder Mr Elango who is resident in India at the rate of Rs 1000 per share.

Here the aggregate amount in the above example is Rs 4,50,00,000. Maximum surcharge comes under 25% bracket basically. However applying section 112(1) (C ) (iii) the surcharge can be capped at 15%.

Now the tax rate of TDS (Long Term Capital Gain TDS ) is 14.95% – instead of 16.25% (Tax Rate 12.50% + Surcharge 15% and Education Cess is 4%) – Income by way of long term capital gains referred to in section 112(1) (C ) (iii). Higher sucharge of 25% need not to apply.

Whether the rate to be applied on total consideration or on capital gain portion ?

TDS to be deducted on total sale consideration not on capital gain. Considering the example as given above TDS rate of 14.95% should be deducted on Rs 4,50,00,000.

However, if the payee fails to furnish a valid PAN to the payer, the TDS shall be done at the higher of the following rates as per Section 206AA.

Section 206AA (1) – Requirement to furnish Permanent Account Number.

Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on whichtax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible fordeducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—

at the rate specified in the relevant provision of this Act; or

at the rate or rates in force; or

at the rate of twenty per cent:

Is there possibility to deduct TDS on Capital Gain instead of Gross Value ?

Yes, Now we have to apply sub section 2 of section 195 and reproduced for further discussion.

Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

Applicability Of Lower Deduction (TDS) Under Section 197 :

A recipient of taxable payment can seek an application for a lower deduction or nil deduction of tax (TDS) under Section 197. In such cases where the assessing officer has issued a certificate under Section 197, TDS shall be done at the rates mentioned therein. The certificate is generally issued for a specified period. Section 206AA states that a certificate under section 197 is not valid unless the recipient furnishes their PAN at the time of making an application to the assessing officer.

Meaning Of DTAA:

Double Taxation Avoidance Agreement (DTAA) is an agreement signed between India and with several other countries to ensure that individuals and entities are not taxed twice on the same income.

Whether DTAA provision applicable to Long Term Capital Gain ?:

Yes, The DTAA agreements cover a range of income such as income from employment, business profits, dividends, interest, royalties, capital gains, among others.

We have to determine which (DTAA) applies in your case as whether DTAA applicable or not. DTAA applies only when the transaction is taxable both in India and in another country. Also, one party involved in the transaction should be a non-resident (NR) or a foreign company (FC).

We have to determine Which DTAA is applicable to your case. Identify the residential status of the non-resident party and apply DTAA between India and with that country.

Methods of claiming DTAA Benefits :

Taxpayers can claim the taxes paid to foreign governments as a deduction in the country of residence. This is called as Deduction method

Tax relief under this method can be claimed in any one of the two countries. This should be called as Exemption method.

Tax relief under this method can be claimed in the country of residence. This is known as Tax Credit method.

Basi principle to choose DTAA and Income Tax Provision:

1. If DTAA has provision and Act has contractictory provision then DTAA will prevail over the Act

2. If DTAA and Act have the same provision then apply more benefiacial to the tax payer.

3. IF DTAA has provision and the Act does have the same provision then take DTAA

4. If DTAA does not have the provision but the act is having the guidance then refer the Act

Is there any condition to get benefit of DTAA? :

Yes, The tax payer must have proof of tax residence certificate of treaty country and meet certain conditions and comply the provion of treaty (i.e., proof of tax residence certificate of living country).

Time Limit for deposit 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.

Filing of TDS Return:

After depositing the TDS, the buyer should electronically file a TDS return by filing Form 27Q. TDS returns are filed quarterly within the below due date.

Time Limit to issue of certificate of TDS and Form:

As per Rule 31A after the TDS returns have been filed, the Deductor can issue the TDS certificates or Certificate of Deduction of Tax, i.e. Form 16A to NR. The certificate should be issued to the seller within 15 days from the due date of TDS returns for the quarter.

Threshol Limit under section 195:

There is no threshold limit prescribed under section 195 and hence tax has to be deducted at source for any amount chargeable to tax in India

Procedure to apply for Lower or Nil TDS (Form 13):

A non-resident recipient can apply when they believe that the payment received (other than salary) is either not taxable in India, only partially taxable, or taxable at a lower rate.

For this purpose, the non-resident must submit an application in Form 13 to the Assessing Officer (AO).

The AO examines the application and verifies whether the lower or nil deduction is justified based on the facts.

If satisfied, the AO issues a certificate under Section 197 allowing a lower or nil TDS deduction.

This certificate authorises the payer/deductor to deduct TDS at the reduced or nil rate specified, instead of the standard prescribed rate.

Rule 37BB – Furnishing of information for payment to a non-resident, not being a company, or to a foreign company.

The payer responsible for paying any amount to a non-resident or a foreign company is required to furnish complete and accurate information regarding such payment in Form 15CA and Form 15CB via the income tax e-filing portal. Note that such information must be furnished even if the amount paid is not taxable under the Act. This is a necessity since the bank will request the same before remitting such an amount outside India. Failure to do such compliance shall attract a penalty of Rs 1 lakh under Section 271-I.

Scope of the term any other sum in section 195 (1):

The  term”anyother sum” used  in section  195(1) does not necessarily mean the sums which represent wholly  income or profits. In other words, it can be said the provision of  Tax deduction at source applies not only to  amounts paid Which wolly bears “income” character, but also to gross sum the whole of which is not income or  profits to the recipicnt. Thus, section 195 takes within its  ambit any amount  paid  to a  non-resident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents.

Ultimat assessment of Non Resident is irrelevent for applicability of section 195:

Person who is liable under section 195 to make deduction of income tax while making payment of any income, profits or gains are not relevant to the ultimate result of the assessment of non-resident person from whose income they deduct and pay income-tax in India.

CBDT Instruction No 2/2014, dated 26.02.2014-Deduction of TDS under section 195 read with section 201 relating to payment made to non resident provides as under :

Where the assessee fails to deduct tax under section 195 of the Act, the AO shall determine the appropriate proportion of the sum chargeable to tax as mentioned in sub section 1 of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act.

Tax is to be deducted on the sum paid whole of which may not be income or profites of the recipient:

The purpose of sub-section (1) of section 195 is to see that on the sum which is chargeable under section 4 of the Act, for levy and collection of income-tax, the payer should deduct income-lax thereon at the rates in force, if the  amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, any manner, adversely affected. Further, the rights of the payer or recipient are fully safeguarded under sections 195(2), 195(3) and 197. The only thing which is required  to be done is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of a certificate authorising the recipient to receive the amount without deduction of tax, or deduction of income-tax at any  lower rate. On such determination, tax at the appropriate rate could be deducted at the source. lf no such application is filed,  income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such “sum” to deduct  tax thereon before makmg payment.