Summary: Tax is required to be deducted by any person making a payment to a non-resident or foreign company, on sums chargeable to tax in India, excluding salaries. The applicable tax rate is determined by the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial. If the non-resident has a Permanent Establishment (PE) in India, higher tax rates apply based on the payment amount. For non-residents without a PE, DTAA benefits can be claimed by providing a Tax Residency Certificate (TRC) and Form 10F. There is no threshold exemption for TDS under Section 195. Surcharge and education cess apply to rates specified under the Act but are generally included in DTAA rates. TDS is also applicable to presumptive incomes, payments made by non-residents to other non-residents if taxable in India, and payments in kind. However, no TDS is required on exempt income. Payments made in foreign currency are converted using the telegraphic transfer buying rate. If the payer bears the tax, the payment is grossed up. Non-residents without a Permanent Account Number (PAN) may face higher TDS rates, though relaxations exist under Rule 37BC. Both payers and payees can apply for lower or nil deduction certificates. For remittances to non-residents, Forms 15CA and 15CB are mandatory, with certain exempted categories.
Person Responsible for Deducting Tax
Section 195(1) mandates that any person responsible for paying to a non-resident (other than a company) or to a foreign company, any interest (except interest under sections 194LB, 194LC, or 194LD) or any other sum chargeable to tax under the Act, shall deduct income tax at the rates in force.
This section excludes income chargeable under the head “Salaries,” which is governed by Section 192.
“Rates in Force [Section 2(37A)(iii)]
“At the rate in force” means the rate specified in the relevant sections of the Income Tax Act or DTAA, whichever is beneficial. For example, Section 115A prescribes withholding tax rates for interest, dividend, fees for technical services, and royalty.
Taxpayers may also benefit from Most Favored Nation (MFN) clauses in some treaties.
Rates under Section 115A:
| Particulars | Income Tax Rate | DTAA Rate | Treaty Exemption Conditions |
| Royalty / Fees for Technical Services | 20.8% | 10%-15% (varies) | As per treaty agreements with UK, US, Australia, Singapore. If the “made available” clause is not satisfied, DTAA rate may be NIL. |
So, The person responsible for making payment to a non-resident must deduct tax on the sum chargeable to tax at rates prescribed either under the Income Tax Act or under the Double Taxation Avoidance Agreement (DTAA), whichever is lower, When the non-resident/foreign company does not have a PE in India
Important Points to Consider for TDS on Non-Resident Payments
1) Non-Resident/Foreign Company Having a PE in India
If the non-resident/foreign company carries on business through a Permanent Establishment (PE) in India, tax must be deducted under Section 195 at applicable rates:
- Amount exceeding Rs. 1 Crore: 40% + 4% Cess + 2% Surcharge (Effective: 42.432%)
- Amount exceeding Rs. 10 Crores: 40% + 4% Cess + 5% Surcharge (Effective: 43.68%)
2) Non-Resident/Foreign Company Not Having PE in India
If the non-resident/foreign company does not have a PE in India, tax shall be deducted at the lower of the DTAA rate or the Income Tax Act rate.
3) Tax Residency Certificate (TRC) and Form 10F for DTAA Benefits
Non-residents must provide a TRC/ Form 10F to claim DTAA benefits.
CBDT Rule 21AB mandated furnishing prescribed particulars in Form 10F along with the TRC, such as status, PAN, nationality, tax identification number, period of residency, and address.
Electronic filing of Form 10F has been mandated from 16 July 2022, And Portal allowing the feature that non-residents without PAN can file Form 10F online.
4) No Threshold Exemption / No Prescribed Rate
Section 195 does not provide a basic threshold exemption; TDS must be deducted even if the payment is nominal. The section also does not prescribe a fixed rate; tax is deducted at the applicable rate in force.
5) Levy of Surcharge & Education Cess on TDS Rate
Rates prescribed under the Act are subject to surcharge and education cess. However, under DTAA, rates include surcharge and cess, so no additional surcharge/cess is applicable beyond treaty rates.
6) Income Chargeable on Presumptive Basis
Certain non-resident business incomes are taxed presumptively under Sections 44BB to 44BBB. TDS should be deducted on the income portion only, as held by the Supreme Court and ITAT in relevant cases.
Hence, for example, Income of a non-resident from operation of ships is taxable @ 7.5 percent of the gross receipts under Section 44BB of the Act, therefore, TDS is required on the income element i.e., 7.5 percent of the sum payable to the non-resident.
7) TDS on Payment Made by Non-Residents to Non-Resident
Section 195 also applies to payments made by a non-resident to another non-resident, including payments outside India if the income is taxable in India.
8) TDS applies to payments made in kind
TDS applies to payments made in kind as well. The Supreme Court upheld the extraterritorial application of Section 195 in GVK Industries Ltd (332 ITR 130).
9) TDS on Exempt Income
TDS is not required if the income is exempt in India (under domestic law or DTAA). This is clarified by CBDT Circular No. 786 dated 7 February 2000.
10) Income Chargeable at Concessional Rates on Gross Basis
Some incomes (dividend, interest, royalty, fees for technical services) are taxed on gross basis at concessional rates under Chapter XII. TDS should be as per these concessional rates.
For example, royalty and fees for technical services are taxed at the concessional rate of 10 percent of the gross receipt. When special provisions are invoked, TDS is required at the rates prescribed under such special provisions.
11) Exchange Rate for Foreign Currency Payments
Rule 26 provides that the telegraphic transfer buying rate of the currency on the date of deduction (as adopted by SBI) shall be used for converting foreign currency payments for TDS.
12) Grossing Up for Net-of-Tax Payments (Sections 195A and 198)
If the payer bears the tax burden, payments are treated as net of tax and grossed up accordingly. For example:
| Particular | Amount (INR) |
| Net payable to non-resident | 100 |
| Applicable tax rate | 20% |
| Grossed-up income | 100 * 100/(100-20) = 125 |
| Tax payable | 125 * 20% = 25 |
| Net amount after tax | 125 – 25 = 100 |
CBDT Circular No. 785 dated 24 November 1999 confirms the grossed-up income is deemed income of the payee. ITAT Bangalore clarified that Section 206AA higher TDS rates do not apply to grossed-up payments.
13) Implications of Section 206AA (PAN Requirement)
Section 206AA mandates higher TDS rates if the payee does not have PAN, deducting tax at the highest of:
- Rate specified under the Act
- Rates in force (including DTAA rates)
- 20% flat rate
However, ITAT Pune and Bangalore have held that TDS rates cannot exceed those prescribed under DTAA or the Act, whichever is more beneficial.
The implications of the provision are summarized in the following table-
| PAN | Tax Residency Certificate (TRC)/Form 10F | Does Treaty provide for a lower rate ? | Applicable WHT Rate |
| ☑ | ☑ | ☑ | Treaty rate |
| ☑ | ⮽ | NA | Act rate |
| ⮽ | ☑ | ☑ | Treaty rate (Most Cases) |
| ⮽ | ⮽ | ⮽ | Act ate subject to S. 206AA |
Rule 37BC provides relaxation for non-residents (other than companies) who do not have PAN but furnish prescribed details and documents.
14) Application for Lower / Nil Deduction Certificates
- Application by Payer (Section 195(2)): To determine the chargeable portion when part of the payment is taxable. Application is provisional and appealable under Section 248.
- Application by Payee (Section 195(3)): Non-resident payee can apply for nil deduction certificate subject to conditions in Rule 29B. Application in Form 15C (banking companies) or 15D (others).
- Application by Payee (Section 197): Payee can apply for lower or nil deduction certificate for all receipts in Form 13. Certificate is not appealable.
| Particular | Section 195(2) | Section 195(3) | Section 197 |
| Applicant | Payer | Payee (subject to Rule 29B) | Payee |
| Purpose | Determine appropriate withholding rate | Nil deduction on specified receipt | Lower/Nil deduction for all receipts |
| Applicability | Specified payments | Specified receipts | All receipts |
15) Certification and Reporting under Section 195(6) (Forms 15CA / 15CB)
From 1 July 2009, payer responsible for remittance to non-residents must furnish information in Form 15CA (self-declaration) and Form 15CB (CA certificate).
- Part A: Where the remittance or the aggregate of such remittance does not exceed 5 lakh rupees during the F.Y.
- Part B: Where remittance or the aggregate of such remittances exceed 5 lakh rupees during the FY and an order / certificate u/s 195(2) / 195(3) /197 of the Act has been obtained from the Assessing Officer
- Part C: Where the remittance or the aggregate of such remittance exceed 5 lakh rupees during the FY and a certificate in Form No 15CB from an accountant has been obtained
- Part D: Where the remittance is not chargeable to tax under the Income Tax Act, 1961.
- Penalty under Section 271I of Rs. 1 lakh applies for failure or inaccuracies in Forms 15CA/15CB.
Form 15CB is required only when Part C of Form 15CA is filled in. ⎯ In all other cases, Form 15CB is not mandatory
List of payments of specified nature mentioned in Rule 37BB( 33 Exempted Categories ), which do not require submission of Forms 15CA and 15CB,
| Rule 37BB( List of 33 Exempted categories payment which do not require Submission of Forms 15 CA and 15 CB | |
| Sl. No. | Nature of Payment |
| 1 | Indian investment abroad -in equity capital (shares) |
| 2 | Indian investment abroad -in debt securities |
| 3 | Indian investment abroad-in branches and wholly owned subsidiaries |
| 4 | Indian investment abroad -in subsidiaries and associates |
| 5 | Indian investment abroad -in real estate |
| 6 | Loans extended to Non-Residents |
| 7 | Advance payment against imports |
| 8 | Payment towards imports-settlement of invoice |
| 9 | Imports by diplomatic missions |
| 10 | Intermediary trade |
| 11 | Imports below Rs.5,00,000-(For use by ECD offices) |
| 12 | Payment- for operating expenses of Indian shipping companies operating abroad. |
| 13 | Operating expenses of Indian Airlines companies operating abroad |
| 14 | Booking of passages abroad -Airlines companies |
| 15 | Remittance towards business travel. |
| 16 | Travel under basic travel quota (BTQ) |
| 17 | Travel for pilgrimage |
| 18 | Travel for medical treatment |
| 19 | Travel for education (including fees, hostel expenses etc.) |
| 20 | Postal Services |
| 21 | Construction of projects abroad by Indian companies including import of goods at project site |
| 22 | Freight insurance – relating to import and export of goods |
| 23 | Payments for maintenance of offices abroad |
| 24 | Maintenance of Indian embassies abroad |
| 25 | Remittances by foreign embassies in India |
| 26 | Remittance by non-residents towards family maintenance and-savings |
| 27 | Remittance towards personal gifts and donations |
| 28 | Remittance towards donations to religious and charitable institutions abroad |
| 29 | Remittance towards grants and donations to other Governments and charitable institutions established by the Governments. |
| 30 | 30 Contributions or donations by the Government to international institutions |
| 31 | Remittance towards payment or refund of taxes. |
| 32 | Refunds or rebates or reduction in invoice value on account of exports |
| 33 | Payments by residents for international bidding. |
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Disclaimer: The views expressed in this article are the personal views of the author. Neither the views nor the analysis constitute a legal opinion and are not intended to be advice.
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