Understanding TDS on Payments to Non-Resident Indians (NRIs) under Section 195
Understanding TDS on Payments to Non-Resident Indians (NRIs) under Section 195
The Indian Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on specific payments made to non-residents. This provision, covered under Section 195, ensures that taxes are collected at the source of income for NRIs.
What is Section 195?
Section 195 outlines the rules for deducting TDS on income generated by NRIs through business transactions in India. This mechanism helps prevent double taxation and regulates tax deductions on various NRI income sources.
Who is Responsible for Deducting TDS on NRI Payments?
A wide range of entities are liable to deduct TDS under Section 195, like:
- Individuals
- Hindu Undivided Families (HUFs)
- Non-Resident Indians (NRIs)
- Partnership Firms
- Individuals with exempt income in India
- Foreign Companies
- Juristic Individuals
It's important to remember that NRIs with taxable income under Section 195 are considered the payee. The applicable TDS rate depends on the nature of the income or payment made to the NRI.
How to Deduct TDS under Section 195
- Obtain a Tax Deduction Account Number (TAN): Before deducting TDS, entities (payers) must acquire a TAN. This can be easily obtained online or offline by submitting Form 49B. Both the payer's and the NRI's PAN details are required for successful form submission.
- Deduct TDS at Source: The regulation mandates that TDS be deducted at the source when making payments to NRIs. It's crucial to mention TDS details in the sale deed for relevant transactions between NRI sellers and prospective buyers.
- Deposit Deducted TDS: The deducted TDS must be deposited through a challan or TDS payment form by the 7th of the next month following the deduction. Government-authorized banks or the Income Tax Department of India accept TDS deposits.
- File Quarterly TDS Returns: After depositing TDS, entities must electronically file quarterly returns using Form 27Q. The return filing timelines are:
- First Quarter (April 1st - June 30th): July 15th of the same year.
- Second Quarter (July 1st - September 30th): October 15th.
- Third Quarter (October 1st - December 31st): January 15th of the following year.
- Fourth Quarter (January 1st - March 31st): May 15th.
- Issue TDS Certificate (Form 16A): Once TDS is filed, the payer can provide a TDS certificate, also known as Form 16A (Certificate of Deduction of Tax), to the NRI seller. Issuing Form 16A is mandatory within 15 days of the due date.
TDS Rates under Section 195
There's no threshold limit for TDS deductions under Section 195. Regardless of the amount, TDS must be deducted on NRI payments.
|
Type of Income |
TDS Rate |
|
Payments from Investments |
20% |
|
Long-Term Capital Gains (LTCG) Income |
10% (except for Section 115E) |
|
LTCG under Section 115E |
10% |
|
Other Sources of LTCG |
20% |
|
Short-Term Capital Gains (STCG) under Section 111A |
15% |
|
Interest on Foreign Currency Loans |
20% |
|
Income from Technical Services (Government or Indian Concern) |
10% |
|
Royalty Income (Indian Concern or Government) |
10% |
|
Royalty Income (Other Sources) |
10% |
|
Other Income Sources |
30% |
Importance of Timely TDS Deduction and Payment
- Interest on Late Deposit: If the deducted TDS isn't deposited by the due date, a 1.5% interest penalty is levied from the deduction date until the deposit is made.
- Penalty for Non-Deposit of TDS: When TDS is deducted but not deposited, the Income Tax Act (ITA) Section 221 imposes a penalty equivalent to the deducted TDS amount.
- Partial Deduction or Deposit: If only a portion of the TDS is deducted or deposited, the payer is liable for a penalty under Section 271C. This penalty is calculated as the difference between the original deductible amount and the deducted/deposited amount.