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December 4, 2024

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‍Exploring Section 195 of the Income Tax Act: TDS for NRIs

In India, the taxation system is designed in a manner that NRIs face the issue of complexities in tax liabilities. Section 195 of the Income Tax Act is one of the significant provisions affecting the NRIs. The departmental Guidelines section serves the purpose of collecting taxes from the time of payment imposing a legal obligation on the payer to deduct tax from time to time. Section 195 TDS ensures that tax is deducted at source on payments made to non-residents, thereby facilitating timely tax compliance.

What is Section 195 of the Income Tax Act?

This analysis is based on section 195 of the Income Tax Act on the payments made to a non-resident person or a foreign entity. It requires that any person making payment to a non-resident shall be liable to deduction of tax at source (TDS) before paying such amount. This clause makes sure that even if a person is a non-resident but earns any income from Indian sources he should comply with Indian tax laws.

Non-residents are taxed through Section 195 which covers many forms of income paid to them, be it business income, salaries, interests, royalties, technical fees, dividends, etc. The tax deduction applies to payments made directly to the non-resident or indirectly via a foreign intermediary.

Key Features of Section 195

Who is covered

All non-residents must comply with Sec 195 of Income Tax Act.
Tax Deduction at Sources (TDS): The person (individual, company or others) making the payment has to deduct tax from such payment at the relevant applicable rate.
Scope: Income earned in India by non-residents like salaries, royalties, fees for technical services, interest, dividends and others.
TDS Rate: The rate of TDS varies depending on the type of payment and the provision of the Double Taxation Avoidance Agreement (DTAA) between India and the home nation of the non-resident.

Why is Section 195 Important for NRIs?

NRIs need to know about TDS for NRI because it determines the taxation of their income from Indian sources. Although the tax is deducted at the source the NRIs need to be aware of the following:

Tax Deducted at Source on Foreign Payments: Section 195 allows for the Indian government to levy tax on income that was generated within India, even when the recipient is outside of India. It matters particularly in the case of foreign payments where non-residence means no local filing of tax returns.
Ease of Double Tax: With the help of treaties such as the Double Taxation Avoidance Agreement (DTAA), NRIs are not required to pay tax on the same earnings in both India and their country of residence.
Easier to deal with tax: While an NRI is liable to pay taxes only after deducting the section 195 tax at source, it makes it easier for them to deal with tax. This relieves NRIs from the obligation of filing tax returns just to pay tax on Indian source income.

You might also be interested in ITR 3 VS ITR 4: What are these and How do they Differ?

TDS on Non Resident: What Payments are Covered Under Section 195?

Section 195 relates to payment to non-residents for income accrued or arising in India. The main categories of payments under Section 195 that fall within the cross-border payments realm:

Interest Income

Section 195 — Interest Income (Loans/Investments) earned in India by a Non-Resident, TDS shall be applicable on interest paid by a non-resident or a foreign company on a fixed deposit or loan given by a non-resident to the Indian banks or Indian companies.

The applicable rate of TDS on interest income predominantly varies based on the type of interest and more importantly on the fact whether the said non-resident is a tax resident of an entity with whom India has a DTAA. It is generally 20% but in case there is no DTAA, it will be lower.

2. Royalty and Technical Fees

Section 195 TDS of the Income-tax Act on payments made for the use of an intellectual property (which means a patent, a copyright, trademark) technical services. The TDS shall apply to foreign companies that provide technology services or license intellectual property to businesses in India.

The TDS rate on such payments may vary with the nature of services (typically the TDS rate can go up to 10% if the services are availed from a non-resident entity providing services), and in many cases, based on the provisions of the DTAA the rate may also vary.

3. Dividends

Also, dividends paid to non-residents are subject to Section 195 TDS. The TDS rate on dividend payments is 20% in general but can be lower as per DTAA.

4. Capital Gains

Non-residents are liable to TDS on capital gains for the sale of Indian securities. The stated tax rate depends upon the holding period (i.e. Short term or Long term) as well as the nature of the securities i.e. listed or unlisted. Short-term capital gains, in general, are taxed at a higher rate than long-term capital gains.

5. Salaries

While the income of salary is taxable in the country of residence (mostly), there are some scenarios under which the non-residents can earn income in India as well (i.e. foreign nationals working in India or NRI working with the Indian company). Under such circumstances, the deductor is obliged to withhold that by sub-section (1) of section 195.

6. Income from Business and Profession

Section 195 of the Income Tax Act deals with income earned by a non-resident from a business or profession in India which shall be liable to tax deduction at source (TDS). If a foreign consultant is rendering services to an Indian entity, then the amounts paid to them will bring in TDS under this section.

7. Other Income

Similarly, other income like income from lottery and gambling or any other source in India is also liable for TDS under 195.

TDS for NRI: The Role of DTAA

The important thing that NRIs need to know about Section 195 TDS is — NRIs can save tax under the Double Taxation Avoidance Agreement (DTAA). India has entered into Double Taxation Avoidance Agreements (DTAA) with various countries in order to prevent taxing the same income in both, India and the NRI’s country of residence.

How DTAA Affects TDS for NRIs?

Reduced Rate of TDS: Under a DTAA, the rates of TDS on certain types of income (including interest, royalties and technical fees) can be lowered. For instance, although the TDS rates applicable would be 20% on the royalties and technical fee, as per the provisions of DTAA it may be reduced say, to a pact to 10% or even lower.
Tax Credit: NRIs could get a tax credit in their home country for the taxes paid in India as well. This allows for preventing double taxation on the same income.
Particulars of Income Exempt: Under a DTAA, income of a specified source may be totally exempt from Indian tax. Exemption, for example, dividends received by NRIs from Indian companies would be exempt in India as per the relevant provision of the DTAA.

TDS on Foreign Payments: The Role of the Indian Taxpayer

Although the provisions of Section 195 of the Income Tax Act are only applicable to non-residents, the onus of complying with TDS liability is on the person making the payment to the non-resident. This implies that all Indian companies and individuals making foreign payments should be doing proper tax at source deduction.

The payer must:

Identify the Nature of Payment: Identify if the payment is covered under the scope of section 195 like salary, interest, and royalty.
Determine the relevant TDS rate: Check the relevant TDS rate with regard to the type of income and whether a DTAA is applicable
Get a Tax Residency Certificate (TRC): If the non-resident seeks to avail the benefits of DTAA, they may be required to submit the TRC of his residence country.
Depositing TDS: The deducted TDS needs to be deposited with the Indian government and the proper tax authorities.

Source of Income/Transaction	Percentage
Payments, income, or transactions resulting from investments	20%
Income earned from long-term capital gains	10%
Income derived from long-term capital gains under Section 115E	10%
Other sources of long-term capital gains	20%
Earnings from short-term capital gains under Section 111A	15%
Interest payments on amounts borrowed in foreign currency	20%
Income from technical services provided to the government or an Indian entity	10%
Earnings from royalty payments made by an Indian entity or the government	10%
Income from royalty payments received from sources outside India or the government	10%
Other sources of income	Varies

Therefore no one can avoid Section 195 because Failure to comply with Section 195 would provoke penalties, interest and additional tax liabilities.

You can also use various online software like Swipe to make your tax compliance easier.

Conclusion

This provision is important for NRIs and foreign entities earning income in India. It simplifies the taxation process and reduces the burden of filing for tax for non-residents by ensuring the deduction of tax at the source itself. However, NRIs also need to be aware of the detailed provisions of this section like the TDS rates, DTAA implications and types of income covered by TDS.

Thus NRI needs to stay updated regarding TDS for NRI obligations to stay tax compliant and avoid penalties. Using DTAA to its advantage and timely deduction of TDS can be helpful for the NRIs in minimizing their tax liability and avoiding dual taxation from their income of Indian origin.

To conclude, Section 195 is a proactive step towards ensuring that all non-residents also contribute to the Indian taxes but are armed with provisions to reduce tax liabilities thanks to double tax avoidance treaties. And so, both payers and payees need to know the intricacies of this provision for manoeuvring through India’s tax framework.

FAQs

1. What is Section 195 of the Income Tax Act, and how does it affect NRIs?

It is the TDS payments of the non-residents under Section 195. Hence, if you happen to be an NRI and earn income in India by way of interest and royalties, then the payer shall withhold tax on a net basis and pay you the balance.

2. What types of payments are subject to TDS under Section 195 for NRIs?

Section 195 covers such payments as interest, royalty, technical fees, dividends, and even capital gains. Essentially all income in India of an NRI will be TDS liable.

3. How does the Double Taxation Avoidance Agreement (DTAA) affect TDS on payments to NRIs?

Let’s assume DTAA (Double Taxation Avoidance Agreement) exists between your country and India. In this case, you have a fair chance of attracting a lower rate of tax deduct at source (TDS) on your payments — interest or royalty — so that the same income is not taxed twice.

4. What is the TDS rate under Section 195 for NRIs, and can it vary?

The TDS rate can range from 10% to 20% depending on the income type. If there’s a DTAA, the rate might be even lower, so it’s worth checking the agreement.

5. Who is responsible for deducting TDS under Section 195 for NRI payments?

The payer (the person or company making the payment to you) is responsible for deducting the tax. They have to do it before sending you the money, so you don’t have to worry about it.

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