Tax Deducted at Source (TDS) serves as a method employed by the Indian government for collecting taxes directly from the source of income. In the case of payments made to non-residents, TDS plays a crucial role in regulating tax compliance. Section 195 of the Income Tax Act, 1961, outlines the TDS requirement for individuals disbursing payments, such as interest or other amounts (excluding salary), to non-resident Indians (NRIs) or foreign companies. This blog post aims to provide a comprehensive guide to understanding TDS on payment to non-residents in India.
Who is an NRI?
As per Section 6 of the IT Act, if a particular individual does not satisfy the conditions mentioned below, he or she is considered an NRI:
- He/she must stay for 182 days or more in the particular financial year
- He/she must stay 60 days or more for the specific financial year and for 365 days or more for the immediate preceding four financial years.
Section 195 of the IT Act
According to the provisions outlined in Section 195, any individual or entity responsible for making payments that qualify as interest or any other taxable sum must deduct tax at source. This provision applies when the payment is being made to a non-resident (excluding companies) or a foreign company.
Additionally, whether an individual or entity is classified as a resident or non-resident, they must deduct tax at source prior to making payments to non-residents only if the payment is subject to taxation in India for the non-resident. This ensures that tax is deducted beforehand to prevent any loss of revenue when making payments to non-residents.
TDS on Payment to Non Residents
Here is how TDS works on payment to non residents under Section 195 of Income Tax Act, 1961:
- Payer: An individual, a Hindu Undivided Family, a firm, non-residents or a foreign company
- Payee: Non-Resident Indian (Individuals) or Foreign Companies
- Nature of Payments
Under this section, any individual who renders a payment subject to taxation in India to a non-resident Indian (NRI) must withhold the applicable tax. This requirement excludes salary or interest payments as mentioned in sections 194LB, 194LC, and 194LD.
- Time of Deduction
The deduction of TDS should occur at the earlier of the following instances:
- When the amount is credited to the payee’s account, or
- When the payment is made to the payee, either in cash or through a bank transaction.
- Threshold Limit
Under Section 195, there is no threshold limit to deduct TDS. However, the payer must deduct tax only when the payment made to an NRI is taxable in India. Hence, no tax is withheld if the income is exempt or falls under any other category of income that is not taxable according to the provisions of the IT Act.
- TDS Rates
TDS is deducted at any of the following two rates, whichever is more beneficial to the payee. These rates can be categorized as follows:
- Rates specified in the Finance Act of the respective year.
- Rates mentioned in the Double Taxation Avoidance Agreement (DTAA) signed between India and the non-resident’s country of residence.
It’s important to note that the rates mentioned in the Finance Act are subject to an additional surcharge and education cess of 4%. However, the DTAA rates do not require the inclusion of surcharge and cess.
The TDS rates are as follows:
|Income from the investment made by an NRI||20%|
|As per Section 115E, long-term capital gains from the transfer of the following assets:Shares of an Indian CompanyDebentures and deposits issued by a Public Company in IndiaSecurities issued by the government|
|Long-term capital gains derived from listed shares and securities as defined in Section 112A.||10%|
|Long-term capital gains resulting from the sale of property, where TDS should be deducted based on the sale value.||20%|
|Short-term capital gains under section 111A.||15%|
|Interest payments on loans obtained in foreign currency.||20%|
|TDS on payment to non resident for technical services.||10%|
|Royalties and fees for technical services payable by the Government or an Indian entity.||20%|
|Various forms of games including card games, lotteries, crossword puzzles, and other similar activities.||30%|
|House Property Rent||30%|
Payment of TDS under Section 195
To deduct TDS under Section 195, follow these steps:
- Obtain a Tax Deduction Account Number (TAN) as per Section 203A of the Income Tax Act. Both the buyer and the NRI seller should have their respective PAN numbers.
- Deduct the TDS at the time of making payments to NRIs.
- Deposit the TDS amount through the designated challan for TDS payment on or before the 7th of the following month in which the TDS was deducted.
- Through authorized banks appointed by the government or the Income Tax Department to deposite the TDS amount. The buyer is responsible for making the deposit.
- Once the TDS has been deposited, the buyer should electronically file a TDS return using Form 27Q.
Note: TDS returns are filed on a quarterly basis. For example, TDS deducted during the first quarter (April 1st to June 30th) should be filed by July 15th.
- After filing the TDS returns, buyers can issue TDS certificate, also known as Form 16A, to the NRI seller. The certificate should be issued within 15 days from the due date of the TDS returns for the respective quarter.
Consequences of Not Paying TDS Under Section 195
Here are the consequences when individuals fail to comply with the provisions of Section 195:
- If the tax deducted is not withheld or submitted within the specified timeframe, the tax benefit or allowance will be invalidated in the year of payment.
- If the payer deducts the TDS but fails to submit it by the due date, they will be subject to an interest charge of 1.5% per annum. This interest will be calculated from the date of deduction to the date of deposit.
- When TDS is deducted but not paid, a penalty equivalent to the amount of TDS will be imposed.
- In the event of short tax deduction, a penalty will be levied equal to the difference between the actual amount that should have been deducted and the amount actually deducted.
TDS on Sale of Property by NRI Form 27Q
Non-Resident Indians (NRIs) who sell property in India are responsible for paying taxes. The tax liability will vary based on the duration of property ownership prior to the sale. If an NRI sells a property that has been owned for more than 2 years, they will be subject to long-term capital gains tax at a rate of 20% on the property sale. However, if the property has been held for 2 years or less, the applicable tax will be short-term capital gains tax based on the individual’s income tax slab rates.
TDS Payment and TDS Return: It is the buyer’s responsibility to deposit the TDS amount with the government within a specified timeframe. Additionally, the buyer must file a TDS return that provides comprehensive information about the transaction. The TDS return form, known as Form 27Q, includes details regarding the TDS amount deducted and deposited.
Due to a complicated tax system and recurrent amendments, understanding tax laws can be confusing and NRIs may be subject to additional fees or miss claiming deductions and other benefits. At SBNRI, we understand this struggle. You can download SBNRI App to connect with our NRI Tax Experts to know more about new TDS/ TCS rules for NRIs. You will also get end-to-end assistance related to NRI tax filing.