Section 195 of TDS
A summary of Section 195 TDS
This post will discuss Section 195 of TDS and its applicability, provisions, etc. Let’s take a close look at each section in detail:
What is Section 195 of the Income Tax Act?
Section 195 of the Income Tax Act requires the deduction of Tax Deducted at Source (TDS) for certain payments made to nonresidents. This includes interest, royalties, technical service fees, and other taxable amounts in India. Individuals, HUFs, firms, nonresidents, and foreign companies making such payments must deduct the Tax before making the payment.
The purpose of Section 195 TDS is to ensure that tax laws are followed by collecting taxes from nonresidents before payment.
Section 195 – Applicability and Provision
Section 195 of the Act makes provisions for deducting Tax on all payments made by any person to NRs or a foreign company that is taxable in India, except salary and interest, which are defined in Sections 194LB, 194LC, and 194LD.
The provisions of Section 195 apply in the following cases:
- Payments to an NR for services provided or for the sale of goods or merchandise.
- Interest, royalty, technical services fee, or any other amount paid to an NR.
- Remittances to an NR outside of India.
It is important to note that Section 195’s provisions do not apply to payments made to Indian residents or companies.
Who should Deduct Tax under Section 195?
For this section, the payer or deductor can be any person, as mentioned herein, remitting the payment to a nonresident.
- Individual,
- Hindu Undivided Family (HUF),
- Firm or LLP,
- Company,
- AOP,
- BOI,
- Nonresident,
- Foreign Company.
Like resident individuals, nonresidents (NRs) are eligible to receive a refund of TDS when they file their income return in India.
Rate of TDS under Section 195
There is no threshold limit for TDS deductions under Section 195. Simply put, TDS must be deducted regardless of the amount.
See the table below for further information on TDS deductions under Section 195.
Type of income | TDS Rate |
Investment-related payments, income, or transactions. | 20% |
Income earned from long-term capital gains | 10% |
Income from long-term capital gains gained under Section 115E. | 10% |
Other types of long-term capital gains | 20% |
Earnings from short-term capital gains gained under the terms of Section 111A. | 15% |
Interest to be paid on the amount of money received in a foreign currency. | 20% |
Earnings from technical services paid for by the government or an Indian firm. | 10% |
Earnings from royalties paid by an Indian firm or the government | 10% |
Income from royalties earned from sources other than an Indian firm or government | 10% |
Other income sources | 30% |
Other provisions of Section 195
The provisions related to TDS, as stated by Section 195 of the Act, are detailed below:
- To get a Tax Deduction Account Number (TAN), complete Form 49B and submit it to the Income Tax Department. Use both your PAN and that of the NR deductee.
- If you are confident that no tax or lower Tax applies to your total income, you can request a No Tax or Lower Tax order from the Assessing Officer.
- Deduct TDS when you pay the NR or credit the account, whichever comes first.
- Deposit the TDS amount with authorised banks or the Income Tax Department by the 7th of the month using the relevant form or challan.
- After depositing TDS, file the TDS return (Form 27Q) electronically by the quarterly deadlines of July 31, October 31, January 31, and May 31 for Quarters 1, 2, 3, and 4.
- After the TDS return for the applicable quarter is filed, provide the NR deductee with the TDS certificate (Form 16A) within 15 days.
Consequences of Non-Compliance of Section 195
Suppose TDS is not deducted appropriately by the Income Tax Act of 1961. In that case, the person making the payment must pay the required Tax plus interest and penalties imposed by the Income Tax Department.
Here are the consequences of not following Section 195 of the Act:
- If TDS is not deducted, costs may be disallowed under Section 40(a)(i).
- If Tax is deducted but not deposited on time, interest at 1.5% per month or part of the month will be charged from the deduction date to the deposit date.
- If Tax is deducted but not paid, a penalty of the TDS amount will be applied.
- A penalty equal to the difference between the actual and deducted TDS amounts will be levied for the short deduction of TDS
Conclusion
Section 195 of the Income Tax Act of 1961 specifies TDS regulations for nonresident payments. This section is essential for those making such contributions to comply with tax requirements. It primarily addresses rates, deductions, and consequences for business transactions with nonresidents.
It is important to realise that the deductor is responsible for collecting and depositing the Tax from nonresidents, not the nonresident recipients.
We concluded the post on Section 195 of the Income Tax Act 1961. Please share your thoughts and opinions with us in the comment section below.
FAQ
1. Do I need a TAN to pay TDS under Section 195 when purchasing a property from an NRI?
Ans: Yes, a TAN is required to deduct TDS. You must apply for a TAN.
2. What is a tax residence certificate, and where can I get one?
Ans: To obtain relief under the DTAA, the resident country’s tax authorities must provide a tax residence certificate
3. Which part of Tax is withheld on sitting fees paid to a nonresident director of an Indian company?
Ans: Section 194J applies to resident payees, while Section 195 applies to nonresident payees.
4. What are the conditions and processes for NRIs to receive DTAA benefits?
Ans: The DTAA is an agreement between the two countries. This arrangement provides the benefit of only having to pay income taxes once. The assessee must submit form 10F and a self-declaration to the person responsible for tax deductions.
