Sec 195 – TDS Applicability for NRI

Introduction-

Section 195 of the Income Tax Act, 1961, deals with the Tax Deducted at Source (TDS) on payments made to non-residents. It requires that any person (including a business or individual) making payments to non-residents for services, royalties, technical fees, or any other kind of income that is taxable in India must deduct TDS at the prescribed rate.

Who are Non-residents?

Non-residents are individuals, companies, or other entities that do not meet the criteria to be classified as residents under Indian tax law (as defined in Section 6).

The person or entity must not have a place of residence or place of business in India, and their income may be subject to tax withholding (TDS) under Section 195 if it is taxable in India.

Applicability-

There is no minimum payment threshold for deducting TDS on payments to non-residents. This means that TDS should be deducted regardless of the amount being paid, whether it’s small or large, as long as the payment is of a nature that is taxable in India.

Key Points:

• No Minimum Limit: The obligation to deduct TDS applies to any payment made to a non-resident, whether it’s for interest, royalties, technical fees, or other taxable income in India.
• Full Deduction Requirement: Even if the payment amount is small, the person making the payment must deduct tax at the applicable rate under Section 195.

Applicable rates to deduct TDS-

The rate of TDS depends on the type of income being paid and whether the country of the non-resident has a Double Taxation Avoidance Agreement (DTAA) with India.

Here are the general TDS rates under Section 195 for common types of payments to non-residents:

1. Interest Payments (Section 195)

• Interest other than on Government securities: 20% (plus applicable surcharge and cess).
• Interest on Government securities: 20% (plus applicable surcharge and cess).
• Interest paid to non-resident Indians (NRI) under specific provisions: It may be subject to 10% (if applicable under DTAA) or the standard rate of 20%.

2. Royalties and Technical Fees

• Royalties (including for the use of patents, trademarks, or copyrights): 10% (plus surcharge and cess).
• Fees for Technical Services (including professional services): 10% (plus surcharge and cess).

 Payments for Dividends

• Dividends paid to a non-resident: 20% (plus applicable surcharge and cess). If the dividend is subject to a tax treaty, the rate may be lower based on the provisions of the applicable DTAA.

4. Payments for Rent (Use of Immovable Property)

• Rent paid to a non-resident for the use of immovable property: 30% (plus surcharge and cess).

5. Payments for Sale of Property

• Capital Gains Tax: The rate depends on the nature of the property and whether it’s short-term or long-term capital gains. Generally:
  • Short-term capital gains on the sale of shares (listed) or property: 15% (plus surcharge and cess).
  • Long-term capital gains on the sale of shares (listed) or property: 10% (plus surcharge and cess), subject to specific exemptions and conditions.

6. Payments for Other Types of Income

• For other types of income like management fees, consulting fees, or commission paid to non-residents, the TDS rate is typically 20% (plus surcharge and cess), unless a DTAA provides a reduced rate.

Conclusion

• The TDS rate under Section 195 can vary depending on the type of payment, the specific provisions of the Income Tax Act, and the existence of a DTAA. It’s important to check the applicable tax treaty (if any) to ensure the correct rate is applied.