Section 195 of the Income Tax Act, 1961 controls TDS deductions on non-resident Indian income and payments. This section lists provisions that help avoid double taxation and focus on NRI business tax deductions and rates.
Who is a Non-resident?
As per the said provisions, a person is said to be a non-resident in India if he is not a resident in India, as laid out in section 6 of the Act.
A person will be a resident of India in any financial year if they satisfy any of the following conditions:
- If they stay in India for 182 days or more during the financial year, OR
- If they stay in India for 60 days or more during the financial year and 365 days or more during the immediately preceding four financial years.
Exception for point (2)
In the case of an Indian citizen or a person of Indian origin (PIO) whose total income, other than income from foreign sources:
- Exceeds Rs 15 lakhs during the relevant financial year – 60 days, as mentioned in point (2) above will get substituted with 120 days.
- Indian citizen leaving India for employment outside – The Indian citizen who leaves India in any year as a crew member or for employment outside India, the period of 60 days in point (2) above will be substituted with 182 days.
Hence, an Indian citizen or PIO earning a total income over Rs 15 lakhs (other than from foreign sources) is deemed a resident in India if they are not taxed in any other country.
Who is responsible to deduct tax u/s 195?
Any person responsible for paying to a non-resident, other than a company, or a foreign company, is liable to deduct income tax at the rates in force.
Here, let’s take a look on which entities are responsible for paying or remitting payments under Section 195 –
- Individuals
- HUFs
- Non-resident Indians
- Partnership firms
- Individuals with exempted income in India
- Foreign companies
Further, non-resident Indians with Income chargeable under Section 195 are deemed as the payee.
Applicable Situations for TDS Under Section 195 of the Income Tax Act
TDS under Section 195 must be deducted in two scenarios:
- When the income is credited to the payee’s account.
- During the actual payment transaction.
The deduction should occur at whichever event happens earlier. Income credited to interest payable, suspense accounts, or other accounts is considered credited to the payee’s account.
For government or public sector bank income, TDS should only be deducted at the time of actual payment, whether through cash, cheque, or draft.
As per Section 5(2)(b), the total income of a Non-Resident Indian (NRI) includes all income accrued, arisen, or deemed to have accrued or arisen in India.
Tax must be deducted on all amounts accruing or arising as specified under Section 195 of the Income Tax Act.
What is the rate of TDS u/s 195?
The rate of tax deduction u/s 195 TDS shall be either of the below rates, whichever is beneficial to you:
- Specified in the Double Taxation Avoidance Agreements between India and the country of the payee.
- Specified in the Income Tax Act.
Surcharges and education cess must be added to the rates provided by the Act at the relevant rate. There is no need to add a surcharge or education cess if the payment is made according to DTAA rates. The following are the rates:
| Particulars | Section 195 TDS rates |
|---|---|
| Income in respect of investment made by an NRI | 20% |
| Income by way of long-term capital gains in Section 115E in case of an NRI | 10% |
| Income from long-term capital gains from listed shares specified u/s 112A | 10% |
| Short Term Capital gains under section 111A | 15% |
| Other income from long-term capital gains | 20% |
| Interest payable by the government or Indian Concern on money borrowed in Foreign Currency | 20% |
| Royalty & fees for technical services payable by the Government or an Indian entity | 10% |
| Winnings from lotteries, online games, and horse races | 30% |
| Any other income | 30% |
Further, if the payee doesn’t have a PAN, then the rate could be based on the law in force or 20%, whichever is higher.
Penalties for Non-Compliance with Section 195
- If TDS is not deducted, then expense will be disallowed under section 40 (a)(i)
- If TDS is deducted but not paid within the time limit, then interest @ 1.5% per month or part of the month will be levied from the date of the deduction to the date of deposit.
- If TDS is deducted but not paid at all, then a penalty is implied equivalent to the TDS amount u/s 271C of the Income Tax Act.
- For the cases where the TDS deducted is less, a penalty equal to the difference between the actual amount deductible and the actually deducted would be levied.
- Where TDS has not been deducted, interest will be charged u/s 201(1A) of the Income Tax Act.
Deduct Section 195 TDS
- Obtain a TAN (Tax Deduction Account Number) under section 203A before deducting TDS, ensuring PAN details for both the buyer and NRI seller.
- Deduct TDS at the time of payment to NRIs.
- Deposit TDS through an authorized bank on or before the 7th of the following month.
- Electronically file quarterly TDS returns (Form 27Q) by specified due dates.
- Issue TDS certificates (Form 16A) to NRI sellers within 15 days from the due date of TDS returns.
FAQs
What will be the head under which the income from dance performance will be shown as per the Income Tax Act, 1961?
If the main income is from dance performance, then income is shown in the profession, and if the main income is other than dance performance, then income is shown in other sources.
What details should be included in TRC?
The following details must be there in TRC
- Name of assessee
- Status of assessee
- Nationality of assessee
- Residential status
- Period for which the certificate is applicable
- Address of applicant for the period for which the certificate is applicable
- Tax Identification Number of taxpayer