Section 195 of Income Tax Act - TDS on Non-Residents

What is Section 195?

As mentioned, section 195 of the Income Tax Act pertains to the deduction of TDS on income or payments made to NRIs in India. This section is popularly known as the NRI TDS section among tax experts and accountants. It outlines provisions to prevent dual taxation and emphasises the applicable TDS rates associated with regular payments and business transactions involving NRIs.
 

TDS for NRIs is applicable either while crediting the respective party or on the date of actual payment. For example, if a resident Indian buys a property from an NRI, the buyer is liable to deduct a TDS on the purchase of property from the NRI under section 195 while making the payment.

Who are Considered NRIs?

Before delving further into the nitty-gritty of section 195, it is essential to understand who qualifies as a non-resident Indian. In the context of the Income Tax Act, an individual is considered an NRI if they do not satisfy the conditions for being a resident Indian, as laid out in Section 6.
 

The determination of the residential status of a person is based on the duration of their physical presence in India during the current financial year and/or the preceding financial years. As per section 6 of the Income Tax Act, a person is a resident of India if they satisfy any of the following conditions:
 

1. They have stayed in India for at least 182 days during the given financial year.
2. They have stayed in India for at least 60 days during the preceding financial year and for at least 365 days during the immediately preceding four financial years.
    

Exceptions for Point (2)

The following are the exceptions for the second point mentioned above:
 

• If the total annual income of an individual, other than the income from foreign sources, exceeds ₹15 lakhs in a financial year, they must reside in India for at least 120 days during the preceding financial year to be considered a resident Indian.
• An individual who leaves India as a crew member or for employment outside India must complete at least 182 days in India during the preceding financial year to be considered a resident Indian.
   

Any individual who does not satisfy any of the conditions mentioned above is treated as an NRI and will have to abide by the taxation rules for NRIs under section 195 of the Income Tax Act.

Who Can Deduct TDS Under Section 195?

As per Section 195 of the Income Tax Act, any person or business entity who makes a payment to an NRI (other than the ones referred to in sections 194LB, 194LC, and 194LD) must deduct a TDS at the applicable rate while making the payment.

The person who makes the payment after deducting the TDS is known as the deductor, and the person who receives the payment is known as the deductee.
 

For a better understanding, below is the list of entities responsible for deducting TDS on payments made to NRIs under section 195:
 

• Individuals
• Hindu Undivided Families (HUFs)
• Partnership firms
• Association of Persons (AOP)
• Other NRIs
• Foreign companies
• Artificial juridical persons
• Non-profit organisations

Rates for TDS Deduction Under Section 195

The rate for TDS under section 195 is determined based on multiple factors, including the nature of the income or payment involved. For example, the TDS rate on the purchase of property from an NRI under section 195 is 30% if the property is held for less than two years. Whereas, the rate for section 195 TDS on the purchase of property from an NRI is 20% if the property is held for more than two years.
 

The table below depicts the TDS rates for various types of payments under section 195 of the Income Tax Act:
 

Note that the TDS rates mentioned above must be increased by adding a surcharge and education cess of 4% while making the payment. However, if the TDS is being deducted as per the Double Taxation Avoidance Agreement (DTAA), there is no need to add the surcharge and education cess.
 

Exceptions for TDS Rates Mentioned Above

The TDS rates mentioned above are not applicable in the following conditions:
 

• Double Taxation Avoidance Agreement
  India has entered into Double Taxation Avoidance Agreements (DTAA) with several countries to prevent the same income from being taxed in both countries. NRIs can claim DTAA benefits to reduce their TDS deduction rates under section 195.
  
  
• Certificate for Lower or Nil TDS Deduction
  An NRI can apply for a lower or nil TDS deduction certificate with the Income Tax Department of India to reduce or avoid the deduction of TDS on their income under section 195. This certificate is provided under section 197 to NRIs whose total income in India is below the tax exemption limit.

How to Deduct TDS Under Section 195?

Following are the ways to deduct TDS under Section 195 of the Income Tax Act:
 

• The deductor must obtain a Tax Deduction Account Number (TAN) to become eligible to deduct TDS under section 195. They need to submit Form 49B along with theirs as well as the NRI’s PAN to obtain a TAN number
• The TDS must be deducted at the time of making the payment to an NRI. Additionally, the TDS must be deposited with the government through a TDS challan on or before the seventh day of the next month
• Once the TDS is deposited, the deductor must provide a TDS certificate to the deductee through Form 16A within 15 days. Additionally, the deductor needs to file TDS returns through Form 27Q at the end of every quarter

Consequences of Not Paying TDS Under Section 195

In case an individual or business entity fails to deduct and/or pay TDS under section 195, they may have to face the following consequences:
 

• If the deducted TDS is not remitted or withheld, the deduction will be disallowed in the year of payment.
• If the deductor fails to remit the TDS by the due date, an interest of 1.5% will be levied from the deduction date until the deposit date.
• Non-deposit of the deducted TDS may attract a penalty equal to the TDS amount.
• In the case of partial deduction or deposit, the deductor may face a penalty equal to the difference between the original TDS amount and the deducted amount.

To Conclude

Section 195 of the Income Tax Act is a critical component of India’s taxation framework, especially in the context of the globalised economy. It regulates TDS on NRI payments and helps the government to check compliance with income tax laws.

As a responsible citizen, you must comply with TDS deduction rules while dealing with NRIs. Additionally, you must ensure timely income tax e-filing to avoid any legal or financial troubles.