Meaning

Section 195 of the Income Tax Act, 1961 deals with the deduction of tax at source (TDS) from certain payments made to non-residents. The objective of this section is to ensure that non-residents pay their fair share of taxes on the income earned in India.

Non -Resident

A person is a non resident if he is not a resident of India.
A person can be a resident of India if he satisfies 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 preceeding 4 financial years

Exception to point (ii)

In case of an Indian Citizen or a person of Indian origin whose total Income other than Income from Foreign sources:

• Exceeds Rs. 15 lakhs during the relevent financial year - 60 days shall be substitued with 120 days.

         Less than 15 lakhs during the relevent financial year - 60 days shall be substituted with 182 days . 

• Citizen who leaves India in any year as a crew member or for employement outside India, the period of 60 days shall be substitued with 182 days

Note: Hence an Indian Citizen or a person of Indian Origin earning a total Income of above 15 lakhs (other than foreign sources) is deemed resident of India if they are not taxed in any other country

Applicability

Section 195 applies to any payment made to a non-resident that is taxable in India, including interest, royalty, technical services, and other similar payments.

When is TDS Deductible?

TDS is deductible by a person if payment (other than salary or interest referred u/s 194LB, 194LC and 194LD) is made to following:

• To a non resident, not being a company or
• Foreign Company

Period of Deduction of TDS

TDS shall be deductible at the earlier of the following dates:

• at the time of credit of income to the account of payee or,
• at the time of payment

Note: If interest is payable by the Government, or a public sector bank or a public financial institution, then TDS shall be deducted only at the time of payment.

Rate of TDS:

TDS is deducted on any of the following rates which is more benificial to the payee

• Rate of the Finance act of the given year and adding surcharge and 4% education cess , or
• Rate mentioned in the Double Taxation Avoidance Agreement (DTAA) between India and country of residence of such Non resident.

Note: If the payee fails to furnish a valid PAN to the payer, the TDS shall be deducted deducted at higher rate u/s 206AA.

TDS at Nil or Lower Rates

If the payer believes that only a partial or no amount is taxable in India in the hands of the non resident payee, then the payer can make an application to the Assessing Officer in Form 15E to obtain a lower or Nil TDS certificate.

TDS on Interest earned on Income Tax refund

Yes, Interest earned by a non resident or a foreign company on the Income Tax refund is liable to TDS u/s 195.

Exchange Rate for TDS on Non residents

Exchange rate shall be the rate given by Reserve Bank of India (RBI) on the date TDS is required to be deducted.

Process to be followed u/s 195

• Buyer should obtain TAN (Tax Deduction Account Number) u/s 203A before deducting TDS.
• Buyer should deduct TDS at the time of making payment to the NRI.
• TDS deducted shall be deposited through challan on or before 7th of next month in which TDS is deducted.
  After TDS is deposited, the buyer should electronically file TDS return by Form 27Q on a quarterly basis.
• Once the returns are filed, the buyer should issue TDS certificate or Certificate of deduction of Tax i.e Form 16A to NRI seller within 15 days of TDS return.

Declaration of Foreign Payment

Any amount payable or paid to the non resident or foreign company by the assessee must be clearly and accurately disclosed in Form 15CA and Form 15CB to the asseessing officer. If the payee fails to furnish such information it shall attract a penalty of Rs.1 lakhs u/s 271-I.

Penalty

• If the payer deducts TDS but fails to submit the amount within the due date - Interest @1.5% shall be charged to the asssessee from the date of deduction to the date of deposit.
• If TDS is deducted but not paid - Penalty shall be equal to TDS amount.
• If tax deducted is lower than the required amount - penalty shall be equal to the difference amount.