Section 195TDS on Payments to Non-Residents

How it works

Section 195 is the widest of the TDS provisions and the one most likely to catch someone who has never thought of themselves as a deductor. It applies to any person, including an individual with no business, who pays a non-resident a sum chargeable to tax in India. There is no monetary threshold below which it stops applying, and no exemption for one-off transactions.

The first question is always chargeability, not rate. Section 195 bites only if the sum is chargeable to tax in India in the hands of the non-resident, which turns on the source rules and on the treaty. A payment for services performed entirely outside India by a person with no presence here may not be chargeable at all; a royalty or fee for technical services generally is, regardless of where the work happened. Getting this wrong in the cautious direction, by deducting where nothing was chargeable, creates a refund problem for the payee. Getting it wrong in the other direction leaves the payer liable for the tax plus interest, and the expenditure may be disallowed.

Where the payment is chargeable, the rate is whichever of the Act's rate and the treaty's rate is more favourable to the payee. Claiming the treaty rate is not automatic: it typically requires a Tax Residency Certificate from the payee's home jurisdiction, Form 10F, and usually a declaration that the payee has no permanent establishment in India. Missing documentation is the single most common reason a treaty rate is denied on assessment, long after the payment has gone out.

The property case deserves separate mention because it produces the largest absolute numbers. When a resident buys property from an NRI, Section 195 applies to the sale consideration, not to the capital gain, and at rates far above the token deduction that applies to purchases from residents under Section 194-IA. A seller who has held the property for years and is realising a modest real gain can see a very large deduction against a much smaller actual liability. The remedy is the Section 197 certificate, applied for by the seller before the transaction. Buyers also need to note that this deduction requires a TAN, which purchases from residents do not.

Finally, the remittance mechanics. Banks will not process most foreign remittances without Form 15CA from the remitter, and for the majority of taxable payments a Form 15CB certificate from a Chartered Accountant setting out the nature of the payment, the chargeability, and the rate applied. These are procedural, but they are where the analysis gets written down, and a 15CB that does not match the position taken later is a problem.