What is Section 195 –TDS on Non-Residents?

This section concentrates on the tax deductions and rates that non-resident citizen of India encounters daily in their business dealings. Section 195 of the Income Tax Act applies to all types of earnings. The Act creates a mechanism to prevent revenue loss due to a foreign resident’s tax burden by deducting an equivalent amount from payments made to them at the source. The individual making the payment to a non-resident payee is known as the payer. Consumers, Hindu Undivided Families, businesses, non-residents, overseas companies, persons with exempt income in India and any jurisprudential person, whether or not they have income subject to tax in India, are all eligible to pay.

Did you know?

The TDS deducted by the buyer under Section 195 must be paid by challan or form number for TDS payment on or before the 7th day of the month following the TDS deductions.

Also Read: What is Section 269ST of the Income Tax Act & Penalty for Violation of 269ST?

What is TDS?

As it is known globally, the concept of Tax Deducted at Source (TDS) or withholding taxes was adopted as part of the Income Tax Act of 1961 (the Act) to collect tax at the source. It requires the person or organisation who bears the responsibility, known as the Deductor, to deduct tax at reasonable rates from payments of a particular sort sent to a specific recipient, known as the Deductee.

What is Section 195?

Section 195 of the Income Tax Act, 1961 deals with The Tax Deducted at Source (TDS) for non-resident citizens of India. Under Section 195, any person responsible for paying any interest or any other sum subject must deduct the tax at the source. This rule applies when anyone makes a payment to a non-resident (except a firm) or a foreign company.

Furthermore, whether a resident or a non-resident, a person must deduct tax at the source before making a payment to a non-resident if the payment is taxable in India in the hands of non-residents. Removing the sum before making the payment to the non-resident helps avoid income loss.

The total income of a non-resident includes income that accrues, arises, or is assumed to accrue or arise in India to the non-resident, according to Section 5(2)(b) of the Act. – To determine whether a non-income resident is deemed to accrue or arise in India, we must consult Section 9.

TDS Under Section 195

The following are the procedures for deducting TDS under Section 195:

• TAN (Tax Deduction Account Number): Before deducting TDS, the buyer must first get a TAN under section 203A of the Income Tax Act, 1961. We can obtain a TAN by submitting a Form 49B application. This form is also accessible via the internet. The buyer should also have his PAN number and the NRI seller’s PAN number.
• We must deduct TDS when paying an NRI. We should specify the number of TDS deducted and the rate the parties removed it in the sale agreement between the NRI seller and the buyer.
• The buyer’s TDS shall be deposited via Form number or challan for TDS payment on or before the 7th of the following month in which the TDS was deducted.
• You can deposit TDS in banks authorised to collect Direct Taxes by the Indian Government or the Income Tax Department. The buyer is responsible for the deposit.
• The buyer must electronically file a TDS refund by completing Form 27Q after the TDS has been deposited. TDS returns are due every three months. You must file TDS deducted during the first quarter, from April 1st to June 30th, by July 15th. We must file TDS on October 15th for the second quarter, which runs from July 1st to September 30th. We must file TDS deducted in the third quarter, from October 1st to December 31st, by January 15th. We must file TDS deducted in the fourth quarter, from January 1st to March 31st, by May 15th.
• The buyer can offer a TDS certificate or Certificate of Deduction of Tax (Form 16A) to the NRI seller after filing TDS returns. Within 15 days of the due date for TDS returns for the quarter, this certificate should be issued to the seller.

Rate of TDS Under Section 195 of the Income Tax Act

What Will Be the Consequences of Non-Complying Section 195 of the Income Tax Act?

Non-compliance with section 195 of the Income Tax Act of 1961 has the following consequences:

• If the tax is not deducted at the source, the spending will not be allowed under section 40(a) of the Internal Revenue Code (i).
• If tax is deducted but not paid within the time constraints, interest will be charged at 1.5% each month or part of a month from the date of deduction to the date of deposit.
• A penalty equal to the TDS amount will be imposed if TDS is deducted but not paid.
• The act would impose A penalty equal to the difference between the actual amount deductible and the amount deducted in the event of a short tax deduction.

Is It Possible For Non-Residents to Obtain a Nil Deduction Certificate?

A non-resident can apply for a Nil Deduction Certificate if you meet all of the following conditions:

• The non-resident is not in arrears on taxes, interest or penalties.
• The non-resident has been doing business in India for at least five years and has fixed assets worth more than ₹50 lakhs in India.
• As of applying, the assessee has been assessed to tax regularly and has submitted all required income returns.
• Section 271(1) does not impose any penalties on non-residents (iii)

Also Read: Know About Section 43B in Income Tax Act 1961

Is TDS Under Section 195 Applicable to Salaries and Dividends Payments to Non-Residents?

Non-residents are specifically exempt from salary and dividend payments under section 195. Section 192 of the Internal Revenue Code governs salary tax deductions, and it applies to both resident and non-resident employees. The dividend is taxable in the hands of the recipient. Beginning in 2021, any individual who qualifies as a Non-Resident in India (NRI) would have dividend income taxed at 20% applicable surcharge and 4% health and education cess (maximum marginal rate of 28.5%) on a gross basis. Dividend income is taxed at applicable slab rates if a shareholder is a resident of India.

Due Date of Payment of TDS

Additional Amounts Under Section 195

You must deduct TDS on any sum chargeable under the Income Tax Act of 1961 that is not income chargeable under the heading ‘Salaries.’ (For example, payments such as interest, royalties, and fees for technical services are Tax-deductible under Section 195 of the IT Act.) 

 Payee: Non-residents or a foreign corporation 

There is no TDS under section 195 on payments of income charged under the heading ‘Salaries’ or payments covered under sections 194LB, 194LC or 194LD.  

The act will deduct TDS at payment or credit, whichever occurs first.

Conclusion

TDS payments under Section 195 account for a significant component of the government’s tax collection, accounting for more than 42.45% of total revenue (As given in the Annual report of 2016-17 passed by the Finance Ministry of India). TDS under section 195 spreads the tax burden across a taxpayer’s income and allows for a simple payment method. It also discourages tax evasion and avoidance, maintaining a steady stream of money for the government.

TDS provisions are an essential aspect of Indian tax law compliance. It provides the government with a consistent source of revenue and serves as a reporting tool for diverse types of income, simplifying tax management. Furthermore, the penalties for failing to comply are severe, and all individuals charged with deduction and remittance must be aware of them. Each business entity should also put a proper control mechanism to guarantee that you follow the TDS regulations to the letter.
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