Section 195 of the Income Tax Act: TDS Rules for NRIs and Foreign Entities

Section 195 of the Income-tax Act, 1961 mandates the deduction of Tax at Source (TDS) on any taxable payment (excluding salaries) made to Non-Resident Indians (NRIs) or foreign companies, where the income is chargeable under Indian tax laws. This provision ensures tax is collected at the point of transaction, reducing the chances of tax evasion by foreign recipients.

According to Section 6 of the Income-tax Act, a person is considered a Non-Resident for tax purposes if they:

• Spend less than 182 days in India during the financial year; or
• Spend less than 60 days in that year and less than 365 days over the past 4 preceding years

Note: The criteria may differ slightly for Indian citizens and Persons of Indian Origin (PIOs) visiting India.

Any person or entity (resident or non-resident) making a taxable payment to an NRI or foreign company must deduct TDS under this section. This includes:

• Individuals
• Hindu Undivided Families (HUFs)
• Partnerships or LLPs
• Indian or foreign companies
• Government bodies or banks

Importantly, TDS must be deducted whether or not the payer has a taxable presence in India.

TDS under Section 195 must be deducted when any income becomes payable to a non-resident, provided it is taxable in India. This includes the following situations:

• Sale of property by NRI
• Payment of rent to NRI
• Interest on NRO accounts
• Royalty, dividends, and technical service fees
• Remittance of foreign income or consultancy fees
• Payments to foreign companies or overseas professionals

Timing of TDS deduction:

• When the income is credited to the NRI’s account, or
• When the actual payment is made—whichever is earlier
  

There is no minimum threshold for deduction—TDS applies to any taxable amount paid to a non-resident.

In many cases, the DTAA (Double Taxation Avoidance Agreement) provides reduced rates. To avail this, the payee must submit:

• Tax Residency Certificate (TRC)
• Form 10F
• A valid self-declaration
  

When purchasing property from an NRI, TDS must be deducted under Section 195, generally at:

• 20% on long-term capital gains, or 
• 30% on short-term capital gains 
• Plus applicable surcharge and cess 

This TDS is deducted on the full sale consideration, not just the profit or gain, unless the seller has obtained a Lower/NIL deduction certificate (Form 13) under Section 197.

If you’re deducting TDS under Section 195, here’s what you need to do:

1. Obtain a TAN (Tax Deduction Account Number) under Section 203A
2. Collect PAN of both payer and payee (NRI)
3. Deduct TDS at the applicable rate (DTAA or regular)
4. Deposit TDS by the 7th of the next month using Challan ITNS-281
5. File TDS return quarterly via Form 27Q
6. Issue Form 16A (TDS certificate) within 15 days after return due date
7. For remittances, submit:
   • Form 15CA (self-declaration)
   • Form 15CB (certificate from Chartered Accountant, if required)

Failure to deduct, deposit, or file returns under Section 195 can result in:

• Disallowance of expense under Section 40(a)(i) (expense can’t be claimed in ITR) 
• Interest penalty @ 1.5% per month from deduction to deposit date 
• Penalty under: 
  • Section 271C (for non-deduction)
  • Section 271-I (for non-filing of Form 15CA/15CB): ₹1,00,000

Section 195 is a critical compliance requirement when making any taxable payment to NRIs or foreign companies. Whether you’re buying property from an NRI, paying professional fees overseas, or sending interest abroad, ensuring proper TDS deduction and documentation is mandatory.