Section 195 Of The Income Tax Act: TDS Deduction, Process And Eligibility
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When Non-Resident Indians earn an amount in India, that income is taxed under Section 195 of Income Tax Act. If you are paying an amount to an NRI, you have to deduct a TDS and deposit it to the government.
Section 195 of the IT Act consists of various provisions regarding TDS deduction from the income of an NRI. The following sections provide a detailed rundown of Section 195.
Table of contents
Section 195: What is it?
According to Section 195 of Income Tax, if you are paying a certain amount to an NRI, then you have to make a tax deduction on the same.
For instance, you live in a property as a tenant which belongs to a Non-Resident Indian. If you pay rent to the NRI individual every month, then that amount is taxable under Section 195. This is because the NRI is making an income in India. In such cases, you have to deduct a TDS from the rent amount and submit it to the government.
This TDS deduction is made on behalf of the NRI individual.
Who is Eligible to Deduct TDS on NRI Income?
Section 195 of the Income Tax Act states that the following taxpayers can deduct TDS from the income that NRIs earn in India:
- Hindu Undivided Families
- Partnership firms
- Residential individual taxpayers
- Foreign companies
- Juristic individual
- Other Non-resident Indians
Also read: Section 194I TDS on Rent
How to Deduct TDS under Section 195?
If you are paying an amount to an NRI, then you need to follow these steps for making a tax deduction under Section 195:
Step 1: Get a TAN
To make a TDS deduction on NRI income, you should have a TAN (Tax Deduction Account Number). A TAN consists of all details regarding the TDS that you deduct and deposit with the government. Hence, you should have a TAN in order to make a TDS deduction on NRI income.
To get a TAN, you have to fill up Form 49B and submit it either online or offline. The Income Tax Department will allot a TAN after necessary verifications. However, PAN cards of the NRI as well as the applicant are necessary while filling and submitting Form 49B.
Step 2: Mention TDS provisions
As a payer, you have to mention the provisions of TDS deduction in the agreement or sale deed that is made between you and the NRI individual. This will help the NRI to have a clear understanding of deductions under Section 195.
Step 3: Deposit TDS after Deductions
Once you have made necessary deductions as per Section 195 of the Income Tax Act, you should deposit the same to the government. For this, you have to fill up and submit a TDS deduction form by the 7th of the next month.
For instance, if you deduct TDS in January, you have to compulsorily submit it on or before February 7. You can deposit the TDS either through the Income Tax Department or via any government-approved bank.
Step 4: File the TDS return
If you have deducted TDS from NRI income, you need to file TDS returns mentioning the amount that you have deducted. This has to be done every quarter online through Form 27Q. Here are the dates for filing TDS returns for each financial quarter:
- April-May-June quarter: within July 31
- July-August-September quarter: within October 31
- October-November-December quarter: within January 31
- January-February-March quarter: within May 31
Step 5: Issue a TDS certificate
Once you have deducted and deposited TDS on behalf of the NRI individual, you have to issue a TDS certificate. This certificate will include details about the TDS amount. Also known as Certificate of Deduction of Tax, the IT Department issues it in Form 16A.
You need to issue a TDS certificate within 15 days of the quarterly filing of the TDS return. Let’s say you have filed TDS returns for the April-May-June quarter on July 31. In that case, you should issue the certificate within August 15.
TDS Deduction Rate under Section 195
The rate of TDS under Section 195 will vary on the nature of the income of an NRI. The following table shows different TDS rates depending on the type of income:
| Type of Income | TDS Rate |
| Income through long-term capital gains (under Section 115E) | 10% |
| Earnings from any type of investment | 20% |
| Earnings from short-term capital gains (under Section 111A) | 15% |
| Income through long-term capital gains | 10% |
| Any other earnings from long-term capital gains | 20% |
| Earnings from the royalty that is payable by the government or other an Indian firm | 10% |
| Interest payable on the amount borrowed in foreign currency | 20% |
| Income from the royalty that is to be paid by any entity other than the government or Indian firm | 10% |
| Earnings obtained as technical fees from the government or any Indian firm | 10% |
| Other sources of income | 30% |
Also read: Section 194J of the Income Tax Act
Final Word
If you are making any form of payments to an NRI or if you are an NRI earning from an Indian taxpayer, you should be aware of Section 195 of the Income Tax Act. Make sure to abide by the provisions of this section to avoid any kind of violations.
Frequently Asked Questions
Ans: No, TDS deduction is not applicable on the dividend income of an NRI under Section 195. However, this income will be taxed at 20% along with an education and health cess of 4%. The government will levy a maximum marginal tax of 28.5% on the dividend.
Ans: An NRI can apply for nil deduction certificates provided they fulfil these criteria:
> The NRI should not have defaulted any tax or interest.
> He or she has a business in India for at least 5 years, and the fixed assets are worth more than Rs. 50 lakh.
> The NRI applicant has regularly filed all IT returns till the date of application.
Ans: Note that the exchange rate of the RBI (Reserve Bank of India) on the day you make the TDS deduction has to be taken into account. NRIs can follow this exchange rate for TDS deduction.
Ans: It is crucial to submit the deducted TDS from NRI income within the due date. If not, then the government will levy interest of 1.50% per month or part of the month from the date of TDS deduction to the date of deposition.
Ans: As per government mandates, if the payee doesn’t have a PAN, then the TDS deduction will be 20% more than the regular deduction rate. This is applicable to NRIs whose payments or remittances are liable to TDS deduction.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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