What is Withholding Tax? What are its Rates? How is it Different from TDS?
The Central government of India levies income tax, a type of direct tax, on the income of individuals and entities. The amount of tax levied is based on the income of the taxpayer. The Income Tax Act, 1961, has prescribed several slabs to categorise income and a taxpayer must pay taxes according to the slab they belong to. The tax liability of an individual also depends on their residential status, i.e. whether they are a resident Indian or non-resident Indian.
When the payer or employer directly deducts tax from a payee or employee’s earnings and pays it to the government, the amount is called withholding tax or retention tax.
While withholding tax seems similar to tax deducted at the source, there is a difference between them. This article will help you understand withholding tax, how it is calculated, how it is different from TDS and a lot more.
What is Withholding Tax?
Withholding tax refers to the paying entity’s obligation to withhold a sum of money as tax while paying for the services availed from a non-resident Indian. The paying entity could be an Indian individual or company that avails services in exchange for monetary compensation. The services may include salary, rent, commission, contract, professional services, etc. The amount to be withheld depends on the withholding tax rates laid down in the Income Tax Act.
What is Non-Resident Withholding Tax?
The Double Tax Avoidance Agreement (DTAA) determines the tax rate for NRIs. The DTAA is a tax treaty that two or more countries sign in order to avoid imposing double taxes on the same income. Section 195 of the Income Tax Act, 1961, lays down the rules regarding taxes applicable to non-residents. The act mandates that any person or company paying a non-resident must deduct tax before making the payment. The tax amount will be based on the withholding tax rates prevalent at the time of payment.
The act also states that deduction of tax must also be made on the interest that the government or a public sector bank pays. Dividends are exempt from withholding tax.
The below conditions govern payments to non-resident Indians:
- The payee must have a permanent establishment in the country
- The non-resident is seeking tax refunds withheld in India
- Non-resident investors are earning capital gains, interests, etc. from India
- A non-resident is earning income from India in the form of rent, fees, commission, salary, etc.
- NRIs receiving fees or royalties for technical services they offer in India
- Capital gains earned from the sale or transfer of Indian assets
Non-resident Indians from countries that do not have a DTAA in India are subject to the following withholding tax rates:
| Type of transaction | Withholding tax rate |
| Interests earned | 20% |
| Dividends paid by Indian companies | 0% |
| Fees for technical services | 10% |
| Royalties | 10% |
| Services offered to individuals | 30% |
| Services offered to companies | 40% |
Companies are categorised as resident and non-resident companies. Resident companies have the control and management of a business in India, whereas non-resident companies have it elsewhere in the world.
There are threshold values based on the payee, and the payer must withhold tax only if the total amount payable to a single person in a single tax year is above the limit.
Also Read: Regressive Tax – Types and Working with Examples
Recent Withholding Tax Rates
1. Withholding tax applicable to payments made by resident companies to a single person
The table below shows the applicable tax rates and threshold limits for payments made by resident companies:
| Nature of Payment | Payment Threshold for Withholding Tax | Withholding Tax Rate |
| Specified types of interest | None | 10% |
| Non-specified types of interest | Rs.5,000 | 20% |
| Professional or technical services | Rs.30,000 | 10% |
| Commissions and brokerage | Rs.5,000 | 10% |
| Rent of plant, machinery, or equipment | Rs.1,80,000 | 2% |
| Rent of land, building, or furniture | Rs.1,80,000 | 2% |
| Contractual payments (except for Individuals / HUF) | 2% | |
| Contractual payments to Individuals / HUF | 1% | |
| Royalty / Fees for technical services | Rs.30,000 | 10% |
| Interest received from banks, co-operative societies, or deposits with post offices | Rs. 10000 | 10% |
If the payee doesn’t furnish PAN details, the tax rate is higher among the following:
- 20%
- Tax rate based on Income Tax act, 1961
- The tax rate in force
2. Withholding tax for payments made to non-resident companies
| Nature of Payment | Withholding Tax Rate |
| Dividend | 20% |
| Interest on foreign currencies (subject to certain conditions) | 5% |
| Interest on money borrowed in foreign currency under a loan, or through long-term infrastructure bonds (or rupee-denominated bonds) – the time period for borrowing is July 2012 to July 2015 | 5% |
| Interest on investment in long-term infrastructure bonds issued by an Indian company (rupee-denominated bonds or Government securities) | 5% |
| Royalty | 25% |
| Technical fees | 25% |
| Long-term capital gains (other than exempt income) | 20% |
| Income by way of winnings from horse races | 30% |
| Other income | 40% |
Example of Withholding Tax
Mr X is a non-resident freelance writer. Y is a resident eCommerce firm seeking the services of X. Suppose, X generates an invoice of Rs. 1,00,000. Now, this is above the threshold of Rs. 30,000. Since it is a professional service, it will attract 10% withholding tax. Y will thus pay Rs. 90,000 to X after deducting Rs. 10,000 as tax. Now, Y is liable to pay the withheld amount, i.e. Rs. 10,000, to the Income Tax department.
Withholding Tax Due Dates for Payment and Filing of Returns
Withholding tax payment is due on the 7th day of the month of deduction of withholding tax. However, if the withholding tax is deducted in March, the withholding tax payment due date is 30th April.
Taxpayers must file quarterly returns and the returns must include payee information and the amount of tax deducted for the quarter. The table below mentions the due dates for filing returns of withholding tax:
| Quarter | Particulars | Due Date |
| 1st Quarter (April – June) | Form 24Q and Form 26Q, Form 27Q and Form 27EQ | 15-Jul |
| 2nd Quarter (July – September) | Form 24Q and Form 26Q, Form 27Q and Form 27EQ | 15-Oct |
| 3rd Quarter (October – December) | Form 24Q and Form 26Q, Form 27Q and Form 27EQ | 15-Jan |
| 4th Quarter (January – March) | Form 24Q and Form 26Q, Form 27Q and Form 27EQ | 15-May |
Difference Between Withholding Tax and TDS
TDS refers to tax deducted at the source. Withholding tax and TDS are the same in essence. They are based on Indian tax regulations and deduct tax at source at the time of paying salary, rent, commission, professional fees, etc. The payer then pays the amount to the government of India on the behalf of the payee.
The only difference between them is that withholding tax is applied to cross-country payments, i.e. for payments made to non-residents. TDS, on the other hand, applies to resident Indians.
Also Read: What Is The Procedure To Check TDS Status Using Your PAN Card?
Key Points About Withholding Tax
- The effective withholding tax rate is derived by adding surcharge, education cess, and secondary and higher education cess
- Income from some mutual funds is exempt from taxation
- The shareholder doesn’t need to pay tax on dividends from Indian companies
- 15% tax applies to short-term capital gains arising from the transfer of company shares or units of equity-oriented funds that are subject to the tax
- Taxpayers need to furnish their PAN details irrespective of individual or company. Failure to do so will attract a higher tax rate.
Final Word
Taxpayers earning income from any of the sources in India are liable to pay tax to the Government of India. The tax they pay depends on their residence status in the country. Withholding tax is deducted from the income of non-residents earning some type of income in India. It is similar to the TDS that applies to resident Indians.
FAQs
Ans. The total stay of a person in India determines their residence status. The period from 1st April to 31st March is regarded as the previous year. A resident Indian is someone who has stayed for at least 182 days in the previous year in India. They are also regarded as a resident if they have lived for more than 60 days in the previous year and a total of 365 days in the 4 years before the previous year. Others are classified as non-resident Indians or NRIs.
Ans. TDS and withholding tax serve the same purpose but are not the same. This is because TDS applies to resident Indians, whereas withholding tax applies to non-residents.
Ans. The tax rates are high in case a pan card is not provided. They are the highest value among 20% and prevalent tax rate.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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