Section 195 of Income Tax Act: TDS on Payments to Non-Residents
- Section 195 applies to any sum chargeable to tax in India paid to a non-resident or foreign company, excluding salary. There is no minimum threshold - even small payments can trigger TDS if taxable.
- For TDS events from 1 April 2026, the corresponding provision is Section 393(2), of the Income-tax Act, 2025.
- Key remittance forms are now renamed: Form 15CA → Form 145, Form 15CB → Form 146, Form 27Q → Form 144, and Form 16A → Form 131 under the Income-tax Act, 2025 workflow.
- DTAA benefit can reduce the TDS rate, but the payer should collect proper documents such as the Tax Residency Certificate and the applicable self-declaration form before applying the treaty rate.
This guide explains when TDS applies on payments to non-residents, how to choose the right rate, which forms are required and what checks businesses should complete before making a foreign remittance.
What Section 195 Covers
Section 195 of the Income Tax Act, 1961 requires TDS deduction when any person pays interest or any other sum chargeable to tax in India to a non-resident or a foreign company. Salary is not covered under Section 195 because salary TDS is handled separately under Section 192.
The key phrase is “sum chargeable under the provisions of the Act.” This means TDS is not required merely because the payment is going outside India. TDS is required only when the payment, or a part of it, is taxable in India.
For example, if an Indian company pays royalty to a foreign software owner for use of intellectual property in India, Section 195 may apply. But if the payment is pure business income of a foreign company that has no Permanent Establishment in India, taxability must be examined before deducting TDS.
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Section 195 and Section 393(2) Under the Income-tax Act, 2025
The Income-tax Act, 2025 comes into force from 1 April 2026. For payments or credits made before 1 April 2026, the old Income Tax Act, 1961 applies. For TDS events on or after 1 April 2026, the corresponding provisions of the Income-tax Act, 2025 apply.
Under the new Act, the old Section 195 type obligation is covered under Section 393(2). This entry covers any interest not covered by earlier entries, or any other sum chargeable under the Act, other than salaries, payable to a non-resident or foreign company .
Who Must Deduct TDS on Payments to Non-Residents
The obligation can apply to a wide range of payers, including individuals, firms, companies, trusts and government bodies. What matters is not the payer’s size, but whether the payment falls within the non-resident TDS framework. In practical terms, businesses should not wait until the remittance date to check TAN , taxability and form requirements. The persons include:
- Individuals
- HUFs
- Partnership firms and LLPs
- Indian companies
- Foreign companies with Indian tax exposure
- Trusts, societies and other entities
- Government departments and public bodies
Types of Payments Covered
The table below shows common payment categories where businesses usually need a Section 195 review before remittance:
| Payment Type | Practical Meaning |
|---|---|
| Interest | Interest on loans, deposits, borrowings or debt instruments paid to a non-resident |
| Royalty | Payment for use of copyright, trademark, patent, software rights, technical know-how or similar rights |
| Fees for Technical Services | Managerial, technical or consultancy service payments |
| Dividend | Dividend paid by an Indian company to a non-resident shareholder |
| Capital Gains | Payment to a non-resident for sale of Indian property, shares or other Indian assets |
| Rent | Rent from Indian property paid to a non-resident owner |
| Business Income | Taxable only if the foreign enterprise has sufficient Indian tax connection, such as a Permanent Establishment |
Payment Type
Practical Meaning
Payment Type
Practical Meaning
Payment Type
Practical Meaning
Payment Type
Practical Meaning
Payment Type
Practical Meaning
Payment Type
Practical Meaning
Payment Type
Practical Meaning
TDS Rates on Payments to Non-Residents
TDS rates on payments to non-residents depend on the nature of income, category of payee, domestic law, applicable surcharge and cess , and any DTAA benefit available. Under the Income-tax Act, 2025 framework, the corresponding non-resident provision generally refers to “rates in force,” so the exact rate should be checked against the applicable rate chart, treaty and payment category before deduction.
| Nature of Income | Common Domestic Base Rate |
|---|---|
| Dividend (other than specified IFSC cases) | 20% |
| Royalty | 20% |
| Fees for Technical Services | 20% |
| Short-term Capital Gains under Section 111A | 20% |
| Long-term Capital Gains under Section 112A exceeding ₹1,25,000 | 12.5% |
| Other Specified Long-term Capital Gains | 12.5% |
| Other Income of a Non-resident Individual | 30% |
| Other Income of a Foreign Company | 35% |
Nature of Income
Common Domestic Base Rate
Nature of Income
Common Domestic Base Rate
Nature of Income
Common Domestic Base Rate
Nature of Income
Common Domestic Base Rate
Nature of Income
Common Domestic Base Rate
Nature of Income
Common Domestic Base Rate
Nature of Income
Common Domestic Base Rate
Nature of Income
Common Domestic Base Rate
These are common domestic base rates. Applicable surcharge and health and education cess may also apply when TDS is deducted under domestic law. If a DTAA rate is available and properly supported by documents, the treaty rate may be more beneficial.
DTAA Benefit and Required Documents
India has tax treaties with many countries. If a DTAA applies, the payer can generally use the rate that is more beneficial to the taxpayer, subject to treaty conditions and documentation. Before applying a treaty rate, collect and verify:
- Tax Residency Certificate (TRC) from the foreign tax authority
- Form 41 under the Income-tax Act, 2025 framework, corresponding to the earlier Form 10F self-declaration requirement
- Foreign Tax Identification Number or equivalent identification
- Address, contact details and country of residence of the payee
- Beneficial ownership declaration, where relevant
- PE declaration, especially for business income and service payments
- Contract, invoice and scope of work
Forms Required for Foreign Remittance and TDS Compliance
| Purpose | Earlier Form | Corresponding Form Under 2025 Act Workflow | Practical Use |
|---|---|---|---|
| Foreign Remittance Declaration | Form 15CA | Form 145 | Filed before remittance where applicable |
| CA Certificate for Taxable Foreign Remittance | Form 15CB | Form 146 | Required for Part C cases of Form 145 |
| Quarterly TDS Statement for Non-Resident Payments | Form 27Q | Form 144 | Quarterly reporting of TDS deducted |
| TDS Certificate to Non-Resident Payee | Form 16A | Form 131 | Generated through TRACES after statement processing |
| Self-Declaration for DTAA Benefit | Form 10F | Form 41 | Supports treaty benefit claim |
| Payer Application for Lower or Nil Withholding Determination | Form 15E / 195(2) Process | Form 129 | Application under Section 395(2) |
Purpose
Earlier Form
Corresponding Form Under 2025 Act Workflow
Practical Use
Purpose
Earlier Form
Corresponding Form Under 2025 Act Workflow
Practical Use
Purpose
Earlier Form
Corresponding Form Under 2025 Act Workflow
Practical Use
Purpose
Earlier Form
Corresponding Form Under 2025 Act Workflow
Practical Use
Purpose
Earlier Form
Corresponding Form Under 2025 Act Workflow
Practical Use
Purpose
Earlier Form
Corresponding Form Under 2025 Act Workflow
Practical Use
Form 145 Parts
| Part | When It Applies |
|---|---|
| Part A | Taxable remittance up to ₹5 lakh during the financial year |
| Part B | Taxable remittance above ₹5 lakh where a certificate or order under Section 395 is available |
| Part C | Taxable remittance above ₹5 lakh where Form 146 accountant certificate is required |
| Part D | Remittance not chargeable to tax in India |
Part
When It Applies
Part
When It Applies
Part
When It Applies
Part
When It Applies
Lower or Nil TDS Certificate and Payer Determination Application
A lower or nil TDS certificate can be important where the full payment is not taxable in India , or where tax should apply only on part of the payment. Under the old law, Section 195(2) allowed the payer to apply to the Assessing Officer to determine the appropriate taxable portion of a payment to a non-resident. Section 195(3) allowed eligible payees to apply for a certificate to receive certain sums without deduction, subject to prescribed conditions.
Under the Income-tax Act, 2025, Section 395 provides for certificates where tax is required to be deducted at a lower rate or where no deduction is required . The applicable form depends on who is applying and why.
| Application Type | Who Applies | Form Under 2025 Rules | Purpose |
|---|---|---|---|
| Lower or Nil Deduction Certificate | Payee / Taxpayer | Form 128 | Used by a taxpayer to obtain a certificate authorising the payer to deduct tax at a lower or nil rate under Section 395(1) |
| Determination of Taxable Portion of Non-Resident Payment | Payer / Deductor | Form 129 | Used by the payer to ask the AO to determine the amount chargeable to tax before remittance and authorise deduction at the determined lower or nil rate |
Application Type
Who Applies
Form Under 2025 Rules
Purpose
Application Type
Who Applies
Form Under 2025 Rules
Purpose
Form 128 is the new equivalent of old Form 13. Form 129 is the new equivalent of old Form 15E and is relevant for payer-side applications in non-resident remittance cases. Both are filed electronically, and Form 129 is filed through TRACES before the remittance is made.
Practical Use Case
Suppose an NRI sells an Indian property. If the buyer deducts TDS on the full sale consideration without examining the actual capital gain , excess TDS may be deducted. Depending on who applies and the nature of relief sought, either the NRI seller may apply for a lower or nil deduction certificate, or the payer may seek determination of the taxable portion before remittance. The certificate or order should be obtained before payment or registration-related settlement, not after the transaction is completed.
Practical Examples
Example 1: Payment to a Foreign Consultant
An Indian company pays ₹8 lakh to a US consultant for technical advisory work. The finance team should not decide the TDS treatment only from the invoice title. The agreement should be reviewed to see whether the work is ordinary consultancy, technical service, or a service covered differently under the India-US DTAA.
If the consultant provides the required treaty documents and the DTAA rate is more beneficial, the company may apply the treaty rate. If the documents are not available, or if the service clearly falls within taxable technical services under domestic law, TDS may have to be deducted at the applicable domestic rate .
Example 2: SaaS Subscription Paid to a Foreign Company
An Indian business pays a foreign SaaS vendor for a standard subscription. This should not be blindly treated as royalty. The business should check whether it is only an end-user access arrangement, whether any copyright or IP right is transferred, whether the vendor has a PE in India and whether the applicable DTAA changes the treatment.
A practical file should include the invoice, subscription terms, TRC, Form 41, PE declaration and tax position note. If the amount is material, obtain a CA review before remittance.
Example 3: NRI Property Sale
A resident buyer purchases property from an NRI seller. This is a high-risk Section 195 situation because the buyer can become responsible for TDS compliance . The buyer should check the seller’s residential status, sale consideration, capital gain computation and whether a lower deduction certificate is available.
The safer approach is to complete the TDS review before registration and payment, not after the sale deed is executed.
Common Mistakes to Avoid
- Don’t decide TDS only from the invoice title. A foreign vendor may describe an invoice as “consulting,” “subscription,” “license fee” or “service charges,” but the tax treatment depends on the actual contract, rights granted, service scope and treaty position.
- A lower treaty rate should be supported by documents, not assumed from the vendor’s country. Keep the TRC, Form 41, invoice, agreement, PE declaration and relevant tax position note together before processing the remittance.
- From the 2025 Act period, teams should update remittance and TDS workflows with the correct new forms. This is especially important for finance teams, banks, ERP records and CA coordination.
- PAN should be collected wherever applicable. But for specified non-resident payments, Rule 37BC may provide relief from higher TDS if the required foreign tax details and documents are available.
- Treaty rates can differ based on payment type , beneficial ownership, PE status, country-specific protocol and article wording. Always verify the relevant treaty before applying a rate.
Pre-Remittance Compliance Checklist
- Check the payee’s residential status and identify whether the payment relates to royalty, FTS, interest, dividend, capital gains, business income or another category.
- Record why the payment is taxable in India, partly taxable or not taxable. For service and business income cases, keep the PE declaration and contract review on file.
- If treaty benefit is claimed, keep the TRC, Form 41, foreign tax identification details, address and beneficial ownership declaration where relevant.
- Do not apply a higher PAN-related rate mechanically without checking whether Rule 37BC relief is available for the specific payment.
- For high-value or partly taxable payments, evaluate whether the payee should use Form 128 or the payer should use Form 129 before remittance.
- File Form 145 where applicable and obtain Form 146 if the remittance falls under Part C of Form 145.
- Deduct and deposit TDS within the due date, report the transaction in Form 144 and issue Form 131 after processing.
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Conclusion
Section 195 is one of the most important TDS provisions for cross-border payments because it places responsibility on the payer before money leaves India. The rule is not that every foreign remittance needs TDS. The correct rule is that TDS applies when the payment to a non-resident or foreign company is chargeable to tax in India.
The safest approach is to classify the payment first, check taxability, review DTAA, collect documents and only then process the remittance. For high-value payments such as royalty, FTS, SaaS contracts, NRI property purchases and capital gains, a CA review before payment is much cheaper than interest, disallowance or refund delays later.
