Section 195A of the Income Tax Act, 1961, governs scenarios where the payer agrees to bear the tax liability on income payable to a recipient, requiring the income to be “grossed up” to ensure the recipient receives the agreed net amount after tax deduction. Below is a detailed breakdown:
1. Applicability of Section 195A
✅ Covered Cases:
- Applies when the payer agrees to bear the taxon income subject to TDS (e.g., fees, royalties, interest) under Chapter XVII (Sections 192 to 195).
- Excludes salary paymentscovered under Section 192(1A).
❌ Exemptions:
- Salary income (handled under Section 192).
- Payments where the recipient bears the tax liability.
2. Key Mechanism: “Grossing Up”
- Calculation: The payable amount is increased so that after TDS deduction, the recipient receives the agreed net amount.
Formula:
- Example: If ₹100,000 is payable net of tax (TDS rate: 10%):
TDS (10%): ₹11,111 → Net Payment: ₹100,000 .
3. Compliance Requirements
- TDS Deduction: Payer must deduct tax on the grossed-up amount.
- Deposit & Reporting:
- Deposit TDS by the 7th of the next monthvia Challan 281.
- File Form 26Q(residents) or Form 27Q (non-residents) quarterly.
- Certificate Issuance: Provide Form 16Ato the payee, even if tax is borne by the payer.
4. Penalties for Non-Compliance
- Late Deduction/Payment: Interest @ 1%–1.5% per month.
- Non-Issuance of Form 16A: Penalty up to ₹1 lakh.
5. Key Takeaways
🔹 Grossing Up: Ensures the recipient receives the agreed net amount after TDS.
🔹 Form 16A Mandatory: Even if tax is borne by the payer.
🔹 Exclusions: Salary payments (Section 192) and non-taxable income.
