Section 195 of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on payments made to non-residents (excluding salary income) to ensure tax compliance on income earned in India. Below is a structured breakdown of its provisions:
1. Applicability of Section 195
✅ Covered Payments:
- Interest, royalties, fees for technical services(e.g., software, consultancy).
- Capital gains(e.g., sale of property/shares by NRIs).
- Dividends(unless exempt under Section 10(34)).
❌ Exemptions:
- Salary income(covered under Section 192).
- Payments not taxable in India(e.g., DTAA-exempt income).
2. Who Must Deduct TDS?
- Any payer(individual, company, HUF) making payments to:
- Non-resident individuals(NRIs).
- Foreign companies.
3. TDS Rates & Key Rules
| INCOME TYPE | TDS RATE (PAN PROVIDED) | PAN NOT PROVIDED |
| Interest | 20% | 20% or higher |
| Royalties | 10% | 20% |
| Fees for Technical Services | 10% | 20% |
| Long-term Capital Gains | 10% (listed shares) / 20% (others) | 20% |
| Other Income | 30% | 30% |
Notes:
- DTAA Benefit: Lower rates apply if supported by a Tax Residency Certificate (TRC).
- No Threshold: TDS applies even on small amounts.
4. Compliance Requirements
- Deduction Timing: Earlier of credit to payee’s accountor actual payment.
- Deposit TDS: By the 7th of the next monthvia Challan 281.
- File Returns: Quarterly Form 27Q.
- Issue Certificate: Form 16Ato payee.
Special Cases:
- Government Payments: TDS deducted only at payment(not credit).
- Taxable Portion: Payer may apply to the Assessing Officer to determine the taxable portion.
5. Penalties for Non-Compliance
- Late Deduction/Payment: Interest @ 1%–1.5% per month.
- Non-Deduction: Disallowance of expense under Section 40(a)(i).
- Incorrect TDS: Penalty equal to the shortfall.
Key Takeaways
🔹 No Threshold: TDS applies to all taxable payments to non-residents.
🔹 DTAA Relief: Lower rates possible with TRC and Form 10F.
🔹 Quarterly Filing: Use Form 27Q for returns.
