What is Section 195 of The Income Tax Act? Essential Guide

Know how to manage your NRI payments as per the provisions under Section 195.

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Key Takeaways:

The Income Tax Department regulates payments made from Indian taxable income to NRIs under section 195 of the Income Tax Act. As someone conducting business or personal transactions, you should know the various TDS rates. TDS is applicable to various investments and expenses under section 195 includes income from investments, transfer of capital assets, LTCG, etc.

When you conduct business transactions, you can deduct tax at source and remit the same to the Income Tax Department at the end of the financial year. The Government of India introduced tax deducted at source (TDS) to prevent tax evasion and streamline the process of tax payment. Deducting tax on payments made during business dealings in India is a standard process. But when you are transacting with a Non-Resident Indian (NRI), TDS deduction slightly varies. How it works is explained under Section 195 of the Income Tax Act. Read on to learn more about the same.

What is Section 195 of the Income Tax Act?

The Income Tax Section 195 specifies the rules and procedures for TDS collection on payments made to NRIs. The payment must be an amount paid from their taxable Indian income. It may be in the form of any other amount except for salaries or interest referred to in Sections 194LB, 194LC, and 194LD. Under such transactions with NRIs, as the payer, you could be resident or Non-Resident Indian individual, a member of HUF, part of a partnership firm, or a foreign company.

TDS Under Section 195

TDS is deducted under Section 195 as per the following provisions:

You can make the tax payment under Section 195 after obtaining a Tax Deduction Account Number (TAN). You can do so with submission of form 49B, which is covered under Section 203A of the Income Tax Act, 1961. You need your and the NRI’s PAN details to submit form 49B.
The TDS deducted during payments to the NRI should be clearly mentioned with the other necessary transaction details in the sales deed or invoice.
You must deposit the TDS through a challan or a TDS payment form on or before the 7^th of the next month following the transaction, in which the TDS deduction has been made.
You can deposit the TDS through Government authorised banking institutions or directly with the Income Tax Department of India.
Once you have made the TDS deposit, you can file Income Tax Returns on a quarterly basis. For example, in the first quarter, the deductions made between 1^St April and 30^th June can be filed by 15^th The same pattern follows for other three quarters during the financial year.
After filing the tax returns, you can issue a TDS certificate to the NRI. You are required to mandatorily issue the TDS certificate or Form 16 within 15 days from the due date of filing for TDS returns.

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TDS Rates Under Section 195

The following are the applicable, government-determined TDS deduction rates under Section 195:

Income Type	TDS Rate
Income resulting from investments made by an NRI in the form of interest/dividend.	20%
Income by way of long-term capital gains arising from the transfer of capital assets to an NRI under Section 115E.	10%
Income by way of long-term capital gains as specified under Sections 112 and 112A.	10%
Any other income earned in the form of long-term capital gains (excluding the long-term capital gains referred to in clauses 10(33), 10(36) of 112A.	20%
Income as short-term capital gains as mentioned under Section 111A.	15%
Income in the form of interest payable by the Government or an Indian concern on the funds borrowed in foreign currency (excluding interest income referred to in Section 194LB or Section 194LC).	20%
Income resulting from royalty payable by the Government or an Indian concern for transfer of copyrights of any book or computer software as referred to under Section 115A.	10%
Income resulting from royalty payable by the Government or an Indian concern relating to a matter included in the industrial policy. TDS rates applicable on the agreement in accordance with the policy are as follows: A. Agreement made after 31^st March 1961 but before 1^st April 1976 – B. Agreement made after 31^st March 1976 –	50% 10%
Income arising from the fees paid towards technical services by the Government or an Indian concern where it relates to matters included in the industrial policy. TDS rates in accordance with the agreement with that policy are as follows: A. Agreement made after 29^th February 1964 up to 31^st March 1976 – B. Agreement made after 31^st March 1976 –	50% 10%
Income from sources other than those listed above	40%

The tax deducted under section 195 is as per the rates of the Finance Act or the rates specified under the Double Taxation Avoidance Agreement (DTAA), whichever proves beneficial to the payee (NRI). Note that the TDS rates prescribed under the Finance Act are to be increased by adding the applicable surcharge and education cess. Such additions do not apply to rates as per DTAA.

Final Note:

Knowing the provisions applicable under Section 195 of the Income Tax Act helps you make informed decisions while making payments to NRIs. While making such payments, you may have noted the absence of any threshold limit. Hence, irrespective of the sum of money involved in the transaction with NRIs, TDS must mandatorily be deducted.

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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.

The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.