TDS Provisions on Foreign Remittances under Section 195 of Income Tax Act

Currently, India is the 4th largest economy in the world. Cross Border Transactions have been significantly on the rise over the past few decades in India. To ensure compliance in such payments, the Income Tax Department in India has placed certain TDS provisions under Section 195 of the Income Tax Act, specifically for foreign remittances.

When you make a payment to an NRI, the provision ensures that tax is deducted at source. This provision plays a crucial role in the taxation of foreign companies and NRIs, who earn income from India.

In this blog, one of the top chartered accountant firms in Gurgaon will simplify the provisions mentioned under Section 195 of the Income Tax Act, and help you understand the importance of TDS deduction, filing returns on time, and how to avoid penalties.

Who is a Non-Resident Indian?

As per Section 6 of the Income Tax Act, a Non-Resident Indian (NRI) is someone who is a citizen of India and does not reside within India. They do not meet the criteria for a resident individual during the financial year. Classification of NRIs, foreign companies, or any individual/entity who earns income from foreign sources or stays outside India is necessary for tax purposes in India. You are considered an NRI if you meet the following conditions:

• Must be residing in India for at least 182 days or more within the financial year 
• Must be residing in India for at least 60 days or more within the financial year and for at least 365 days or more within the previous four financial years.

Recommended: Residential Status and its Impact on Taxability in India

What is Section 195? What is the Importance of TDS Provisions on Foreign Remittances?

Section 195 of Income Tax Act states the provisions for tax deducted at source (TDS) that are applicable to the income of NRIs. TDS on NRI ensures that the taxes are collected at the time of payments, and helps prevent chances of tax evasion by holding the person making the payment responsible. 

Section 195 mentions the details of applicable tax rates and deductions involving the payments made to NRIs for business transactions. For such payments, a certificate of remittance must be issued to NRIs. The section also explains guidelines to prevent loss of revenue due to tax liabilities faced by NRIs by ensuring that the payer deducts the TDS appropriately during payments. A professional tax consultant in Gurgaon can guide you on how to issue a certificate of remittance to NRIs. 

Who Needs to Deduct TDS u/s 195?

Any individual who is a resident or non-resident Indian and is making a payment to a non-resident Indian (excluding companies in India or foreign companies) that may be taxable in India (excluding salary payments) is required to deduct TDS under Section 195. This includes any individual, company, HUF, or firm, whether or not they have an income that is taxable under the Income Tax Act in India.

If you are facing difficulties in navigating FEMA Compliance or other complex taxation laws and regulations in India, then you can reach out to DSRV India for further professional guidance.

Read Also: Corporate Tax Filing Obligations for Foreign Companies in India

Applicable Situations for TDS Under Section 195 of the Income Tax Act

TDS under Section 195 of the Income Tax Act, TDS deducted is applicable in two circumstances:

• When the income is credited to the NRI's bank account
• During the transaction of the payment transaction

The deduction needs to be done according to whichever circumstance happens first. As per Section 5(2)(b), the total income earned by the Non-Resident Indian (NRI) includes all income accrued or arisen in India. TDS payment needs to be deducted on the income accruing or arising as mentioned in Section 195 of the Income Tax Act.

TDS Rate under Section 195 of Income Tax Act

There is no fixed TDS rate under Section 195. The rate of TDS depends on the type of payment and provisions made by the individual to the NRI. The Double Taxation Avoidance Agreement (DTAA) and the Income Tax Act play an important role in determining the TDS rates. The TDS rates under Section 195 are:

If the ones who pay the TDS do not have a PAN, then the applicable rates will be 20% or based on the laws in force, whichever rate is higher. 

Ways to Deduct TDS under Section 195

To deduct TDS under Section 195, the payer must:

• Obtain a valid TAN (Tax Deduction Account Number) under Section 203A of the Income Tax Act while also making sure there are PAN details for both the individual making the payment and the NRI who is the recipient of the payment.
• Calculate the TDS amount based on the applicable rates.
• Deduct the TDS at the time of credit or payment, whichever is earlier.
• Deposit the TDS through an authorized bank. This must be done before or on the 7th of the next month.
• File your TDS returns through Form 27Q before the mentioned due date.
• Issue a TDS certificate for the NRI within 15 days before the mentioned due date of TDS returns. 

What are the Consequences of Non-Compliance with Section 195?

Failing to deduct TDS under Section 195 or not filing TDS returns on time may lead to the following consequences:

• If the TDS is not deducted or not paid on time, the related expenditure will not be allowed in that year. It will only be allowed in the year when the TDS is paid.
• If TDS is deducted but deposited late, an interest of 1.5% per month will be charged to the payer from the date of deduction till the date of deposit.
• If TDS is deducted but not paid, a penalty that is equivalent to the TDS amount will be imposed on the payer.
• If there is a short deduction of TDS, a penalty equal to the shortfall (i.e., the difference between the required amount and the TDS that has been deducted) may be imposed on the payer.

Read More: When and How Should NRIs File Form 67 for Foreign Tax Credits?

Conclusion

Section 195 of the Income Tax Act ensures that any payment made to non-resident Indians is fairly taxed in India. It's crucial to deduct TDS, file returns on time, and deposit the amount electronically to the Income Tax Department.