Withholding Tax In India on Cross-Border Payments: 2026 Ready-Reckoner for Indian Companies

When Indian businesses start making cross-border payments for software, consulting, interest, or dividends one big question appears:

“Do we need to withhold tax on this payment, and if yes, how much?”

This is where withholding tax on cross-border payments (TDS on foreign payments) becomes critical. If you get it wrong, you risk higher tax, interest, penalties, and even disallowance of expenses. Get it right, and your Indian companies and foreign partners stay compliant and hassle-free.

This ready-reckoner walks you through the basics of TDS, DTAA, and practical compliance steps Indian companies (including startups) should follow before sending money overseas and highlights why it’s often prudent to consult an experienced tax consultant in Gurgaon to review your withholding tax, DTAA application, and documentation.

Understanding TDS & Withholding Tax on Cross-Border Payments

Under the Income Tax Act, India follows a simple principle:

If income is taxable in India in the hands of a non-resident in India, the Indian payer usually must deduct tax at source before remitting money.

This deduction is what we commonly call:

• TDS (Tax Deducted at Source), or
• Withholding tax on cross-border transactions.

Income Tax Department withholding tax overview:

• The Indian payer (company or individual) becomes responsible for tax collection on behalf of the Income Tax Department.
• The tax is deducted at the applicable TDS rate and deposited with the government.
• The non-resident receives the net amount and can claim credit in their home country, often using tax treaties.

So whenever you make payments to non-resident companies or foreign individuals, ask:

• Is the income taxable in India?
• If yes, what withholding tax rate applies under the Income Tax Act and the double taxation avoidance agreement (DTAA), if any?

When Do Cross-Border Payments Attract Withholding Tax?

Not every international payment triggers TDS, but many do. As a rough guide, tax in India is often involved when:

• A foreign party has business in India or income is sourced from India; and
• The payment falls under categories like royalty, fees for technical services, interest, contract payments, or dividends received from Indian companies.

Typical payments made to non-residents that may attract withholding tax include:

• Fees to foreign consultants, designers, lawyers, or technical services providers.
• Software licence and SaaS subscriptions, where Indian tax law treats them as royalty or services.
• Interest paid to foreign investors or lenders.
• Dividends received from Indian companies by shareholders abroad (subject to current tax rates on dividends).

Under Indian tax regulations, if such income is taxable in India, the Indian payer has a tax obligation to deduct tax before paying.

Recommended: A Detailed Guide on Form 15CA and 15CB for Cross-Border Payments

Role of DTAA: Using Tax Treaties To Avoid Double Taxation

India has double taxation avoidance agreements (DTAA) with many countries. These tax treaties decide:

• Whether a particular cross-border payment is taxable,
• Which country gets the right to tax, and
• The maximum withholding tax rate India can apply.

For example, a treaty may:

• Cap the tax rate on interest or royalties;
• Specify when business profits are taxable in India (often only if there is a permanent establishment);
• Change the way certain services are taxed.

To apply a treaty, Indian companies must generally:

• Confirm that a DTAA exists between India and the recipient’s country.
• Obtain a valid Tax Residency Certificate (TRC) from the non-resident.
• Often collect Form 10F to claim DTAA benefits and basic tax residency status details.
• Keep all official Double Taxation Relief documentation ready in case a tax officer or tax authorities ask for proof

Only when the payer has a valid Tax Residency Certificate (and other docs) can they safely apply lower DTAA rates instead of domestic Indian tax rates.

Key Concepts: Tax Residency, Source, and Chargeability

Before deciding whether to withhold tax, Indian payers should understand three simple questions:

• Who are you paying?
• Is the recipient resident in India or a non-resident in India?
• This affects which sections of the Income Tax Act apply.
• What are you paying for?
• Professional fees, royalty, cloud services, commission, interest, or something else?
• Indian tax law classifies each differently.
• Where is the income sourced?
• Is the income taxable in India because the services are used in India, the payer is in India, or business is linked to India?

If the answer is “yes, this income is taxable in India”, then withholding taxes in India are likely triggered.

Read more: Importance Of Cross Border And Regulatory Planning

Common Cross-Border Payments & Their TDS Concerns

Let’s look at typical cross border scenarios where tds on foreign payments becomes a real issue for guide for Indian payers.

1. Fees to Foreign Consultants / Service Providers

A company providing services abroad such as strategy, tech, or design may still face tax in India if:

• Services are used for business in India, or
• The service amounts to fees for technical services under the Income Tax Act or treaty.

In such cases, tax will be deducted at the applicable withholding tax rate, either as per domestic law or reduced under DTAA.

2. Software, SaaS & Licences

Payments for software licences, cloud platforms, or digital tools often fall into a grey area of taxation. Depending on the facts, they can be seen as:

• Royalty,
• Business income, or
• Ordinary service fees.

Many Indian startups get notices because they treated these as simple imports without withholding tax, while Indian tax authorities considered them royalty or technical services.

3. Interest & Loan Payments

Interest paid abroad (for example, to foreign investors or banks) is typically taxable in India and subject to withholding tax.

• The tds rate may be different under domestic law and DTAA.
• Proper deduction and reporting help avoid unexpected tax liabilities and disputes later.

4. Dividends to Non-Residents

Where dividends received from Indian companies are paid to non-resident shareholders, tax in the hands of the recipient may be withheld by the Indian company, subject to:

• Domestic tax laws, and
• The specific double taxation avoidance agreement with that country.

Recommended: CHALLENGES OF CROSS-BORDER E-COMMERCE AND SOLUTIONS

Practical Checklist Before Making Cross-Border Payments

Before you click “Remit” through your bank or tax portal, walk through this basic checklist:

Step 1: Identify the Payee and Nature of Payment

• Confirm if the payee is non-resident in India.
• Classify the payment: royalty, interest, fees for technical services, commission, training, etc.

Step 2: Check Taxability Under Indian Law

• Review whether such income is taxable in India under the Income Tax Act.
• If it is not taxable, you may not need to withhold tax, but you should document your reasoning.

Step 3: Examine DTAA Benefits

• Check if a double taxation avoidance agreement applies between India and the recipient’s country.
• Ask the non-resident to provide a Tax Residency Certificate and Form 10F to claim DTAA benefits where required.

Step 4: Decide the Applicable Rate

• Compare:
• Domestic withholding tax rate, and
• DTAA rate.
• Apply whichever is more beneficial to the non-resident, if all treaty conditions are met.

Step 5: Deduct and Deposit TDS

• Deduct tax at the chosen rate before making the remittance.
• Deposit TDS within the due date and file related TDS returns.

Step 6: Keep Documentation Ready

• Contract / invoice.
• TRC, Form 10F, no-PE declarations (if relevant).
• Working papers showing how you determined that the payment is or isn’t taxable in India.

Doing this systematically helps Indian companies and Indian startups stay on top of rules on foreign payments and prevents surprises.

Compliance & Reporting: Don’t Forget the Back-End

It isn’t enough to just withhold tax. You also have to:

• Pay TDS to the Income Tax Department within timelines.
• File TDS returns correctly (with details of payments made to non-residents).
• Provide tax certificate / TDS certificates so the non-resident can claim credit abroad.

If TDS is deducted but not deposited, or returns are not filed, tax authorities can:

• Treat you as “assessee in default”.
• Demand tax, interest, and penalties.
• Even disallow the underlying expense for tax in India.

Good compliance habits are as important as correct tax rate selection.

Common Mistakes Indian Companies Make on Cross-Border TDS

Some patterns show up repeatedly when Indian tax authorities review cross-border payments:

• Assuming no TDS just because invoice is in foreign currency
• Payment in foreign currency doesn’t mean no tax in India.
• Taxability depends on source and nature, not currency.
• Ignoring DTAA completely
• Paying full domestic tds rate even when a treaty offers a lower withholding tax rate.
• Or worse, applying treaty benefits without TRC / documentation.
• No written analysis of taxability
• Indian companies often cannot show why they did or did not withhold tax.
• This weakens their position in tax issues or scrutiny.
• Not obtaining TRC and Form 10F
• Trying to use DTAA rates without a valid Tax Residency Certificate or 10F to claim DTAA benefits.
• Confusing TDS and TCS
• Tax collected at source (TCS) is different from TDS.
• Some payments in India may have both regimes; confusion can lead to errors.

Avoiding these errors can save a lot of time and money later.

Know more: Cross-Border Transactions And Recent Tax Controversies in India [2025]

How to Reduce Disputes and Unexpected Tax Liabilities

To minimise tax liabilities and unexpected tax exposure on withholding taxes in India, consider:

• Having a simple internal SOP for cross-border payments.
• Involving a chartered accountant or tax advisor early, especially for large or recurring payments.
• Using the income tax portal and bank workflows carefully to ensure the right nature of remittance code.
• Documenting your decision process especially where you decide that some payments made do not attract withholding tax.

If a payment is large (for instance, above a threshold like INR 2 million) and you’re unsure whether it’s taxable in India, you can apply to a tax officer for a certificate or lower-deduction order in appropriate cases. This way, your tax obligation is formally clarified in advance.

Conclusion: Withholding Tax Doesn’t Have To Be Scary - Just Structured

Withholding tax on cross-border payments is one of those areas where many finance teams feel nervous especially in Indian startups and growing companies beginning to work globally. But the rules are manageable if you:

• Understand when income is taxable in India,
• Use DTAA and tax residency correctly, and
• Build a simple, repeatable process to deduct, deposit, and report tax deducted at source.

Handled well, this protects both sides Indian companies avoid penalties, and foreign partners avoid messy foreign tax credit problems. Handled casually, it can trigger higher tax, interest, and scrutiny that distracts from your business.

If your organisation is making more and more international payments and you’re not fully sure when you must withhold tax, this is the right time to tighten your process before Indian tax authorities ask questions. Consulting an experienced income tax consultant in Gurgaon can help you structure payments correctly, apply the right TDS rates, and maintain proper documentation for cross-border transactions.