Section 195 of Income Tax act - TDS on Foreign Payments

1. Must stay 60 days or more for the specific financial year and for 365 days or more for the immediate proceeding four financial years

Who should Deduct Tax under Section 195 

Payment made by any individual to any non-resident, which is taxable in India other than salary or interest, as referred to in the sections 194LB, 194LC and 194LD, should deduct tax under this Section of Income Tax Act.

Payer is the person who is remitting the payment to a non-resident payee. The payer can be individuals, Hindu Undivided Family, firms, non-residents, foreign companies, persons having exempt income in India and any juristic person irrespective of whether that person has income chargeable to tax in India or not.

In the case of an Indian citizen or a person of Indian origin (PIO), whose total income, excluding income from foreign sources:

1. Exceeds Rs 15 lakhs within the relevant fiscal year - The 60-day period indicated in point (2) above will be replaced with 120 days.

1. If fewer than Rs 15 lakhs are spent during the relevant fiscal year, the 60-day period specified in point (2) above would be replaced by 182 days. Similarly, for any Indian citizen who leaves India in any year as a crew member or for employment outside India, the period of 60 days in point (2) above shall be replaced with 182 days.

As a result, an Indian citizen or PIO with a total income of more than Rs 15 lakhs (other than from foreign sources) is considered a resident in India if they are not taxed in any other country. As a result, anyone who does not meet any of the qualifications listed above will be considered a non-resident Indian.

TDS under section 195

The following are the ways to be followed to deduct TDS under Section 195:

1. TAN (Tax Deduction Account Number): Buyer should first obtain TAN under section 203A of the Income Tax Act, 1961 before deducting TDS. TAN can be obtained by applying buy filling up the Form 49B. This form is also available online. Buyer should also have his own PAN number and PAN number of the NRI seller.
2. TDS must be deducted at the time of making the payment to the NRI. The information about the TDS being deducted and the rate at which it was deducted should be mentioned in the sale deed between the NRI seller and the buyer.
3. The TDS deducted by the buyer should be deposited through Form number or challan for TDS payment on or before the 7^th of next month in which the TDS is deducted.
4. The TDS can be deposited through banks that are authorised by government of India or the Income Tax Department to collect Direct Taxes. The deposit has to be made by the buyer.
5. After the TDS has been deposited, the buyer has to electronically file TDS return by submitting Form 27Q. TDS returns are filed quarterly. TDS deducted during the first quarter from 1^st April to 30^th June must be filed on 15^th July. TDS deducted during the second quarter from 1^st July to 30^th September must be filed on 15^th October. TDS deducted during the third quarter from 1^st October to 31^st December must be filed on 15^th January. TDS deducted during the fourth quarter from 1^st January to 31^st March must be filed on 15^th May.
6. After the TDS returns have been filed, buyer can issue TDS certificate or Certificate of Deduction of Tax which is Form 16A to NRI seller. This certificate should be issued to the seller within 15 days from the due date of TDS returns for the quarter.

Rate of TDS under Section 195

Rates prescribed under the Act has to be increased by surcharge and education cess at the prescribed rate. If the payment is being made as per DTAA rates, then there is no need to add surcharge and education cess. The section 195 TDS Rates are as follows:

What are the Consequences of Non-Complying of Section 195? 

The following are consequences of non-complying of Section 195: 

1. If TDS not at all deducted, then expense under 40 (a)(i) is not allowed 
2. Interest at the rate of Rs.1.50 per month or part of month from date of deduction to deposit, should be paid if TDS is not paid within time 

1. Penalty equivalent to the TDS amount under Section 221 will be deducted, if TDS deducted and not paid 
2. If TDS deducted is short, then penalty will be deducted which is equivalent between actual deductible and deducted amount Section 271C

TDS Payment Under Section 195

The various ways of deducting TDS under section 195 are mentioned below -

1. TDS must be subtracted by buyers when paying NRIs.
2. Before deducting the TDS, buyers should get a TAN (Tax Deduction Account Number) in accordance with section 203A of the Income Tax Act. Additionally, buyers should have their PAN numbers as well as the NRI seller's PAN numbers.
3. Banks that are permitted by the government or the Income Tax Department to collect direct taxes can accept TDS as a deposit.
4. On or before the seventh day of the next month in which the TDS is deducted, the buyer's TDS deductions must be paid through a challan for TDS payment.
5. Buyers may issue TDS certificates, also known as Certificates of Deduction of Tax, or Form 16A to NRI sellers after the TDS returns have been filed. Within 15 days of the TDS returns for the quarter's due date, the seller should receive the certificate.

Information Disclosure about Foreign Payments

When making a payment to a non-resident or a foreign corporation, the payer is required to file Forms 15CA and 15CB with the AO with complete and correct information about the payment.

Keep in mind that this information must be provided even if the payment was not subject to taxation under the Act. The violation of this provision will result in a Rs. 1 lakh fine under Section 271-I.

Buyers may provide TDS certificates, also known as Certificates of Deduction of Tax, or Form 16A, to NRI sellers after the TDS returns are filed. The seller should obtain the certificate within 15 days of submitting the TDS returns for the quarter's due date.

Application for a Certificate of Zero or Lesser TDS Deduction Made by the Payer

The payer may submit a Form 15E application to the Assessing Officer (AO) for a lower or nil deduction certificate if he or she believes that no amount, only a portion of an amount, or neither (other than salary) is subject to tax in the hands of the non-resident in India.