TDS on foreign remittances under Section 195 vs TDS on commission payments under Section 194H
Nimisha Panda- 8 hours ago
- 11 min read
The Income Tax Act, 1961, lays out several provisions regarding the deduction of tax at source (TDS), aimed at ensuring that tax is collected in advance on various types of payments. Two important sections governing TDS are Section 195 and Section 194H, each addressing distinct categories of payments. Section 195 is concerned with TDS on foreign remittances made to non-residents, while Section 194H deals with commission payments made to residents.
Despite serving different purposes, both sections share common compliance requirements, such as the necessity of TDS deduction at the time of payment or credit, and the submission of relevant forms and certificates. However, these sections differ in terms of the nature of payments, the payee involved, the applicable rates, and the thresholds that determine when TDS must be deducted.
In light of the Union Budget 2024 and Finance Act 2025, both of these provisions have been updated to simplify the compliance process and adjust the tax burden on businesses and individuals.
Table of Contents
How does TDS on foreign remittances under Section 195 differs from TDS on commission payments under Section 194H?
TDS under Section 195 applies to payments made to non-residents, which includes a wide variety of income types, such as interest, royalties, technical services fees, and commissions. This section ensures that taxes are deducted at the source before these payments are made abroad, preventing tax evasion on income generated in India but paid to foreign entities or individuals.
In contrast, Section 194H is concerned specifically with commission or brokerage payments made to residents. It mandates the deduction of TDS on commission payments that exceed a certain threshold in a financial year. Recent amendments, including a reduction in the TDS rate and an increase in the threshold for commission payments, have made compliance easier, particularly for small businesses and individuals involved in commission-based services.
The key differences between these two provisions lie in the type of payee (non-resident vs resident), the nature of the payment (foreign remittances vs commission), and the compliance protocols involved. While Section 195 requires additional paperwork such as Form 15CA and Form 15CB for non-resident payments, Section 194H focuses on more straightforward reporting of commission payments with simplified filing requirements. These sections also differ significantly in terms of the TDS rate and the threshold limits for deduction, with Section 194H offering more lenient provisions for smaller commission payments.
TDS on Foreign Remittances Under Section 195
Applicability
Section 195 of the Income Tax Act, 1961 governs the deduction of TDS on payments made to non-residents. This section applies to any payment made to a non-resident or foreign company, which includes foreign remittances such as interest, royalties, fees for technical services, and commissions.
The key aspect of Section 195 is that it applies to payments that are chargeable to tax under Indian law. This means that if the payment is considered income in India, TDS must be deducted. The TDS is required to be deducted at the time the income is credited to the non-resident's account or at the time of payment, whichever occurs first. This ensures that tax is paid at the point of transaction, preventing tax evasion on income earned by non-residents from Indian sources.
Compliance Requirements
To ensure compliance with Section 195, the payer must follow a series of steps:
Form 15CA & 15CB: Before remitting funds abroad, the payer is required to submit Form 15CA, which is a declaration stating that the applicable taxes have been deducted on the remittance. In certain cases, the payer is also required to obtain a Form 15CB, which is a certificate from a Chartered Accountant certifying the correctness of the TDS deduction.
Tax Deduction Account Number (TAN): The payer must have a TAN to deduct and remit the TDS. This is a mandatory requirement for all entities deducting tax.
Filing TDS Returns: The payer must file TDS returns using Form 27Q. This form records the details of tax deducted at source from payments to non-residents.
Issuance of Form 16A: After deducting the TDS, the payer must issue a Form 16A to the non-resident payee. This certificate serves as proof of TDS deduction.
Penalties for Non-Compliance: Failure to comply with these requirements can lead to penalties. For instance, Section 271-I imposes a fine of Rs. 1 lakh for non-compliance with the TDS provisions under Section 195.
Rates and Thresholds
The TDS rate under Section 195 varies depending on the nature of the payment and the relevant Double Taxation Avoidance Agreement (DTAA) provisions between India and the country of the non-resident payee.
TDS on interest payments could range from 10% to 20%, depending on the nature of the interest and any applicable tax treaty.
Royalties and technical service fees typically attract a TDS rate of 10%, again subject to the DTAA.
Other payments, such as commission, are generally taxed at 20%, unless reduced by a tax treaty.
The Union Budget 2024 and Finance Act 2025 have made updates to the threshold limits for some types of payments under Section 195. For instance, the threshold for rent payments has been increased from Rs. 2.4 lakhs to Rs. 6 lakhs, effective from April 1, 2025. These changes aim to streamline TDS compliance and reduce the administrative burden for both the payer and the non-resident payee.
TDS on Commission Payments Under Section 194H
Applicability
Section 194H pertains to commission or brokerage payments made to residents, including payments made by individuals, firms, and corporations. It applies to payments made for services rendered where the payee is receiving commission for facilitating business transactions. The TDS is deducted at the time the commission is credited or paid, whichever is earlier, provided the payment exceeds the prescribed threshold.
This section is particularly relevant for businesses that pay commission to agents, brokers, or other intermediaries for services rendered. The key aspect of Section 194H is that it focuses exclusively on commission payments to residents, unlike Section 195, which deals with payments to non-residents.
Recent Amendments (Budget 2024 & Finance Act 2025)
TDS Rate Reduction: The TDS rate under Section 194H was reduced from 5% to 2% starting October 1, 2024. This amendment is aimed at reducing the tax burden on smaller commission payments and simplifying compliance for businesses.
Threshold Increase: The threshold limit for TDS deduction has been increased from Rs. 15,000 to Rs. 20,000 from April 1, 2025. This means businesses will not be required to deduct TDS on commission payments under Rs. 20,000, which provides relief to small businesses and reduces their compliance costs.
PAN Requirement: As with Section 195, if the payee does not provide a PAN, TDS is deducted at a higher rate of 20% under Section 194H. This ensures that the government can track such transactions and ensure proper tax compliance.
Compliance Requirements
Similar to Section 195, compliance under Section 194H includes the following:
TDS Deduction and Deposit: Businesses must deduct TDS on commission payments at the prescribed rate and deposit the deducted tax with the government within the stipulated timelines.
Filing TDS Returns: Businesses must file TDS returns and provide details of the commission payments made, including the amount of TDS deducted.
Issuance of Form 16A: After deducting the TDS, businesses must issue Form 16A to the recipient of the commission, confirming the amount of TDS deducted.
Key Differences Between Section 195 and Section 194H
Feature | Section 195 (Foreign Remittances) | Section 194H (Commission Payments) |
Applicability | Payments to Non-Residents/Foreign Companies | Commission/Brokerage payments to Residents |
Nature of Payment | Any taxable income remitted abroad (interest, royalty, commission, fees, etc.) | Commission or brokerage payments on business/professional services |
TDS Rate | Varies as per Income Tax Act/DTAA | 5% before Oct 1, 2024; 2% from Oct 1, 2024 onwards |
Threshold Limit | No fixed threshold; TDS applicable on all taxable payments | Rs. 15,000 before Apr 1, 2025; Rs. 20,000 from Apr 1, 2025 |
PAN Requirement | PAN of non-resident required; else higher TDS rates may apply | PAN of payee required; else TDS at 20% |
Forms for Compliance | Form 15CA, Form 15CB, Form 27Q, Form 16A | TDS return filing and Form 16A issuance |
Effective Dates of Amendments | Threshold changes effective April 1, 2025 | Rate reduction effective Oct 1, 2024; threshold increase effective April 1, 2025 |
Conclusion
Both Section 195 and Section 194H cater to different types of payments but share common compliance requirements, such as TDS deduction and filing returns. Section 195 is concerned with payments to non-residents, including foreign remittances, while Section 194H deals with commission payments to residents. Recent amendments, such as the rate reduction and threshold increase for commission payments, are intended to ease the tax burden and improve compliance for businesses.
To simplify this process, TaxBuddy offers an AI-driven tax filing platform that helps ensure seamless compliance with TDS provisions under Sections 195 and 194H. With its user-friendly interface, real-time assistance, and automatic calculation of TDS, TaxBuddy’s mobile app is a must-have tool for individuals and businesses alike. Download the TaxBuddy mobile app today for a hassle-free filing experience.
Frequently Asked Question (FAQs)
1. What is the main difference between TDS under Section 195 and Section 194H?
The primary difference between TDS under Section 195 and Section 194H lies in the nature of the payments and the payee involved. Section 195 applies to payments made to non-residents or foreign entities for services like interest, royalties, commission, or technical services. On the other hand, Section 194H specifically deals with commission payments made to residents. Additionally, the TDS rates and compliance procedures differ: Section 195 requires filing of Form 15CA and Form 15CB, while Section 194H requires standard TDS return filing and issuance of Form 16A. Furthermore, Section 195 applies to a broader range of payments, while Section 194H is limited to commissions and brokerage.
2. When do I need to submit Form 15CA for foreign remittance?
Form 15CA must be submitted before making a foreign remittance, ensuring that the tax deduction requirements under Section 195 are met. The form provides details of the remittance and the taxability of the payment. In some cases, you may also need to obtain Form 15CB from a Chartered Accountant, which certifies the correctness of the tax deduction. Failure to submit Form 15CA may result in penalties and non-compliance with tax regulations, delaying or preventing the remittance process.
3. Can TDS under Section 195 be avoided if the payment is not taxable in India?
Yes, TDS under Section 195 can be avoided if the payment is not taxable in India. However, even in such cases, Form 15CA must still be submitted, declaring the nature of the payment and confirming its non-taxability under Indian law. If the payment is not taxable, no TDS will be deducted, but the payer must provide the necessary documentation to substantiate the claim. If the payment is taxable, TDS will be deducted according to the applicable rate.
4. How does the increase in threshold under Section 194H affect small businesses?
The increase in the threshold under Section 194H from Rs. 15,000 to Rs. 20,000, effective from April 1, 2025, provides relief to small businesses. Payments made below this threshold will no longer require TDS deduction, easing the compliance burden. This change is particularly beneficial for small enterprises making commission payments under Rs. 20,000, as they won’t need to file TDS returns or issue TDS certificates. This also reduces administrative costs and simplifies financial operations for businesses that primarily deal with low-value commissions.
5. What is the TDS rate for foreign remittances under Section 195?
The TDS rate for foreign remittances under Section 195 depends on the nature of the payment and the provisions of the relevant Double Taxation Avoidance Agreement (DTAA) between India and the recipient's country. If no DTAA exists, the standard rates under the Income Tax Act apply, which vary depending on the payment type (e.g., interest, royalty, technical fees). The rates are generally higher than those for domestic payments and must be deducted at the time of payment or credit, whichever is earlier. Additionally, if the recipient doesn't provide a PAN, the rate of TDS may be higher.
6. Is PAN mandatory for both Section 195 and Section 194H?
Yes, PAN is mandatory for both Section 195 and Section 194H. Under Section 195, the payer is required to deduct TDS at the applicable rate, and if the non-resident recipient does not provide their PAN, a higher rate of TDS may apply. Similarly, under Section 194H, the payee’s PAN is essential for correctly calculating and deducting TDS at the prescribed rate. If the payee fails to provide a PAN under Section 194H, TDS will be deducted at a higher rate of 20%.
7. What are the recent changes to TDS rates under Section 194H?
Recent amendments to Section 194H, effective from October 1, 2024, reduce the TDS rate from 5% to 2% on commission or brokerage payments. Additionally, the threshold for TDS deduction has been raised from Rs. 15,000 to Rs. 20,000, effective from April 1, 2025. These changes aim to ease compliance for smaller commission payments, lowering the TDS burden on businesses that deal with smaller amounts. However, businesses will still need to deduct and file TDS returns for commission payments above the updated threshold.
8. How does a Double Taxation Avoidance Agreement (DTAA) affect TDS under Section 195?
A DTAA between India and another country plays a crucial role in determining the TDS rate under Section 195. If the payee is a resident of a country with which India has a DTAA, the TDS rate may be reduced or exempted based on the treaty provisions. In such cases, the payer must refer to the specific terms of the DTAA to apply the correct rate. To avail of the reduced rate, the non-resident payee must submit a valid Tax Residency Certificate (TRC) and other required documents to substantiate the claim.
9. Do foreign remittances under Section 195 always require TDS?
Foreign remittances under Section 195 do not always require TDS if the payment is not taxable in India. In cases where the remittance is for non-taxable income under Indian law (e.g., dividends from foreign investments not taxable in India), TDS is not applicable. However, the payer must still submit Form 15CA and provide a declaration stating that the payment is non-taxable in India. The compliance is essential to avoid penalties and ensure that the remittance is processed without delays.
10. How do compliance requirements differ between Section 195 and Section 194H?
The compliance requirements for Section 195 and Section 194H differ primarily in terms of the forms and procedures involved. Section 195 requires the submission of Form 15CA, and, in some cases, Form 15CB, along with the filing of TDS returns in Form 27Q. For Section 194H, businesses need to file TDS returns (Form 24Q or 27Q, depending on the entity) and issue Form 16A to the payee. While Section 194H deals with resident payees and simpler compliance, Section 195 includes additional steps due to the involvement of non-resident payees and foreign remittances.
11. What happens if PAN is not provided for commission payments under Section 194H?
If the payee does not provide a PAN for commission payments under Section 194H, the payer is required to deduct TDS at a higher rate of 20%. This ensures that tax is still collected even when the payee does not comply with the PAN requirement. To avoid this higher deduction, the payee must provide their PAN at the time of the transaction. Failure to do so will result in the application of the higher TDS rate, increasing the tax burden for the payee.
12. How do the recent amendments in the Budget 2024 impact TDS on foreign remittances and commission payments?
The recent amendments in the Union Budget 2024 have brought significant changes to both foreign remittance and commission payment TDS provisions. The threshold for commission payments under Section 194H has been increased, which will reduce compliance efforts for small businesses. For foreign remittances under Section 195, changes in the threshold and the clarity on DTAA applicability have simplified TDS rates for non-residents. These changes are part of the government's ongoing efforts to streamline TDS compliance and ease the tax burden for businesses, especially smaller enterprises.
13. How does TaxBuddy simplify the TDS compliance process?
TaxBuddy provides a seamless and automated solution for managing TDS compliance for both Section 195 and Section 194H. With AI-driven tax filing, the platform simplifies the process of filing TDS returns, issuing TDS certificates, and ensuring timely payments. TaxBuddy's comprehensive support system guides users through each step, making TDS compliance stress-free.
14. Can I use TaxBuddy's mobile app to manage my TDS-related tasks?
Yes, TaxBuddy's mobile app allows you to manage all your TDS-related tasks on the go. The app simplifies the filing of TDS returns, issuance of Form 16A, and other compliance requirements. With its user-friendly interface and seamless filing experience, the TaxBuddy mobile app makes it easier to handle tax-related tasks from your smartphone, saving you time and effort.
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