Section 195: TDS on Payments to Non-Residents Explained
- Rashmita Choudhary
- Nov 18, 2025
- 9 min read
Section 195 of the Income Tax Act, 1961 mandates deduction of Tax Deducted at Source (TDS) on payments made to non-residents such as NRIs and foreign companies. It ensures that tax is collected at the source when income arises from India, covering payments like interest, royalty, professional fees, rent, and capital gains. This mechanism prevents tax evasion and secures government revenue by holding the payer accountable for deduction and remittance of tax to the government.
Table of Contents
Understanding Section 195 of the Income Tax Act
Section 195 of the Income Tax Act, 1961 governs the deduction of tax at source (TDS) on payments made to non-residents, including Non-Resident Indians (NRIs) and foreign entities. The objective is to ensure that income earned by non-residents from Indian sources is taxed appropriately before it leaves the country. This provision covers various types of income such as interest, royalty, professional fees, rent, and capital gains. It applies to any person—resident or non-resident—making payments to a non-resident where such income is taxable in India. The responsibility of deducting and depositing TDS lies with the payer, ensuring that tax is collected at the very source of income generation.
Who Is Liable to Deduct TDS Under Section 195?
Every individual, firm, or company making payments to a non-resident is required to deduct TDS if the income is chargeable to tax under Indian law. The liability is not limited to residents; even a non-resident making payments to another non-resident for income arising in India must comply. For instance, if an Indian company pays fees to a foreign consultant, the Indian company must deduct TDS before remitting the amount. Similarly, if a non-resident makes a payment to another non-resident but the income arises in India, TDS applies. The payer acts as the agent of the government for collecting tax from the source of income.
When Is TDS Deducted on Payments to Non-Residents?
TDS under Section 195 must be deducted either at the time of crediting the amount to the account of the payee or at the time of actual payment—whichever occurs first. This ensures that tax deduction is not delayed until payment is physically made. Even if the payer credits the payment to a “suspense account” in their books, TDS must still be deducted. The provision ensures that tax is captured at the earliest possible stage of the transaction, minimizing the risk of revenue leakage.
Applicable TDS Rates Under Section 195
The rate of TDS depends on the nature of payment and the relevant provisions of the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA) between India and the payee’s country of residence. Generally, TDS rates under the Act range between 10% to 20% for most payments. For example, interest paid to non-residents is usually taxed at 20%, while royalty or fees for technical services are typically taxed at 10%. However, if the applicable DTAA provides a lower rate, the assessee can choose the beneficial rate.
DTAA and Its Impact on TDS Rates
Double Taxation Avoidance Agreements (DTAAs) are treaties signed between India and other countries to prevent the same income from being taxed twice. Under Section 90 of the Income Tax Act, taxpayers can opt for the rate specified in the DTAA if it is more beneficial than the domestic tax rate. For instance, under India’s DTAA with the USA, certain royalty or technical service payments are taxable at 10%, which is lower than the standard 20% rate under Indian law. To avail DTAA benefits, the non-resident must furnish a valid Tax Residency Certificate (TRC) and other required documents to the payer.
Lower or Nil TDS Certificates Under Section 197
Non-residents or payers may apply to the Assessing Officer for a lower or nil TDS certificate under Section 197 if the actual tax liability is expected to be less than the standard TDS rate. The certificate authorizes the payer to deduct tax at a reduced rate or not deduct it at all. This provision helps avoid excess deduction of tax, especially in cases where the recipient’s actual income or profit margin is significantly lower than the gross payment.
Payments Covered Under Section 195
Section 195 applies broadly to almost all payments made to non-residents that are taxable in India. These include:
Interest on loans or deposits paid to non-residents
Royalty payments for intellectual property usage
Fees for technical or consultancy services rendered in India
Rent for properties or equipment situated in India
Dividend distributions or other income earned from Indian assets
Capital gains arising from the sale or transfer of Indian securities or property
Compliance Process for Section 195
Compliance under Section 195 involves several steps. The payer must first determine the taxability of the payment in India and the applicable TDS rate. After deducting the tax, the payer must deposit it with the Central Government within the prescribed due date using Challan ITNS 281. TDS returns must be filed in Form 27Q, providing details of payments made to non-residents and the taxes deducted. The payer must also issue Form 16A (TDS certificate) to the non-resident, allowing them to claim credit while filing their Indian tax returns.
TDS on Non-Resident Bank Accounts and Remittances
Banks play a significant role in ensuring compliance with Section 195. When non-residents open bank accounts related to business or investment income, banks verify PAN and TAN details to ensure proper TDS deduction. Any remittance from India to a foreign account that represents taxable income must comply with Section 195 before transfer. The bank may require Form 15CA and Form 15CB—declarations and certifications that confirm tax compliance on the remittance. Failure to comply with these requirements can result in delays, penalties, or disallowance of expenses.
Consequences of Non-Compliance With Section 195
Non-compliance with Section 195 can result in severe penalties and interest charges. If the payer fails to deduct or deposit TDS, they are treated as an assessee-in-default under Section 201. The undeducted amount can be disallowed as an expense while computing taxable income, leading to a higher tax burden. Additionally, interest under Section 201(1A) is levied for the delay in deduction or deposit, and penalties under Section 271C may also apply. Persistent non-compliance can attract prosecution under the Income Tax Act.
Role of TaxBuddy in Simplifying Section 195 Compliance
Managing TDS compliance under Section 195 can be complex, especially when dealing with DTAAs, foreign remittances, or varying income categories. TaxBuddy simplifies the process by providing AI-driven automation and expert support for TDS calculation, verification, and filing. Its digital interface helps taxpayers determine applicable rates, generate challans, file returns, and track compliance seamlessly. By integrating both automation and expert review, TaxBuddy ensures that taxpayers stay compliant and avoid unnecessary penalties.
Conclusion
Section 195 plays a vital role in ensuring tax compliance for payments made to non-residents, maintaining the integrity of India’s taxation framework. Whether it involves interest, royalties, or capital gains, accurate deduction and timely deposit of TDS are mandatory. Platforms like TaxBuddy help taxpayers manage these obligations efficiently through guided tools and expert support, ensuring accurate deduction, filing, and compliance. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? TaxBuddy provides both self-filing and expert-assisted plans to cater to different taxpayer needs. The self-filing plan is ideal for individuals with straightforward salary income who want a quick, automated solution. The platform’s AI auto-fills data from Form 16, PAN, and AIS, ensuring accuracy. For complex cases involving capital gains, foreign income, or business income, the expert-assisted plan connects users with qualified tax professionals who handle the process end-to-end. This dual option allows taxpayers to choose convenience or expert guidance based on their filing complexity and comfort level.
Q2. Which is the best site to file ITR? The official Income Tax Department e-filing portal is the government-approved platform for filing returns. However, many taxpayers prefer platforms like TaxBuddy for their simplified filing experience. TaxBuddy integrates AI-powered automation, guided data verification, and professional review to ensure error-free filing. It reduces manual effort, eliminates calculation mistakes, and provides ongoing support, including post-filing assistance and notice management. This makes TaxBuddy one of the most trusted and user-friendly alternatives to the official portal.
Q3. Where to file an income tax return? An income tax return can be filed online through the official government portal (incometax.gov.in) or through authorized third-party platforms like TaxBuddy. Filing through TaxBuddy ensures a faster and more seamless process since it automatically pulls data from PAN, Form 16, and AIS. The platform also offers step-by-step guidance for deductions, regime selection, and accurate tax computation, making the filing process more intuitive for both salaried and self-employed individuals.
Q4. Who is liable to deduct TDS under Section 195? Under Section 195, any person making a payment to a non-resident is required to deduct TDS if the income is chargeable to tax in India. This includes individuals, firms, companies, or even non-residents making payments to other non-residents. The responsibility to deduct tax arises at the time of credit or payment, whichever is earlier. This ensures that tax is collected before funds leave India. The payer becomes legally responsible for compliance, deposit, and reporting of the TDS deducted.
Q5. What types of payments come under Section 195? Section 195 applies to a wide range of payments made to non-residents that are taxable in India. These include:
Interest on loans, bonds, or deposits
Royalties for the use of patents, trademarks, or intellectual property
Fees for technical, consultancy, or professional services
Rent for property or equipment located in India
Dividends distributed by Indian companies
Capital gains arising from the transfer of Indian securities or immovable property The provision ensures that all income earned by non-residents from Indian sources is taxed at the point of payment.
Q6. Is there any threshold limit for TDS under Section 195? No, Section 195 does not prescribe a minimum threshold limit for tax deduction. Even if the payment amount is small, TDS must be deducted if the income is taxable under Indian law. This distinguishes Section 195 from other TDS provisions like Section 194C or 194J, which specify monetary limits. The absence of a threshold ensures that all cross-border taxable payments are brought under tax net, preventing revenue leakage.
Q7. Can DTAA rates override Indian TDS rates? Yes. When a Double Taxation Avoidance Agreement (DTAA) exists between India and the recipient’s country of residence, the taxpayer can choose the more beneficial tax rate. If the DTAA provides a lower TDS rate than the one under the Indian Income Tax Act, the lower rate prevails. To avail these benefits, the non-resident must furnish a valid Tax Residency Certificate (TRC), Form 10F, and proof of beneficial ownership. This mechanism prevents double taxation and encourages cross-border investment by ensuring fair tax treatment.
Q8. What is the procedure for depositing TDS deducted under Section 195? After deducting TDS, the payer must deposit it with the Central Government using Challan ITNS 281 within the prescribed due dates. The payment can be made online through the NSDL or income tax e-payment portal. Once deposited, the deductor must file quarterly TDS returns in Form 27Q, detailing the payment and tax deducted for each non-resident recipient. The deductor is also required to issue Form 16A (TDS certificate) to the payee, which the non-resident can use while filing their Indian tax return to claim credit or refund.
Q9. What happens if TDS is not deducted or deposited? Failure to deduct or deposit TDS under Section 195 attracts severe consequences. The payer is treated as an assessee-in-default under Section 201 and becomes liable to pay the tax not deducted along with interest under Section 201(1A). Additionally, expenses related to such payments are disallowed under Section 40(a)(i), increasing the taxable income. Penalties under Section 271C may also apply, and in extreme cases, prosecution can be initiated. Timely deduction and deposit of TDS are therefore crucial for maintaining compliance.
Q10. Can a lower or nil deduction certificate be obtained? Yes. A payer or payee can apply to the Assessing Officer for a lower or nil TDS deduction certificate under Section 197. This is especially useful when the recipient’s actual tax liability is expected to be lower than the standard TDS rate. Upon review, the Assessing Officer may issue a certificate specifying the applicable reduced rate. Once issued, the payer can deduct tax accordingly, avoiding overpayment and reducing the need for refund claims later.
Q11. How does DTAA help in avoiding double taxation? A Double Taxation Avoidance Agreement (DTAA) ensures that income earned by non-residents is not taxed twice—once in the source country (India) and again in the country of residence. The agreement outlines which country has the right to tax specific types of income such as dividends, interest, or royalties. It may also allow tax credits for taxes paid in India when filing in the home country. This mechanism promotes cross-border trade and investment by providing certainty, fairness, and relief from double taxation.
Q12. How does TaxBuddy assist in Section 195 compliance? TaxBuddy simplifies TDS compliance under Section 195 through an AI-driven interface that automatically identifies applicable rates, validates DTAA provisions, and assists in return filing. It provides a step-by-step workflow for deducting, depositing, and reporting TDS while ensuring error-free calculations. For businesses handling frequent foreign remittances, TaxBuddy’s expert-assisted service ensures proper documentation, TRC verification, and form filing, reducing compliance risk. The platform offers continuous support, ensuring users remain compliant and avoid penalties during audits or scrutiny.
