Section 195 of the Income Tax Act: TDS on NRI Income

• Section 195 applies to any payment (except salaries) made to NRIs that are taxable in India. This includes interest, dividends, rental income, capital gains, and professional fees.
• Any resident or non-resident making payments to an NRI is responsible for deducting TDS.
• These rates vary depending on the type of income and the Double Taxation Avoidance Agreement (DTAA) benefits.
• The payer must obtain a Tax Deduction and Collection Account Number (TAN) before deducting TDS (tax deducted at source).
• These forms are required for remitting payments to NRIs. Form 15CA is a declaration by the remitter, while Form 15CB is a certificate issued by a Chartered Accountant.
• Some income sources, such as specific interest earnings, may be exempt from TDS.
• Failure to deduct or deposit TDS can lead to penalties, disallowance of expenses, and interest charges.

Tax deducted at source (TDS) under Section 195 of the Income Tax Act, 1961, plays a crucial role in taxing income earned by non-resident Indians (NRIs) in India. This provision ensures tax collection at the source of income to prevent tax evasion. Understanding its implications, applicability, and compliance is essential for NRIs and entities making payments to them.

Section 195 is designed to ensure that tax on income earned by NRIs is deducted at the source before the funds are transferred abroad. This applies to various types of payments, including professional fees, rent, interest, and royalties. The provision is important because it helps the Indian government collect taxes efficiently.The TDS deduction applies to income that is taxable in India. If the income is not taxable, no TDS is required. However, the payer must ensure they obtain a Tax Residency Certificate (TRC) from the NRI to confirm eligibility for lower tax rates under DTAA . Applicability of Section 195:

• Section 195 applies when any person or entity makes a payment to an NRI.
• The income must be liable to tax in India under the Income Tax Act .
• Payments can be for services, property rental, interest, capital gains, or consultancy fees.
• It does not apply to salary payments, as they fall under Section 192.
• Foreign companies operating in India may also be liable to deduct TDS under this section.

The TDS rates vary based on the nature of the income and whether a DTAA is applicable. Here are some common TDS rates:

Note : DTAA provisions may lower these rates depending on the country of residence of the NRI.

When an NRI sells a property in India, the buyer must deduct TDS under Section 195 before making the payment. The applicable TDS rates depend on whether the property is held as a long-term or short-term asset. Long-term Capital Gains (LTCG) If the property is held for more than 2 years, TDS is 20% (plus applicable surcharge and cess).Short-term Capital Gains (STCG)
If the property is held for less than 2 years, TDS is deducted at 30% (as per the slab rate). DTAA Relief If the NRI’s country has a Double Taxation Avoidance Agreement (DTAA) with India, they can benefit from lower tax rates. Lower TDS Certificate NRIs can apply for a Lower TDS Certificate (Form 13) with the income tax department to reduce TDS liability. Filing ITR for Refund If excess TDS is deducted, NRIs can file an income tax return and claim a refund.To ensure compliance, buyers must deduct TDS, deposit it with the government, and file Form 26QB.

Interest earned by NRIs from various sources in India is subject to TDS under Section 195 . The TDS rates depend on the type of interest income:TDS at 30% Interest on NRO Accountis deducted on interest earned in an NRO (Non-Resident Ordinary) account . Interest on NRE & FCNR Accounts Interest earned on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is tax-free and exempt from TDS. Interest on Fixed Deposits (FDs) TDS is deducted at 30% on interest from fixed deposits held in Indian banks under an NRO account . NRIs can claim DTAA benefits by submitting a Tax Residency Certificate (TRC) and Form 10F to banks to get a lower TDS rate.

NRIs may sometimes pay higher TDS than their actual tax liability . In such cases, they can claim a refund by filing an Income Tax Return (ITR) . The process includes:

• Determine Taxable Income Calculate the total income earned in India and the applicable tax liability.
• Check Excess TDS Deducted Verify the TDS deducted by accessing Form 26AS on the Income Tax Portal.
• File ITR Submit the Income Tax Return (ITR-2 or ITR-3) on the e-filing portal before the due date (usually 31st July ).
• Provide Bank Details Ensure the correct NRO bank account is mentioned for the refund.
• Claim DTAA Benefits (if applicable) NRIs must submit the Tax Residency Certificate (TRC) and relevant documents while filing.

The refund is processed by the Income Tax Department, and the amount is directly credited to the NRI’s Indian bank account. Procedure for TDS Deduction & Payment

• Form 15CA: A self-declaration of TDS deduction before remittance.
• Form 15CB: A Chartered Accountant certificate confirming tax deduction details.

• Obtain a TAN: The payer must apply for a TAN from the Income Tax Department.
• Determine the TDS Rate: Identify the applicable rate based on the income type and DTAA.
• Deduct TDS: Ensure the deduction is made before transferring funds to the NRI.
• Deposit TDS with the Government: Pay the deducted tax using Challan ITNS 281 within the specified deadline.
• File Form 15CA & 15CB:
• File Quarterly TDS Returns: Submit Form 27Q to report TDS deductions for NRIs.

Consequences of Non-compliance Failure to comply with Section 195 can lead to penalties and interest charges:

• Interest: 1% per month for non-deduction, 1.5% per month for non-deposit.
• Penalty: Equal to the TDS amount not deducted or paid.
• Disallowance of Expenses: If TDS is not deducted, the related expense cannot be claimed as a deduction in the business accounts.

Exemptions & Relief Under DTAA NRIs can benefit from Double Taxation Avoidance Agreements (DTAA) signed between India and various countries. Under DTAA, an NRI may pay a lower TDS rate if they meet the eligibility criteria. To claim DTAA benefits, the NRI must submit:

• Tax Residency Certificate (TRC) issued by the tax authority of their country.
• Form 10F, stating their residency details.
• Self-declaration of beneficial ownership of income.

NRIs can reduce their TDS burden through: