Section 195 (TDS on Payments to Non-Residents)

By Sneha Iyer | Updated March 2026

What Is Section 195?

Section 195 of the Income Tax Act, 1961 is the principal withholding tax provision governing payments from India to non-residents. It requires any person making a payment to a non-resident (not being salary, which is covered by Section 192) to deduct tax at source if that payment is chargeable to tax in India. The deduction must be made at the time of credit to the non-resident's account or at the time of payment, whichever is earlier.

For foreign companies operating in India through subsidiaries, branch offices, or liaison offices, Section 195 is the single most frequently encountered tax provision. Every royalty payment, technology licence fee, interest on intercompany loans, management service charge, or capital gains distribution flowing out of India triggers a Section 195 obligation. Getting this wrong does not just cost the non-resident recipient extra tax — it costs the Indian payer a 100% disallowance of the expense under Section 40(a)(i), effectively doubling the economic impact.

There is no threshold limit for Section 195. Unlike TDS provisions for residents (such as Section 194A, which exempts interest below INR 50,000), Section 195 applies to every rupee of a taxable payment to a non-resident, regardless of the amount.

Legal Basis

• Section 195(1) of the Income Tax Act, 1961 — Core provision requiring any person responsible for paying a non-resident any sum chargeable to tax to deduct income tax at the rates in force.
• Section 195(2) — Allows the payer to apply to the Assessing Officer (AO) for a determination of the portion of the payment that is chargeable to tax (useful for composite payments mixing taxable and non-taxable components).
• Section 195(3) — Permits the CBDT to notify classes of persons or payments eligible for nil withholding certificates.
• Section 197 — Authorises the non-resident (or payer) to apply for a lower or nil withholding certificate if actual tax liability is expected to be less than the standard TDS rate.
• Section 206AA — Mandates a higher TDS rate of 20% (or the applicable rate, whichever is higher) where the non-resident does not furnish a PAN. However, non-residents are exempt from Section 206AA for interest, royalty, FTS, and capital gains if they provide prescribed details (name, email, address, TRC) per CBDT notification.
• Section 40(a)(i) — Disallows 100% of the expenditure if TDS under Section 195 is not deducted or not deposited by the due date of filing the payer's income tax return.
• Rule 37BB — Prescribes Form 15CA/15CB compliance for foreign remittances, amended by Notification No. 93/2015 dated December 16, 2015.

TDS Rates Under Section 195 (FY 2025–26)

TDS rates depend on the nature of the income and whether the recipient is a non-resident individual or a foreign company. The rates below are as prescribed under the Income Tax Act (domestic law). Where a DTAA applies, the treaty rate may be lower.

All rates above are exclusive of applicable surcharge and health & education cess (4%). Surcharge rates are: 10% (income INR 50 lakh–INR 1 crore), 15% (INR 1 crore–INR 2 crore), 25% (INR 2 crore–INR 5 crore), and 37% (above INR 5 crore) for non-resident individuals. For foreign companies, surcharge is 2% (income INR 1 crore–INR 10 crore) or 5% (above INR 10 crore). Note that surcharge and cess do not apply when using DTAA treaty rates.

DTAA Treaty Rates vs. Domestic Rates

Section 90(2) of the Income Tax Act provides that a non-resident can apply whichever rate is more beneficial — the domestic rate or the DTAA treaty rate. This is a critical advantage. Many treaties significantly reduce withholding rates on royalty, FTS, and interest payments.

To claim treaty rates, the non-resident must provide a valid Tax Residency Certificate (TRC) from their home country, a completed Form 10F, and a declaration of beneficial ownership. Without these documents, the payer must apply the higher domestic rate. Some treaties also contain Limitation of Benefits (LOB) clauses requiring the non-resident to demonstrate substance in the treaty jurisdiction.

Form 15CA/15CB Compliance

Every foreign remittance subject to TDS under Section 195 requires the payer to furnish information to the income tax department through Form 15CA, filed electronically on the income tax e-filing portal. Depending on the transaction, an accompanying chartered accountant's certificate in Form 15CB may be required.

Which Part of Form 15CA Applies?

• Part A: Remittance (or aggregate remittances) does not exceed INR 5 lakh during the financial year — no Form 15CB required.
• Part B: Remittance exceeds INR 5 lakh and the payer holds an order or certificate under Section 195(2), 195(3), or 197 — no Form 15CB required.
• Part C: Remittance exceeds INR 5 lakh and no order/certificate exists — Form 15CB from a chartered accountant is mandatory before filing Part C of Form 15CA.
• Part D: Remittance is not chargeable to tax (e.g., listed in the 33 specified exempted categories under Rule 37BB) — no Form 15CB required.

The authorised dealer bank will not process the foreign remittance without a valid Form 15CA. Failure to file Form 15CA/15CB attracts a penalty of INR 1 lakh under Section 271I of the Income Tax Act.

Exempted Payments (No Form 15CA/15CB Required)

Rule 37BB lists 33 categories of payments exempted from Form 15CA/15CB filing. These include imports of goods (with customs bill of entry), personal remittances under the Liberalised Remittance Scheme (LRS) up to USD 250,000, travel expenses, medical expenses, education expenses, and gifts to close relatives. However, all payments for services (royalty, FTS, interest, management fees) require Form 15CA filing.

Lower or Nil Withholding Certificate (Section 197)

If the non-resident's actual tax liability on the income is lower than the TDS otherwise deductible, the non-resident (or the payer) can apply to the Assessing Officer for a certificate under Section 197 authorising deduction at a lower or nil rate. The application must be filed in Form 13 on the income tax e-filing portal (TRACES).

Common scenarios where a Section 197 certificate is beneficial:

• The non-resident has losses or deductions that reduce taxable income below the TDS amount
• The payment includes both taxable and non-taxable components, and TDS on the full amount would be excessive
• The non-resident has already paid advance tax covering the liability
• A treaty rate lower than the domestic rate applies, but the payer is uncertain about applying it without AO confirmation

Processing typically takes 30 days. The certificate is valid for the financial year specified and for the particular payer named in it. The payer can alternatively use Section 195(2) to ask the AO to determine the taxable portion of a composite payment.

Interaction with Equalization Levy

The Equalization Levy (EL) was introduced as an alternative mechanism to tax digital transactions involving non-residents. Originally, a 6% EL applied to payments for online advertising services to non-residents (Finance Act, 2016), and a 2% EL applied to e-commerce operators (expanded from April 1, 2020).

The critical interaction: under Section 10(50) of the Income Tax Act, income that is subject to Equalization Levy is exempt from income tax. This means Section 195 TDS does not apply to payments covered by EL. However, if the payment qualifies as royalty or FTS and is taxable under the Income Tax Act read with an applicable DTAA, the Equalization Levy does not apply — instead, TDS under Section 195 applies.

As of FY 2025–26, the 2% Equalization Levy on e-commerce was discontinued effective August 1, 2024. The 6% levy on online advertising services has been abolished from April 1, 2025 (Finance Act, 2025). Going forward, digital payments to non-residents that were previously subject to EL may now fall back under regular Section 195 withholding if they constitute royalty or FTS under the Act or applicable treaty.

Penalties for Non-Deduction or Short Deduction

The consequences of failing to deduct TDS under Section 195 are severe and multi-layered:

The Section 40(a)(i) disallowance is the most devastating consequence for businesses. If an Indian subsidiary pays INR 2 crore in management fees to its foreign parent and fails to deduct TDS, the entire INR 2 crore is disallowed as a deduction, increasing the subsidiary's taxable income by INR 2 crore and creating a corporate tax liability of approximately INR 50 lakh (at the 25.17% effective rate) — on top of the TDS shortfall itself.

How This Affects Foreign Investors in India

For a foreign company with an Indian subsidiary or presence, Section 195 governs the tax cost on virtually every payment flowing out of India:

• Technology licence fees and royalties: Payments from an Indian subsidiary to its foreign parent for software licences, brand usage, or technology access are subject to TDS. The domestic rate is 20% (plus surcharge and cess), but most DTAAs reduce this to 10–15%.
• Intercompany loan interest: Interest on loans from a foreign parent to an Indian subsidiary attracts 20% TDS under domestic law. Treaty rates (typically 10–15%) apply if properly documented. The interest rate itself must meet transfer pricing requirements.
• Management and shared service fees: If categorised as FTS, these attract 20% TDS. Many foreign companies structure these as cost reimbursements to argue non-taxability — but the tax department frequently challenges such characterisation.
• Exit proceeds: When a foreign investor sells shares in an Indian company, the buyer must deduct TDS on the capital gains portion. For long-term capital gains on unlisted shares, the rate is 12.5% (post-July 2024 budget amendment).
• Dividend repatriation: Dividends paid by an Indian company to foreign shareholders attract 20% TDS under domestic law. Treaty rates are typically 10–15%.

A common frustration for foreign investors: the TDS is deducted on the gross payment, not the net income. A non-resident earning INR 10 lakh in royalty but incurring INR 3 lakh in costs still faces TDS on the full INR 10 lakh. The non-resident must then file an Indian income tax return to claim a refund of any excess TDS — a process that can take 12–24 months.

Common Mistakes

• Applying the DTAA rate without collecting a valid Tax Residency Certificate first. The payer deducts TDS at the treaty rate (say 10% on royalty under the India-Singapore DTAA), but the Singaporean company never provides a TRC. The AO treats it as short deduction, raises a demand for the difference (20% minus 10%), plus interest at 1% per month under Section 201(1A). Always collect the TRC, Form 10F, and beneficial ownership declaration before making the payment.
• Treating all payments to non-residents as requiring TDS. Section 195 only applies to sums "chargeable under the provisions of this Act." Payments for import of goods, reimbursement of out-of-pocket expenses at cost (with no income element), and payments exempt under Section 10 do not attract TDS. Wrongly deducting TDS on imports ties up the non-resident's funds unnecessarily.
• Ignoring the gross-up obligation when TDS is borne by the payer. Many contracts state the foreign party receives payments "net of taxes" or "tax-free." This means the Indian payer bears the TDS. The payer must gross up the payment to compute the correct TDS amount. For example, if the net payment is INR 80 lakh and TDS is 20%, the gross amount is INR 1 crore (not INR 80 lakh), and TDS is INR 20 lakh (not INR 16 lakh).
• Filing Form 15CA Part A for aggregate remittances exceeding INR 5 lakh. Part A is only valid when the total remittances to the non-resident during the financial year are below INR 5 lakh. Once cumulative payments cross INR 5 lakh, the payer must obtain a Form 15CB certificate from a chartered accountant and file Part C. Incorrect Part A filings trigger penalties under Section 271I.
• Not applying for a lower withholding certificate when the non-resident has offsetting losses. A foreign company with an Indian permanent establishment that has carried-forward losses may owe zero tax on royalty income. Without a Section 197 certificate, TDS is still deducted at 20%, locking up cash for 12–24 months until a refund is processed.

Practical Example

Meridian Analytics GmbH, a German data analytics firm, licenses its proprietary software platform to its Indian subsidiary, Meridian India Pvt Ltd, under a technology licence agreement. The annual licence fee is EUR 150,000 (approximately INR 1.38 crore at EUR 1 = INR 92).

Step 1: Determine the nature of the payment. The licence fee is classified as royalty under Section 9(1)(vi) of the Income Tax Act (payment for use of copyright in software). It is also royalty under Article 12 of the India-Germany DTAA.

Step 2: Determine the applicable rate.

• Domestic rate: 20% plus surcharge (2% for foreign company income above INR 1 crore) plus 4% cess = 20.8% effective. On INR 1.38 crore, TDS = INR 28.70 lakh.
• DTAA rate (India-Germany): 10% on royalty. No surcharge or cess on treaty rates. On INR 1.38 crore, TDS = INR 13.80 lakh.
• Beneficial rate: DTAA rate of 10% (saving INR 14.90 lakh compared to domestic law).

Step 3: Collect documentation. Meridian India collects from GmbH: (a) Tax Residency Certificate issued by the German tax authority (Finanzamt), (b) Form 10F (self-declaration of treaty eligibility), (c) Beneficial ownership declaration, and (d) No PE declaration.

Step 4: Deduct and deposit TDS. Meridian India deducts INR 13.80 lakh, deposits it with the government using Challan 281 by the 7th of the following month, and issues a Form 16A (TDS certificate) to GmbH.

Step 5: File Form 15CA/15CB. Since the remittance exceeds INR 5 lakh, Meridian India obtains a Form 15CB certificate from its chartered accountant, then files Part C of Form 15CA on the income tax e-filing portal. The authorised dealer bank processes the remittance of EUR 150,000 minus the TDS equivalent.

Step 6: German side. GmbH claims credit for the INR 13.80 lakh (approximately EUR 15,000) Indian tax against its German corporate tax liability under Article 23 of the India-Germany DTAA (double taxation relief). No double taxation arises.

If Meridian India had failed to deduct TDS: The entire INR 1.38 crore licence fee would be disallowed under Section 40(a)(i), increasing Meridian India's taxable income by INR 1.38 crore and creating an additional corporate tax liability of approximately INR 34.72 lakh. Plus, Meridian India would become an assessee-in-default liable for INR 13.80 lakh TDS, interest at 1% per month, and a penalty of INR 13.80 lakh under Section 271C. Total exposure: over INR 62 lakh.

Key Takeaways

• Section 195 applies to every payment to a non-resident that is chargeable to tax in India — with no minimum threshold. The payer bears the primary compliance burden.
• Domestic TDS rates range from 5% to 40% depending on the nature of income, but DTAA treaty rates (typically 10–15%) apply where proper documentation (TRC, Form 10F, beneficial ownership declaration) is collected beforehand.
• Form 15CA must be filed electronically for every foreign remittance, and Form 15CB (CA certificate) is mandatory when aggregate remittances exceed INR 5 lakh and no AO certificate exists.
• Failure to deduct TDS results in a triple penalty: the TDS amount becomes payable with 1%–1.5% monthly interest, the entire expense is disallowed under Section 40(a)(i), and penalties under Sections 271C and 271I apply.
• A lower or nil withholding certificate under Section 197 (filed via Form 13) can reduce the cash flow burden when the non-resident's actual tax liability is lower than the default TDS rate.
• The abolition of the Equalization Levy from April 2025 means certain digital payments may now fall back under Section 195 withholding if they constitute royalty or FTS.

Managing withholding tax on cross-border payments from India? Beacon Filing provides end-to-end Section 195 compliance, DTAA rate application, Form 15CA/15CB filing, and lower withholding certificate assistance.