What Is Section 207 of the Income-tax Act, 2025?
Section 207 of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) fixes India's default, non-treaty tax rate on specified passive income a non-resident individual or foreign company earns from an Indian source. Headed "Tax on dividends, royalty and fees for technical service in case of foreign companies," it sits in Part E of the Act, "Special provisions relating to non-residents and foreign companies," and sets out two separate rate Tables: section 207(1) taxes dividend and specified foreign-currency interest, and section 207(2) — a distinct Table with its own conditions — taxes royalty and fees for technical services (FTS) received from Government or an Indian concern. Both Tables apply a flat rate to the gross amount of that income, in place of the ordinary slab or corporate computation.
These are the rates that apply unless a Double Taxation Avoidance Agreement (DTAA) fixes a lower rate and the non-resident can substantiate eligibility for it — typically with a Tax Residency Certificate and Form 41.
The Two Rate Tables
The two Tables in section 207 must not be conflated: they cover different income, carry different conditions, and are cited separately in every reference to the section.
Section 207(1) — Dividend and Interest
Under section 207(1) (Table, Sl. Nos. 1–3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), a non-resident's or foreign company's total income that includes the following is taxed as follows:
- 20% — dividend, other than the IFSC dividend below (Sl. No. 1)
- 10% — dividend received from a unit in an International Financial Services Centre (IFSC) (Sl. No. 2)
- 20% — interest received from Government or an Indian concern on moneys borrowed, or debt incurred, in foreign currency, other than the interest at Sl. Nos. 4 and 5 (Sl. No. 3)
- 5% — interest received from an infrastructure debt fund referred to in Schedule VII (Table, Sl. No. 46) (Sl. No. 4)
- the rate fixed in section 393(2) (Table, Sl. Nos. 2, 3 and 4) of the Income-tax Act, 2025 — 5% on interest under a Central-Government-approved loan agreement or long-term infrastructure bond, and on rupee-denominated bonds issued before 1 July 2023; and, for a long-term or rupee-denominated bond listed only on a recognised stock exchange in an IFSC, 4% where the bond was issued on or after 1 April 2020 but before 1 July 2023, or 9% where it was issued on or after 1 July 2023 (Sl. No. 5)
- the rate fixed in section 393(2) (Table, Sl. No. 6) — 5% or 10%, depending on the Schedule V sub-item, for business-trust distributed income of an interest nature paid to a non-resident unit holder (Sl. No. 6)
- 20% — income from units purchased in foreign currency, of a Mutual Fund specified in Schedule VII (Table, Sl. No. 20 or 21) or of the Unit Trust of India (Sl. No. 7)
- the balance of total income, after removing Sl. Nos. 1–7, is taxed at the rates in force — the ordinary slab rates for an individual, or the ordinary corporate rate for a foreign company (Sl. No. 8)
Section 207(2) — Royalty and Fees for Technical Services
Section 207(2) (Table, Sl. Nos. 1 and 2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) is a separate Table with its own qualifying conditions. It applies only where the non-resident's or foreign company's total income includes royalty or FTS that is:
- received from Government or an Indian concern;
- paid under an agreement made after 31 March 1976; and
- either the agreement is approved by the Central Government (where it is with an Indian concern), or the agreement conforms to the Government of India's industrial policy then in force — section 207(2)(a) and (b).
Where all three conditions are met, the rate is a flat 20% on both royalty (Sl. No. 1) and FTS (Sl. No. 2), with residual income taxed at rates in force (Sl. No. 3). Section 207(3) preserves the same 20% rate — without the Central Government approval or industrial-policy conditions in 207(2)(a)/(b) — for royalty paid to transfer or license copyright in a book to an Indian concern, or computer software to a person resident in India. "Royalty" and "fees for technical services" carry the meaning assigned in section 9 of the Income-tax Act, 2025 — royalty at section 9(6), FTS at section 9(7) (section 9(1)(vi) and 9(1)(vii) respectively of the Income-tax Act, 1961).
Section 207(2) expressly excludes royalty or FTS covered by section 59(1) of the Income-tax Act, 2025 (section 44DA of the Income-tax Act, 1961) — royalty or FTS effectively connected with a permanent establishment the non-resident carries on business through in India. That income is instead computed as ordinary business income under section 59, not at the flat 20%.
No Deductions Against Section 207 Income
Section 207(5) blocks any deduction for expenditure or allowance under sections 28 to 58, 60, 61 and 93 when computing income covered by section 207(1) and (2) — the rate is charged on the gross amount, with no expense offset. Section 207(6) goes further: if a non-resident's or foreign company's gross total income consists only of section 207(1) (Sl. Nos. 1–7) income, no deduction is available under Chapter VIII (the general deductions chapter) or Schedule XV; where the gross total income also includes other income, the section 207(1) income is stripped out first and the Chapter VIII deduction is computed only on what remains. Section 207(7) carves out one exception: a deduction available to a unit in an IFSC under section 147 is unaffected.
When a Return Is Not Required
Section 207(8) exempts a non-resident or foreign company from filing a return of income under section 263(1) of the Income-tax Act, 2025 if two conditions both hold: the tax year's total income consists only of section 207(1) (Sl. Nos. 1–7) and section 207(2) (Sl. Nos. 1 and 2) income, and tax has already been deducted at source at a rate not less than the section 207 rate. In practice this is a filing relief for a non-resident whose only Indian income is dividend, interest, royalty or FTS taxed under section 207 and fully withheld at source — it does not reduce the tax itself.
Why It Matters for a Foreign Company or Investor
Section 207 is the default position a foreign investor falls back to whenever no DTAA applies, or DTAA eligibility cannot be documented at the time of payment. Three practical points follow:
- The IFSC dividend rate (10%) is half the general rate (20%). Routing an investment through a GIFT City IFSC unit can matter even before a treaty is considered.
- Section 207 rates are a ceiling a DTAA can undercut, never a floor. A dividend or interest recipient who can show a lower treaty rate — supported by a Tax Residency Certificate and Form 41 — is withheld at the treaty rate under section 393(2), not the section 207 rate.
- The 20% royalty/FTS rate under section 207(2) only reaches the approved-agreement category. Ordinary commercial royalty or technical-service fees paid to a non-resident, and any royalty or FTS tied to an Indian PE, fall outside section 207(2) and are taxed under different provisions instead.
Worked Example
A UK-resident individual holds shares directly in an Indian company (no Indian PE, no Indian business) and receives a dividend of ₹10 lakh, plus interest of ₹5 lakh on a foreign-currency loan made directly to an Indian company (outside the Sl. Nos. 4–6 concessional categories). Absent a DTAA claim, section 207(1) taxes the dividend at 20% (₹2 lakh) and the interest at 20% (₹1 lakh) — on the gross amount, with no expense deduction available under section 207(5). If the same individual instead establishes India-UK DTAA eligibility with a Tax Residency Certificate and Form 41, the dividend and interest articles of that treaty — not section 207 — set the withholding rate actually applied.
Frequently Asked Questions
Does section 207 apply if a DTAA covers the non-resident's country?
Section 207 fixes the domestic-law rate. Where a DTAA is in force and the non-resident documents eligibility — usually with a Tax Residency Certificate and Form 41 — the more beneficial treaty rate applies instead. Section 207 remains the rate that applies when no treaty exists, or when treaty benefits cannot be substantiated at the time of payment.
What is the difference between section 207(1) and section 207(2)?
Section 207(1) is a Table covering dividend and specified foreign-currency interest, taxed mostly at 20% (10% for IFSC-unit dividends). Section 207(2) is a separate Table covering only royalty and fees for technical services received from Government or an Indian concern under an approved post-1976 agreement, also at 20%. The two Tables carry different conditions and must be cited separately.
Can a foreign company deduct expenses against section 207 income?
No. Section 207(5) bars any deduction for expenditure or allowance under sections 28 to 58, 60, 61 and 93 in computing income covered by section 207(1) or (2). The rate is charged on the gross amount received, and section 207(6) further blocks general Chapter VIII deductions against that income unless the gross total income includes other, non-section-207 income.
Does royalty paid to a non-resident with an Indian branch fall under section 207(2)?
Not if the royalty or fee for technical services is effectively connected with a permanent establishment through which the non-resident carries on business in India. Section 207(2) expressly excludes income covered by section 59(1) of the Income-tax Act, 2025 (section 44DA of the 1961 Act); that PE-connected income is instead computed as ordinary business income under section 59.
Does a non-resident taxed only under section 207 still have to file an Indian tax return?
No, if two conditions are both satisfied under section 207(8): the tax year's total income consists only of section 207(1) and section 207(2) income, and tax was already deducted at source at not less than the section 207 rate. This is a filing exemption, not a lower tax rate — withholding must still equal or exceed the section 207 rate.
See also: Withholding Tax, Section 393(2) — TDS on Payments to Non-Residents, and Double Taxation Avoidance Agreement (DTAA).
Structuring a cross-border payment and unsure whether section 207 or a DTAA rate applies? Beacon Filing helps foreign investors document treaty eligibility and get withholding rates right.