TDS on Non Residents U/s 195 under The Income Tax Act, 1961

Here we provide you with a brief on TDS on Non Residents U/S 195 of the Income Tax Act, 1961. TDS (Tax Deducted at Source) is considered to be the first level where tax is paid to the IT department. Section 195 covering the TDS for NRIs is one among the many significant ones.

Introduction

As per the Income Tax Act, 1961 Section 195, “Any person responsible for paying to a non resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head” Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force: Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode.”

Interest to be deducted at Source u/s 195 of income tax act
Interest to be deducted at Source u/s 195 of income tax act

To simplify the above, this Section was inserted in the IT Act, 1995 to avoid any revenue loss that may arise due to the tax liability in the hands of an NRI by deducting it from the payments at the source itself.

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Important terms and points:

  • A Non Resident is judged by his/her residential status i.e. the residential status of the one to whom we will be paying. This section does not apply to residents but not ordinarily residents.
  • The due date is decided to be the one that is earlier of date of crediting the party or date of actual payment
  • The rate of TDS is governed under the Double Taxation Avoidance Agreement wherein the rate would be as per the Act or DTAA.
  • The rate of exchanged is determined in accordance to the RBI’s exchange rate as on the date of TDS

Penal provisions for failing to Deduct TDS u/s 195

In case the payer fails to deduct the TDS then he/she might have to face consequences as below:

  • Penalties for failure to deduct TDS
  • Disallowances of the amounts paid U/s 40(a)(i)
  • Simple Interest @ 12% per annum on monthly basis

Please check the TDS Rate chart U/s 195 of the IT Act, 1995 here.