Tax Deducted at Source (TDS) is a mechanism where tax is collected at the point of certain payments and deposited with the government on the recipient's behalf. Section 195 of the Income-tax Act governs TDS on payments to non-residents.
This guide sets out the TDS rate under Section 195, the threshold that triggers deduction, who must deduct, and the deposit and return-filing compliance that follows.
What is Section 195?
Section 195 covers TDS on any sum (other than salary) paid to a non-resident that is taxable in India.
Rate, threshold and who deducts
| Nature of payment | Payments to non-residents |
|---|---|
| TDS rate | Rates as per the Income-tax Act or the applicable Double Taxation Avoidance Agreement (DTAA), whichever is beneficial |
| Threshold | No basic threshold — applies to taxable payments |
| Who deducts (deductor) | Any person making the payment |
| Whose income (deductee) | Non-resident |
| Time of deduction | At credit or payment, whichever is earlier |
Key points
- Form 15CA/15CB compliance is usually required for foreign remittances.
Compliance for the deductor
- Deduct at the right time. Deduct TDS on payments to non-residents at credit or payment, whichever is earlier.
- Deposit to the government. Pay the deducted tax by the 7th of the following month (special dates apply for March and for Form 26QB).
- File the TDS return. Report the deduction in the quarterly TDS return (Form 24Q/26Q/27Q as applicable) on the TRACES/e-filing system.
- Issue the TDS certificate. Give the deductee Form 16/16A so they can claim credit in their return.
How the deductee claims credit
TDS deducted under Section 195 appears in the deductee's Form 26AS and Annual Information Statement (AIS). It is adjusted against the final tax liability when the deductee files their income tax return, and any excess is refunded.
Frequently asked questions
Do I deduct TDS on payments abroad?
If the payment is taxable in India, Section 195 applies. A tax residency certificate can help apply beneficial DTAA rates.
What happens if TDS is not deducted?
The payer can face disallowance of the expense, interest at 1%–1.5% per month, and penalties. It is important to deduct and deposit on time.
By when must TDS be deposited?
Generally by the 7th of the month following deduction (30 April for amounts deducted in March), with separate rules for property-related challans.