Section 195 of Income Tax Act (Guide)
If you are going to pay any non-resident/NRI you must first deduct tax at source chargeable on the amount under section 195 of Income Tax Act. There’s a lot more to this act, let’s get into it!
So, What is Section 195 of Income Tax?
Accordion to section 195 of IT Act, any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any sum chargeable (not a part of the head “salaries” or “dividends” section) under the provision of this Act must be, at the time of credit through any modes of payment, is liable to deduct tax thereon at the rates as the following conditions:
In case of interest payable by the government or a public sector bank or any public financial institution, a tax must be deducted at the time of payment.
However, no such deductions shall be made for any dividends received, as per section 115-O.
Any person paying such a chargeable amount under this Act, other than salary to any NRI, if he/she feels that not all the amount being paid is chargeable to tax. Then, he/she can put in an application in front of the Assessing Officer to determine the correct proportion of such amount chargeable. And, a tax shall be deducted only on that proportion of the sum, which is chargeable.
A person is entitled to receive any interest or amount on which income tax is chargeable. That person can ask the Assessing officer for the grant of a certificate to allow him to receive such interest or amount without any tax liability.
However, a certificate granted under this section will remain in effect till the expiry of the period specified on it, or if it is cancelled by the AO before the expiry date.
The rules and conditions in which such certificate is granted to the assessee is passed by the Board, in the convenience of both assessees and the interest of revenue.
Who is required to deduct TDS u/s 195?
Any person who has to pay to any non-resident, a foreign company, any amount which does not fall under the salary and dividends heads of income, is liable to deduct tax at source as chargeable according to section 195, before crediting it to the receiver’s account.
The person deducting the TDS can be
- A Resident or Non-Resident,
- An Individual,
- A HUF,
- Partnership Firms,
- Foreign companies,
- A public organisation.
What is the TDS rate for payment to non residents?
The TDS rate for the payments made to non-residents is subjected to tax:
As described under the Finance Act in that Financial Year an additional cess charge of 4% is also added.
As per the rates under the DTAA (Double Taxation Avoidance Agreement) between India and the country in which the Non-resident lives. No surcharge or cess is applicable on the tax deducted under DTAA.
The rates of Tax Deduction at Source for the Finance Act for the year 2022-2023 are:
| Rates for tax deduction at source Particulars [For Assessment year 2023-24] | TDS Rates (in %) |
| Section 195: Payment of any other sum to a Non-resident | |
| a) Income in respect of investment made by a Non-resident Indian Citizen | 20 |
| b) Income by way of long-term capital gains referred to in Section 115E in case of a Non-resident Indian Citizen | 10 |
| c) Income by way of long-term capital gains referred to in sub-clause (iii) of clause (c) of sub-Section (1) of Section 112 | 10 |
| d) Income by way of long-term capital gains as referred to in Section 112A | 10 |
| e) Income by way of short-term capital gains referred to in Section 111A | 15 |
| f) Any other income by way of long-term capital gains [not being long-term capital gains referred to in clauses 10(33), 10(36) and 112A | 20 |
| g) Income by way of interest payable by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency (not being income by way of interest referred to in Section 194LB or Section 194LC) | 20 |
| h) Income by way of royalty payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern where such royalty is in consideration for the transfer of all or any rights (including the granting of a licence) in respect of copyright in any book on a subject referred to in the first proviso to sub-section (1A) of Section 115A of the Income-tax Act, to the Indian concern, or in respect of any computer software referred to in the second proviso to sub-section (1A) of Section 115A of the Income-tax Act, to a person resident in India | 10 |
| i) Income by way of royalty [not being royalty of the nature referred to point h) above] payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy | 10 |
| j) Income by way of fees for technical services payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy | 10 |
| k) Any other income | 30 |
How buyer can deduct TDS u/s 195 if they are buying a property from NRI ie property sale by NRI?
The amount at which the TDS has to be deducted by the buyer from an NRI is decided by an Income Tax Officer and is deducted on the capital gains under section 195. The seller has to fill out Form 13 and send it to the IT Department for the computation of his capital gains.
The IT Department will calculate the capital gains and will issue a certificate of Nil or Lower TDS deductions, according to the value of the property for sale.
If there is no certificate then the TDS will be deducted on the total sale price of the property. Hence, it’s important to get the certificate from the IT Officer.
TDS Rates on Sale of Property by Non-Resident Indian
The TDS rates are applicable as per the short-term and long-term capital gains from the property up for sale.
Short-term capital gain:
If the property holds for less than 2 years, the TDS rates are applicable as per the income tax slab rates of the seller plus surcharge.
Long-term capital gains:
If the property is held for more than 2 years, the TDS rate applicable is 20% plus a surcharge.
The TDS must be paid within 7 days of any payment done to the seller from the buyer. For example, if any advance is paid or the total amount is paid in the form of small instalments. The TDS will be deducted on each of the transactions for the given amount.
How can I pay TDS online under section 195?
Steps to deduct TDS under section 195
- The buyer should get a Tax Deduction Account Number (TAN) under section 203 A of IT Act by applying form 49 B on the Protean website.
- The details of the transaction should be mentioned in the sale deed between the buyer and the NRI.
- The TDS has to be deposited in authorised banks through challan within 7 days of TDS deduction.
- Once the TDS is deposited, the buyer can file for a TDS return online through form 27 Q.
- Then, the buyer can issue the TDS certificate to the non-resident seller, within 15 days from the due date of the TDS return.
For more details on how to make TDS payment Online head to this article.
FAQS- Section 195 of Income Tax Act
1. Is Section 195 bailable or not?
Yes, the offense under section 195 of the Income Tax Act is bailable.
Any person if found giving wrong or incomplete or false proof of income with the intent to procure conviction is guilty and can be imprisoned for life or for 7 years and above.
2. Is surcharge applicable on TDS under Section 195?
Yes, a surcharge of 4% is applicable on TDS under section 195 if the tax collected is as per the Income Tax Act slab rates. However, no surcharge is applicable if the TDS is deducted under the DTAA.
Conclusion
Section 195 of the Income Tax Act provides details of tax deductions by a resident on the payment to a Non-Resident Indian. Any income other than the salary or dividends heads is covered under this section. The TDS rates are according to the finance act and the type of capital gains.
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