Understanding TDS Section 195 of the Income Tax Act
Understanding TDS Section 195 of the Income Tax Act Section 195 of the Income Tax Act, 1961, governs Tax Deducted at Source (TDS) on payments made to Non-Resident Indians (NRIs) or foreign entities. Understanding TDS Section 195 of the Income Tax Act This section ensures tax compliance by mandating TDS deductions on payments other than salaries. In this blog, we will break down the critical aspects of Section 195, including its scope, TDS rates, compliance requirements, and consequences of non-adherence.
What is Section 195 of the Income Tax Act?
Understanding TDS Section 195 of the Income Tax Act Section 195 focuses on TDS obligations for individuals or entities making payments to NRIs or foreign companies. Understanding TDS Section 195 of the Income Tax Act The primary objective is to prevent revenue loss by ensuring taxes are deducted at the source of payment.
Understanding TDS Section 195 of the Income Tax Act This section applies to various types of income, such as interest, royalties, technical services fees, and capital gains, but excludes salary payments. It places the onus of TDS deduction on the payer, who must ensure compliance and remit taxes to the government.
Who is Required to Deduct TDS Under Section 195?
Any person, whether resident or non-resident, paying a sum to an NRI or foreign company must deduct TDS under Section 195. The payer could be:
- Individuals
- Hindu Undivided Families (HUFs)
- Partnership firms
- Foreign companies
- Juristic entities
The recipient of the payment (NRI or foreign company) must have income chargeable to tax under the Income Tax Act.
Threshold Limit for TDS Deduction
Section 195 does not specify a minimum threshold for TDS deduction. Taxes must be deducted on all payments liable to tax under the Income Tax Act unless the income is explicitly exempt.
TDS Rates Under Section 195
Understanding TDS Section 195 of the Income Tax Act TDS rates under Section 195 depend on the type of income and are subject to the provisions of the Income Tax Act or applicable Double Taxation Avoidance Agreements (DTAA). Understanding TDS Section 195 of the Income Tax Act DTAAs allow NRIs to pay lower TDS rates, provided they furnish relevant documents, including Form 10F and a Tax Residency Certificate (TRC).
Below are common TDS rates under Section 195:
| Income Type | TDS Rate |
| Income from investments by NRIs | 20% |
| Long-term capital gains (Section 115E) | 10% |
| Long-term capital gains on listed shares (112A) | 10% |
| Short-term capital gains (111A) Other income from long term capital gain | 15% 20% |
| Interest on foreign currency loans | 20% |
| Royalties and technical service fees | 10% |
| Winnings from lotteries and games | 30% |
| Any other income | 30% |
If the payee does not have a PAN, TDS is deducted at 20% or the applicable rate, whichever is higher.
How to Deduct TDS Under Section 195
The process involves multiple steps:
- Obtain a TAN (Tax Deduction Account Number):
Apply for a TAN via Form 49B (online or offline). Ensure you have PAN details for both the payer and the recipient. - Deduct TDS:
TDS must be deducted at the time of payment. Ensure it is accurately calculated based on the applicable rates. - Deposit TDS:
TDS must be deposited with the government by the 7th of the following month using an authorized bank or online portal. - File TDS Returns:
Quarterly TDS returns must be filed electronically using Form 27Q by the following deadlines:- Q1 (Apr-Jun): File by July 15
- Q2 (Jul-Sep): File by October 15
- Q3 (Oct-Dec): File by January 15
- Q4 (Jan-Mar): File by May 15
- Issue Form 16A:
Provide the recipient with Form 16A (TDS Certificate) within 15 days of filing the TDS return.
https://www.incometax.gov.in/iec/foportal/
Consequences of Non-Compliance
Failure to comply with Section 195 can result in severe penalties, including:
- Disallowance of Expenses: Understanding TDS Section 195 of the Income Tax Act Payments not subjected to TDS will be disallowed as deductions under Section 40(a)(i).
- Interest: Interest of 1.5% per month or part thereof is levied from the date of deduction to the deposit date.
- Penalties: A penalty equal to the TDS amount is imposed for failure to deduct or deposit TDS (Section 271C).
- Late Filing Penalty: Non-filing of TDS returns incurs additional penalties.
Additional Compliance Requirements
- Form 15CA and 15CB:
Submit these forms to the Assessing Officer when making foreign remittances to report and certify TDS deductions. - Nil/Lower TDS Certificate:
NRIs can apply for a certificate under Section 197 to deduct TDS at lower rates using Form 15E.
Frequently Asked Questions
Q1: Can I claim DTAA benefits under Section 195?
Yes, NRIs can claim DTAA benefits to avoid double taxation. A Tax Residency Certificate (TRC) and Form 10F are required for this.
Q2: Is TAN mandatory for TDS deduction under Section 195?
Yes, a TAN is necessary to deduct and deposit TDS under Section 195.
Q3: How is TDS deducted on property purchases from NRIs?
TDS on property purchases is deducted under Section 195 on capital gains, not the sale price.
Q4: What happens if TDS is deducted but not deposited?
Non-deposit of TDS results in interest, penalties, and possible disallowance of expenses.
Conclusion
Section 195 serves as a critical tax collection mechanism for payments to NRIs and foreign companies. Understanding TDS Section 195 of the Income Tax Act Proper compliance ensures seamless transactions and avoids penalties. Whether you are a buyer, seller, or intermediary, understanding the provisions of Section 195 is essential.
If you need assistance with filing TDS or complying with Section 195 requirements, our expert Chartered Accountants are here to help! Contact us for professional tax solutions tailored to your needs.
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