Section 195 of the Income Tax Act, 1961 governs the deduction of Tax Deducted at Source (TDS) on payments made to Non-Resident Indians (NRIs) or foreign companies. Whenever an Indian resident makes a payment—excluding salary—that is taxable in India to a non-resident, TDS must be deducted under this section. The intention is to ensure that income earned by non-residents in India is taxed at the point of payment.
Key Highlights
- Section 195 covers payments such as interest, royalty, capital gains, dividends, and similar taxable income.
- There is no minimum exemption limit; TDS applies to all taxable payments.
- The applicable TDS rate is determined by the Finance Act or relevant Double Taxation Avoidance Agreement (DTAA), and taxes paid in India can be claimed as credit under DTAA rules.
What is Section 195?
Section 195 requires any individual or entity making a payment to a non-resident (other than salary) to deduct TDS if the income is taxable in India.
It applies to NRIs, foreign companies, and other non-resident entities.
The provision covers payments including interest, royalty, dividends, capital gains, and fees for technical services.
Who Is a Non-Resident?
A person is considered a non-resident in India if they do not meet the residency conditions outlined in Section 6 of the Income Tax Act.
An individual is treated as a resident in a financial year if they meet any of the following criteria:
- They stay in India for 182 days or more during the financial year, OR
- They stay in India for 60 days or more in the financial year and 365 days or more in the previous four financial years.
Exceptions to Condition (2)
For an Indian citizen or a Person of Indian Origin (PIO) whose total income—excluding foreign-sourced income—exceeds ₹15 lakhs in a financial year:
- The 60-day requirement is replaced with 120 days.
For an Indian citizen leaving India for employment abroad or working as a crew member on a ship:
- The 60-day period is substituted with 182 days.
Thus, an Indian citizen or PIO with income exceeding ₹15 lakhs (excluding foreign income) will be treated as a resident if not taxed in another country.
Anyone who does not fulfill these conditions is classified as a Non-Resident Indian (NRI).
Who Is Required to Deduct Tax Under Section 195?
Any payment or income (excluding salary or interest covered under Sections 194LB, 194LC, and 194LD) that is payable to a Non-Resident must have TDS deducted under Section 195. The responsibility lies with the payer—the person making or remitting the payment to the NRI.
The payer can be any of the following:
- A Resident or Non-Resident
- An Individual
- A Hindu Undivided Family (HUF)
- A Partnership Firm
- A Foreign Company
- An Artificial Juridical Person (such as a corporation, government body, or non-profit organization)
Section 195 TDS Rates for FY 2025–26
TDS under Section 195 must be deducted at the rate that is most beneficial to the non-resident, based on:
- The rates specified in the Finance Act for that year, or
- The rates mentioned in the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the non-resident
Note: Rates under the Finance Act are subject to surcharge and health & education cess of 4%. These additions are not applied to DTAA rates.
TDS Rates for NRIs as per Finance Act 2025
| Particulars | Rate |
| Income from investments made by an NRI (Interest/Dividend) | 20% |
| Long-term capital gains under Section 115E from transfer of:• Shares of an Indian company• Debentures and deposits of a public company in India• Government-issued securities | 12.5% |
| Long-term capital gains on listed shares and securities under Section 112A | 12.5% (for transfers on or after 23/07/2024)10% (for transfers before 23/07/2024) |
| Any other long-term capital gain | 12.5% |
| Short-term capital gains for FII or specified funds on securities (excluding UTI/MF units) | 20% |
| Interest payable by the Government or an Indian concern on foreign currency borrowings | 20% |
| Royalty and technical service fees payable by the Government or an Indian concern | 20% |
| Winnings from:• Card games, lotteries, crossword puzzles, etc.• Horse races• Online games | 30% |
| Any other income | 30% |
If the payee does not provide a valid PAN to the payer, TDS must be deducted at the higher of the applicable rates as per Section 206AA.
TDS Payment and Compliance Under Section 195
Below are the steps to comply with TDS requirements under Section 195:
- The person making the payment to a non-resident (Deductor/Buyer) must obtain a TAN (Tax Deduction Account Number) under Section 203A before deducting TDS. The deductor must also possess their own PAN as well as the PAN of the NRI.
- TDS must be deducted at the time the payment is made to the non-resident.
- TDS deducted by the buyer must be deposited through a TDS challan on or before the 7th of the month following the month in which the deduction was made.
- TDS can be paid online or through authorised banks using Challan 281.
- After depositing TDS, the buyer must file the TDS return electronically using Form 27Q. TDS returns are filed quarterly by the following due dates:
| Quarter | Due Date for TDS Return |
| Q1 – April to June | 30th July |
| Q2 – July to September | 31st October |
| Q3 – October to December | 31st January |
| Q4 – January to March | 31st May |
Once the TDS return is filed, the deductor can issue Form 16A (TDS Certificate) to the NRI. This certificate must be issued within 15 days from the due date of filing the TDS return for that quarter.
Application for Lower or Nil TDS (Form 13)
- A non-resident can apply for a lower or nil deduction when they believe the payment received (other than salary) is not taxable, partly taxable, or taxable at a lower rate in India.
- For this, the non-resident must submit Form 13 to the Assessing Officer (AO).
- The AO reviews the application and verifies whether lower or nil deduction is justified.
- If approved, the AO issues a certificate under Section 197 allowing deduction at the reduced or nil rate.
- This certificate authorises the payer to deduct TDS at the lower or nil rate specified by the AO instead of the standard rate.
Is There a Threshold Limit Under Section 195?
There is no minimum threshold limit for deducting TDS under Section 195. However, TDS is required only when the payment made to a non-resident is taxable in India. Therefore, no tax is deducted on exempt income or any income that is not taxable under the Income Tax Act unless otherwise notified by the government.
Declaration of Information on Foreign Payments
Any person making a payment to a non-resident or foreign company must provide complete and correct details of such transactions in Form 15CA and Form 15CB through the income tax e-filing portal. This requirement applies even if the payment is not taxable under the Income Tax Act, as banks will insist on these forms before processing any outward remittance. Non-compliance with this obligation can result in a penalty of Rs. 1 lakh under Section 271-I.
TDS Return and Certificates
Under Section 195, anyone transferring funds to a non-resident must obtain a TAN and deduct tax at the prescribed rates. The deducted tax must be deposited with the government within the relevant deadlines using the payee’s PAN. In addition, the payer is required to file the TDS return in Form 27Q every quarter and issue Form 16A as the TDS certificate to the non-resident recipient.
Consequences of Non-Compliance With TDS Under Section 195
If the requirements of Section 195 are not met, the following consequences may arise:
- When tax is not deducted or not deposited on time, the related expenditure will be disallowed for business purposes and allowed only in the year it is finally paid.
- If TDS is deducted but not deposited by the due date, interest at 1.5% per month will apply from the date of deduction until the date of payment.
- Failure to deposit deducted TDS may lead to a penalty equal to the unpaid TDS amount.
- In cases of short deduction, a penalty equal to the shortfall—i.e., the difference between the required deduction and the amount actually deducted—will be imposed.
FAQs on TDS Under Section 195
Is reimbursement of actual expenses covered under Section 195?
No. Even reimbursements of expenses actually incurred by a foreign company or non-resident may attract TDS under Section 195 if such payments form part of a taxable transaction.
Which exchange rate should be used for deducting TDS for non-residents?
The Reserve Bank of India (RBI) exchange rate applicable on the date the tax is required to be deducted should be used for TDS purposes.
TDS is reflected under Section 195 in my Form 26AS. How do I identify its nature?
Section 195 applies to several types of income for non-residents—such as rental income, capital gains, interest, or dividends. The deduction showing under Section 195 in your Form 26AS will relate to one of these income categories.
Is TDS applicable on interest received on an income tax refund?
Yes. Interest credited on an income tax refund to a non-resident is subject to TDS under Section 195.
How can a non-resident claim DTAA benefits?
A non-resident should check the DTAA between India and their country of residence to identify more favourable tax rates. Providing a valid Tax Residency Certificate (TRC) to the payer enables tax to be withheld at the lower DTAA rate. Alternatively, the non-resident can file an ITR in India and claim DTAA relief.
Example:
A resident of Oman receiving dividend income from India is eligible for a 12.5% tax rate under the India–Oman DTAA. However, the Income Tax Act prescribes 20%. By submitting a TRC, the payer can deduct tax at the reduced rate.
I am a non-resident selling a property in India, and the buyer wants to deduct 20% TDS on the entire sale value. What should I do?
Since you are taxed only on capital gains (sale value minus indexed cost), deducting 20% TDS on the full sale consideration may be excessive. You may:
- File an income tax return and claim a refund for excess TDS deducted, or
- Apply for a Lower TDS Certificate in Form 13, submit the required documents to the Assessing Officer, and share the approval with the buyer so they can deduct TDS at a lower rate.
Is TDS under Section 195 required even if the payment is not taxable in India?
Yes. Unless a certificate for nil or lower deduction is obtained, TDS may still be applicable based on the nature of the payment and taxability rules.
Does Section 195 apply to payments made in foreign currency?
Yes. TDS applies irrespective of the currency in which the payment is made, as long as the income is chargeable to tax in India.
Is PAN mandatory for a non-resident to receive payments on which TDS is deducted?
While PAN is recommended, the payer may deduct TDS at a higher rate if the non-resident does not provide a PAN.
Can a non-resident avoid TDS by obtaining a certificate from the Assessing Officer?
Yes. A non-resident may apply for a Nil or Lower TDS Certificate under Section 197 or Form 13 depending on the nature of income.
Is GST applicable on payments made to non-residents along with TDS?
GST implications depend on the nature of the service and place of supply. TDS under Section 195 and GST applicability are two separate obligations.
