A Comprehensive Guide on Section 195 of the Income Tax Act

section 195 of income tax act — (Source: squareyards.com)

Section 195 of the Income Tax Act focuses on tax deductions on payments paid from India to Non-Residents of India. Tax Deducted at Source is applicable on an amount earned by non-residents for performing financial transactions in India. This amount may be or may not be a profit of an income. NRIs need to pay TDS for income from which Indian residents enjoy tax exemption, such as dividends made from mutual funds. Besides knowing what section 195 is all about, scroll down to read its vital aspects.

Who Is Responsible for Deducting Tax Under Section 195 of ITA?

As stated earlier, a payer deducts the tax at the source before making payments to NRIs under Section 195 of the Income Tax Act. Here is the list of entities who are regarded as payers and are responsible for a tax deduction before making payments:

Hindu Undivided Families/ HUFs
Individuals
Indian or multinational companies
Foreign corporations
Non-residents remitting payments to other non-residents

TDS is applicable even to individuals earning income that is not taxable in India. Deductors need to deduct tax at source while making payments to such non-residents is mandatory under Section 195 of the Income Tax Act.

How to Deduct TDS Under Section 195 of the Income Tax Act?

Payers need to follow the ways mentioned below while deducting tax at source under Section 195 of the Income Tax Act:

Step 1: Visit the official website of the Tax Information Network. Select 'Apply Online' and choose 'New TAN'. Then, select the appropriate category of deductors under the option 'Category of Deductors' and choose 'Select' to proceed and fill in Form 49B. This way, payers can obtain a TAN or Tax Deduction Account Number, as mandated under Section 195 of ITA.
Step 2: Payers need to type their and NRIs' PAN details in the form. Now, deduct the applicable tax at the source while remitting the payment to the recipient.
Step 3: Specify the TDS rate charged and the amount on which TDS has been applied in the sales deed.
Step 4: Payers need to deposit the TDS through a form number or challan within the 7th of the following month.
Step 5: Payers need to file their TDS returns by filling in Form 27Q in the appropriate quarter of the given financial year. Besides, issue a TDS certificate, Form 16 A, to non-residents. Issue this certificate to the recipient within 15 days from the due date of filing the returns for Tax Deducted at Source.

What Are the TDS Rates Under Section 195 of the Income Tax Act?

Take a look at the following table illustrating the TDS rates applicable to particular transactions:

Particulars	Rates of Tax Deducted at Source
Income made by NRIs from investment	20%
Income earned by NRIs as long-term capital gains as specified under Section Section 115E	10%
Income earned as long-term capital gains as specified under Section 112 (1)(c)(iii)	10%
Income made by NRIs as short-term capital gains as specified under Section 111A	15%
Other income earned as long-term capital gains, which is not specified under clauses 10(33), 10(36) and Section 112A	20%
Interest payable by an Indian citizen or Government on borrowed money which is in foreign currency (this is not the income earned through interest as specified under Section 194LB or Section 194LC)	20%
Income earned through royalty payable by an Indian individual or Government	10%
Income earned through royalty (it is not the royalty referred to above) payable by an individual or Government	10%
Income through fees for rendering technical services and payable by an Indian individual or Government	10%
Other income	30%

Thus, Section 195 of the Income Tax Act allows payers to deduct tax at source before making payments which removes the possibilities of tax evasion. It also makes it easier for non-residents to remain tax compliant as the responsibility of tax deduction is of payers.