Section 195 – TDS & Income Tax
Section 195 of the Income Tax Act relates to the TDS (Tax deducted at Source) on income or payments belonging to Non-Resident Indians (NRIs).
• Section 195 lays down provisions to avoid double taxation on the amount and focuses on the tax rates and deductions over business transactions with non-residents.
• Any amount made through these business transactions is chargeable under the Income Tax Act, 1961.
What are the features?
Features of Section 195:
• Payer: Any person
• Payee: A non-resident, not being a Company, or a Foreign Company.
• Subject Matter: Deduction of Income-Tax at Source (TDS)
• Payments: Interest or any other sum chargeable under the provisions of Income Tax Act.
• Rate of TDS: At the Rates in Force
Who is the Payer/Payee under Section 195?
The following are the payer who pays the non-resident or remits the payments as per Section 195 of the Income Tax Act, 1961.
• An individual
• HUF (Hindu Undivided Family)
• Partnership Firms
• Non-Resident Indians (NRIs)
• Foreign Companies
• Persons having exempt income in India
• Juristic person (regardless of the income is chargeable to tax in India or not)
• Under Section 195, the NRIs (as per Section 6 of the Income Tax Act) whose sum is chargeable under this section is considered as a payee.
TDS under section 195 needs to be deducted as follows:
• At the time of crediting a Party
• On the actual date of payment
What is the chargeability of income under this section?
A. Determine – Chargeability under Income Tax Act
• Section 5: Scope of Total Income
• Section 9: Income Deemed to Accrue or Arise in India
Section 5: Scope of Total Income – In case of Non–resident
• Income received or deemed to be received in India; or
• Income accrues or arises or deemed to accrue or arise to him in India.
Section 9: Income Deemed to Accrue or Arise in India.
An income is said to be deemed to accrue or arise in India if the same is accruing or arising directly or indirectly, through
• a business connection in India or
• from any property in India or
• from any asset or source of income in India or
• the transfer of a capital asset in India* any other which derives its value from assets in India.
• It also includes any share or interest in a company or entity registered or incorporated outside India which derives its value from assets in India.
What is the method of calculating TDS Under Section 195?
The following are the methods for TDS deduction as per Section 195 of Income Tax Act, 1961:
• Firstly, the buyer must obtain the Tax Deduction Account Number (TAN), as per Section 203A of the Income Tax Act, before claiming for the TDS tax deductions.
o Upon the submission of Form 49B, it can be obtained which is available both online and offline.
o The buyer must hold his/her own PAN card as well as the PAN number of the NRI seller for the completion of the Form 49B submission process.
• As per Section 195, the TDS must be deducted from the source during the payment process to the NRI.
o The details that are related to the TDS deductions and the rates that are applicable to be specified in the sale deed of the transactions that are made between the buyer and the NRI seller.
• The TDS deducted by the buyer under Section 195 has to be deposited via challan or Form number for the TDS payment on or before the 7th of the subsequent month in which the TDS deductions have been made.
• As per Section 195, the TDS can be deposited by the buyer via banks that have been authorized by the Government, or the Income Tax Department to collect the Direct Taxes.
• After the process of TDS deposition as per Section 195, the buyer has to file the TDS return through the computerized medium by submitting the Form 27Q.
• Upon filing the TDS returns under Section 195, the buyer can issue a TDS certificate, referred to as the Certificate of Tax Deduction or Form 16A, to the NRI seller.
o It is mandatory for the buyer to issue this certificate to the seller within 15 days from the due date of filing for TDS returns for that quarter.
What is the rate of TDS under Section 195?
Below is the TDS deduction charges that are applicable under Section 195 of the Income-tax Act, 1961:
– Income/payments/transactions from the investments done by an NRI-20%
– Income from the long-term capital gains for an NRI under Section 115E-10%
– Income from the long-term capital gains-10%
– Income from the short-term capital gains under Section 111A-15%
– Any other source of income from the long-term capital gains-20%
– The interest that is payable on borrowed money in foreign currency-20%
– The income from the royalty payable by the Government or an Indian concern-10%
– The income from the royalty other than that which is payable by the Government or an Indian concern-10%
– The income from the fees for technical services that are payable by the Government or an Indian concern- 10%
Any other source of income-30%
What are the penalties under Section 195?
If any person tries to break or violates the rules under Section 195, then the following consequences to be faced.
• If withholding tax is not deducted or submitted at the specified time, then as per Section 40a(i), the allowances will be canceled, deduction in the year of payments.
• If the TDS is deducted by the payer, but that is not submitted at the specified time, then the interest at 1.50% per month or part of the month from the date of deduction to date of deposit (Section 201(1A)) will be charged.
• If the TDS is deducted by a payer and is not paid, then the penalty equivalent to the TDS amount is charged under Section 221.
• The TDS deducted partial or a part of TDS is submitted and rest is withheld the penalty faced is equivalent to the difference between the actual deductible and deducted amount Section 271C that is not exceeding the amount of the TDS.
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