Non-Resident Indians (NRIs) are subject to Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act, 1961. This article aims to provide a comprehensive understanding of Section 195, including the definition of an NRI, TDS rates for various types of income, and the consequences of non-compliance.
Who is a Non-Resident Indian (NRI)?
An individual is considered a Non-Resident Indian (NRI) if they do not meet the criteria for being a resident of India as defined under Section 6 of the Income Tax Act. A person is a resident if they stay in India for:
- 182 days or more in the current financial year
- 60 days or more in the current year and 365 days or more in the four preceding financial years
TDS Rates under Section 195
The TDS rates under Section 195 vary based on the type of income. The following table summarizes the TDS rates for different income types:
| Income Type | TDS Rate |
|---|---|
| Income from investments | 20% |
| Long-term capital gains under Section 115E | 10% |
| Long-term capital gains under Sections 112 and 112A | 10% |
| Short-term capital gains under Section 111A | 15% |
| Other long-term capital gains | 20% |
| Interest on foreign currency borrowings | 20% |
| Royalty payable by Government or Indian concern | 10% |
| Other royalty income | 10% |
| Fees for technical services payable by Government or Indian concern | 10% |
| Any other income | 30% |
Deducting TDS under Section 195
The person making the payment to an NRI must deduct TDS at the time of credit or payment, whichever is earlier. The payer must follow these steps:
- Obtain a Tax Deduction and Collection Account Number (TAN)
- Deduct TDS as per the rates specified in Section 195
- Deposit the deducted TDS within the prescribed timelines
- File quarterly TDS returns in Form 27Q
- Issue TDS certificates (Form 16A) to the NRI payee
Consequences of Non-Compliance
Failure to deduct or deposit TDS under Section 195 can lead to severe consequences, including:
- Disallowance of the expenditure
- Interest at 1.5% per month on delayed deposit of TDS
- Penalty equal to the amount of TDS not deducted or deposited
Section 195 of the Income Tax Act, 1961 plays a crucial role in ensuring proper tax deduction for payments made to Non-Resident Indians. By understanding the definition of an NRI, the TDS rates for various income types, and the procedures for deducting and depositing TDS, payers can ensure compliance with the law and avoid penalties. It is essential for both payers and NRIs to stay informed about the provisions of Section 195 to manage their tax obligations effectively.