Section 195 of Income Tax Act: TDS on Non-Resident Indians (NRIs)

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.