Full Guide on Section 195 TDS on Non Residents 2025

The Income Tax Act, 1961 comprises of section 195 that is very important to the businesses and individuals in India that pay money to the non-resident populations of India. It mandates that any person responsible for paying to a non-resident any sum chargeable under the Act (other than salary) must deduct tax at source (TDS) at the applicable rates.

This section covers payments like interest, royalty, technical fees, dividends or any other sum (not being salary) to a person who is not a resident of India as per Indian tax rules. The TDS requirement ensures the Indian government can collect tax revenue from foreign transactions and helps taxpayers comply with double taxation avoidance agreements (DTAA) if available.

In 2025 Why Is Section 195 TDS on Non Residents Significant?

The TDS mentioned under section 195 applies even more so in 2025 when India is seeing more and more cross-border transactions. The areas where remittances to other foreign entities are common include digital services, consultancies, technology outsourcing, licensing to foreign markets and business contracts. The situation has also been altered with tax authorities paying greater attention to compliance and as a result, since 2015 the definition of taxable payments has been broadened after court decisions and legal amendments.

Errors in Section 195 of TDS can even attract heavy interest, penal implications and expenses disallowances to the victim. Companies and practitioners should keep in mind their duties when transacting with non-residents to ensure they do not make an expensive mistake.

Important features/ highlights of Section 195 TDS

• Applies to any payment and not salary to a non resident provided that that payment is chargeable income tax act
• Deduction threshold is not limited. As soon as the single rupee is involved, TDS may be triggered despite the fact that there is income tax-payable only in case it exceeds 300,000 rupees.
• Deductor may be a person, a firm, company or any person obliged to make payment to non-resident
• The rate of TDS is determined on the basis of nature of payment and a DTAA in place
• The deduction should be done at the moment of payment or credit which comes earlier
• Procedural compliance consists of filing TDS returns, payment due, and getting Form 15Cb as Chartered Accountant to take particular remittances.
• Failure to comply attracts heavy penalty, interest and prosecution
• Option to apply for Lower/Nil Withholding Certificate (Form 13) if eligible

Advantages-Disadvantages of S 195 TDS

You may not be aware? Due to the 2022 budget, Section 195 compliance on digital service payments was tightened with cautions of analyzing the taxability of a payment of overseas tech or media company in India.

What Is Section 195 TDSApplied To? Typical Situations shown Examples

TDS under Section 195 must be deducted on any sum (except salary) paid to a non-resident, only if the sum is taxable under the Income Tax Act. Typically it involves:

• Paying over to US consultants technical consulting fees
• Royalty to overseas software firms
• Payments on interest to external borrowers
• Paid-out dividends to foreign owners
• Remunerations to non-resident artists or sports persons

TDS will not be applicable in case such amount is not chargeable to tax in India or 100 percent of the applicable DTAA.

Where to Know whether a payment attracts TDS?

Taxability can depend on the nature of the service, the recipient’s residential status, the existence of a Permanent Establishment (PE) in India, and whether a DTAA reduces or eliminates Indian tax. As an example, should a foreign supplier that does not offer any service or technical proficiency in India, such payment might not attract any tax.

Thus, a payer has to analyze the contract, the concerning tax drawing or DTAA before determining TDS responsibility.

Section 195 Rate of TDS

The fundamental TDS rate varies according to the nature of the income between 10 percent and 20 percent on royalties, technical fees and interest. Surcharge and health cess are also applicable with bigger amounts and firms.

In many cases, lower rates are stipulated by DTAA. As an illustration, the rate of TDS on royalties paid to the US company can be only 15 percent in tune with India USA DTAA, but the domestic rate would be higher.

Which Documents and Procedures are Needed in Complying with Section 195?

• PAN of the non resident payee
• Form 15CA (online declaration by the remitter)
• Form 15CB (certificate from CA, if required, to confirm chargeability)
• Invoice, agreement or contract copy
• DTAA residence certificate (Tax Residency Certificate)
• Issue of withholding payment and with deposit of TDS within 7days post month-end
• Quarterly, file TDS returns in Form 27Q

Professional commentary: Foreign remittances become stricter to scrutinize in 2025 by the Reserve Bank of India and banks. Without Form 15CA and 15CB (where needed), your outward remittance request may be rejected.

What to look out about my Experience with Section 195 TDS

In my line of work as an international tax consultant in the practice of chartered accountancy, I have on numerous occasions advised businesses with international operations. A typical case is the client who wants to pay abroad to the product development or the licensing services.

First, most people tend to think that the only adequate compliance is the bank remittance. In one of their recent engagements, an Indian IT startup signed an agreement with a US based software company to provide technical licensing assistance to the latter. The client believed that TDS was inapplicable since he offered his services outside the country. Upon inspection, it turned out that the source of revenue was India and that TDS was to apply. Neglecting it would have posed a threat of disallowance of expense, and penalty.

In the same manner, the other client also got an invoice issued by a European designer for remote consultation. Although the value was little we checked taxability and recommended TDS since we checked that rules apply and no DTAA advantage. The premature move prevented compliance mix-ups and guaranteed evidence prepared to be put under surveillance, in case of inspection.

Major problems encountered:

• Properly categorizing the nature of payment (royalty vs technical service)
• Tax Residency Certificate to get relief of DTAA
• Various follow ups with banks in filing Form 15CA and 15CB
• In order to adhere to the constant changes of regulations

Can I avoid TDS under section 195 by dividing invoices below INR5 lakh or through pay pal? that is another question people tend to ask. No, the invoices are not split, the payment through PayPal/online wallets with no TDS evades Indian tax law. Section 195 comes into play whether the payment mode and amount is taxable or not unless the payment itself is not taxable in India.

What are the Penalties of default under section 195?

Failure to abide by the Section 195 may lead to:

• Disallowance of business expense under Section 40(a)(i)
• Interest for delayed deduction or payment under Section 201(1A)
• Equal to value of tax not deducted/paid
• Willful defaults subject to prosecution

Such may have dire consequences on cash flow and may end up dragging the remitter along with high-ranking officers in trouble.

Table: Common TDS Default Penalties (AY 2025-26)

Do you know? The income tax department data released in March 2025 shows that more than 12000 businesses were scrutinized in AY 2024-25 on non compliance or error regarding TDS on remittances made by foreigners.

Span-by-SPAN Steps to Acheive Smooth Section 195 Compliance

• Analyze every foreign payment to decide if it’s taxable in India before remittance
• Use of relevant DTAA to lower or even nil rates of TDS
• To avail of DTAA the payee must be given a Tax Residency Certificate always
• Look at favoring contracts that define the tax obligations prior to the contractual agreements
• File Form 15CA and Form 15CB (when required) before remitting
• Pay TDS on time and file up to date quarterly returns
• Keep the records of the last five to seven years to be audited in future

Compliance may be easier using online marketplace, or platform, such as online TDS marketplace and services marketplace. Instead of going back and forth between branches, you can do side by side comparison of CA services, quotes, and reviews of Form 15CB, TDS filing and tax consulting.

At what Situation Can You Claim the Nil or Lower TDS under Section 195?

If you believe no tax is required to be deducted (e.g., because your contract is fully exempt under DTAA) or if the actual Indian tax liability is lower, you can apply to the AO (Assessing Officer) using Form 13 for lower or nil TDS.

In 2025, this procedure is estimated to take around four to eight weeks during which information on contracts, invoices, documents of payees, and DTAA benefits shall be submitted. This saves businesses on cost and enhances cash flow, yet it has to be planned.

Industry analysis: By 2025, big Indian businesses will often be employing a special international tax department or contracting consultancy firms to review each of their overseas contracts. Tax professionals have been recommended even to the startups to contact them before making overseas payments.

Frequently Asked Questions- People Ask Section

Does Section 195 apply on the payments made on an NRI who is to buy a property in the year 2025?
The answer is yes, no matter who buys the property even after purchase by an individual of NRI, Section 195 will apply. TDS must be deducted at the rate mentioned for long term or short term capital gains (usually 20 percent plus surcharge and cess). Buyers should also submit The Form 15CA and 15CB in case they are registered.

Ways by which one can establish whether DTAA applies in 2025?
You will need to see whether India has DTAA with the country of payee. If yes, obtain a self-attested Tax Residency Certificate (TRC) and apply the beneficial provisions (lower rate or exemption). Refresh your CA and provide evidences to the bank prior to remittance.

Is there any applicability of Section 195 on importation of goods?
As far as there is no technical service, consultancy or royalty and payment is received outside India, payment towards pure import of goods does not attract any TDS.

Foreign remittance TDS? What is Form 15CA and 15CB?
Form 15CA is an online statement of the remitter. Form 15CB is Chartered Accountant certificate, which is a compliance to TDS and a certificate to prove the nature of payment. Both are required in most foreign payments other than on the items on the RBI-specified list.

Another question of people is: What happens when I deduct TDS under Section 195 at higher rate than provided in DTAA?
The non resident payee is at liberty to make refund of additional TDS in his/her Indian return but this slows down payment and this may hamper the relationship of the business.

Recap In a hurry / TLDR

The tax deductible at source is under Section 195 TDS on non-residents is the type of tax deduction that must necessarily be made by the Indian payer of any amount as non-residents payment which is tax charged where Indian tax is applied. In 2025, it is under the microscope and payments to foreign parties of technology, consulting, royalty, and real estate are under the scrutiny. Errors attract huge fines and hence it is important to locate the taxability, enjoy DTAA advantages along with filling appropriate forms and seek qualified CA assistance before sending overseas funds. Use TDS online service marketplaces to achieve efficient compliance.

Sources:

• T.I.T. (L.) Act, r. 195
• Notifications and Circulars of the CBDT
• Foreign Remittance Guidance of Reserve Bank of India