Section 195 of the Income Tax Act: TDS for NRIs

Written by : Knowledge Centre Team

2024-08-02

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When you are moving in and out of the country frequently, keeping track of your income should be a regular task. You will need to pay tax on the incomes received in India and TDS is the government’s way of tracking such transactions.

If you are a Non-Resident Indian (NRI) but receive income in India, TDS could be a regular deduction from it. Section 195 of the Income Tax Act provides the provisions for the tax deductions for NRIs.

What is Section 195 of the Income Tax Act?

Section 195 of the Indian Income Tax Act 1961 provides for the Tax Deduction at Source (TDS) for all Non-Resident Indians (NRIs).

This section gives you detailed guidelines on tax deductions that are made to all business transactions carried out by a non-resident taxpayer of India on a day-to-day basis. The deduction is done at the given TDS rate under section 195.

Who can Claim Tax Deduction Under Section 195 of the Income Tax Act?

Anyone paying any money to a non-resident individual, or a foreign entity should deduct applicable TDS from the amount. The TDS rate under section 195 governs the amount of deduction as per the type of transaction and threshold.

TDS is a must regardless of whether the non-resident individual or entity has a taxable income or not.

When to Claim Deduction on TDS under Section 195 of the Income Tax Act?

The TDS has to be deducted as and when the said income is credited to the account of the payee or during the time of the transaction, whichever of them is earlier.

a) For this purpose, such income credited to the “Interest payable account” or “Suspense account”, or any other account shall be deemed to be the credit to the account of the payee.

b) For this purpose, “payment” can be in cash or by the issue of a cheque or draft or by any other mode.

c) If interest is payable by the Government or a public sector bank or a public financial institution, then tax deduction shall be made only at the time of payment thereof in cash or by cheque or draft, or any other mode.

According to the provisions of the Income Tax Act, any income which is deemed to have accrued or arisen in India, for that income the payer is responsible to withhold tax levied on it in India. Hence,

Section 5(2)(b) of the Income Tax Act, states that the total income of a non-resident includes all income that accrues or arises or is deemed to accrue or arise in India to the non-resident during the previous financial year. Hence, tax shall be deducted on every such income accrued or arisen.

NRI Incomes Deemed to Accrue or Arise in India

Here is the table showing all the types of incomes of the non-residents that are deemed to accrue or arise in India, and on which TDS shall be deducted at the given TDS rate under section 195:

Types of taxable income of Non-Resident	TDS rate under section 195 of the Act (%)
Investment income	20
Income by way of LTCG u/s 115 E of the Act	10
Income by way of LTCG from unlisted securities u/s 112(1)(c)(iii)	10
Income by way of LTCG from equity unit or EOU of a business trust u/s 112A of the Act	10
Income by way of STCG from listed stocks having the holding period < 12 months u/s 111A of the Act	15
Other types of LTCGs	20
Interest income of an offshore lender	20
Royalty income (in respect of a copyright of a literary work or computer software)	10
Royalty income other than those specified above	10
Income by way of fees for technical services payable by Government or an Indian concern	10
Any other type of income deemed to accrue or arise in India	30

How can NRIs Save Tax?

Whether you are an NRI or a resident, you have several options to save tax on your income in India. Tax saving plans might also allow you to reclaim some of the TDS deducted from your income in the previous year.

You can invest in the following tax-saving options to reduce your tax liability in India:

1. Life Insurance Plans

a) Term life insurance plans are a great choice for the long-term financial protection they offer to your family

b) Invest in Guaranteed Saving Plans to keep your hard-earned money safe and earn fully exempt repatriable income

c) Unit-Linked Insurance Plans (ULIPs) help you grow your investment with Indian markets while offering tax-free returns.

d) Life insurance pension plans like Guaranteed Income4Life Plan to generate reliable and lifetime regular income after retirement.

2. National Pension System

a) Invest up to 20% (+Rs 50,000) of your gross income in India

b) Deduction of up to Rs 2 lakhs per year

c) Choice of aggressive or safe portfolio for investment

d) Best for building your retirement corpus in India

e) Operate with the bank handling your NRO/NRE account

3. Equity Linked Savings Schemes (ELSS Mutual Funds)

a) Invest through your NRO/NRE accounts

b) Tax-free capital gains up to Rs 1 lakh

c) Short lock-in of only three years

TDS Certificate for NRI Taxpayers

As per Section 195 of the Income Tax Act, the payor has to deduct TDS from the payments made to the NRIs or other non-resident entities. The person paying such remittance to a non–resident has to e-file and submit the following certificates of information:

An undertaking of the TDS in the Form 15CA
A Chartered Accountants Certificate in Form 15CB

So, if you are an NRI and receiving any income in India, you have multiple ways of saving tax on it. TDS will apply to most of the income receipts. However, you may claim refunds if you invest adequately in tax-saving options.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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