Making payment to Non Resident? Know when to deduct TDS and the applicable rate

TDS or Tax Deducted at Source is income tax reduced from the money paid at the time of making specified payments such as rent, commission, professional fees, salary, interest etc. by the persons making such payments. Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payments. The deduction of tax at source or TDS has been very helpful in the collection of taxes in the country by targeting the source of income itself.

TDS on non-resident payment has always been a complex area of Income Tax Compliances. Detailed analysis is required to be performed to each transaction to understand TDS on foreign payment before you can initiate a payment. Wrong TDS on foreign party may put your company at greater risk in later years when the assessment is done.

Who is considered as NRI under Income Tax Provisions?

It is essential to determine residential status of taxpayer to determine taxability of income earned by such taxpayer. Section 2(30) defines non-resident as a person who is not a resident. Section 6​ lays down the test of residency for different taxpayers. According to Section 6, An individual is said to be resident in India in any previous year, if he:

• is in India in that year for 182 days or more; or
• within the 4 years preceding that year was in India for 365 days or more and is in India for 60 days or more in that year.

A person will be considered as NRI if he/she does not fulfil the above-mentioned conditions. Let us refer to the various TDS provisions for non-residents in this article.

Section 192 – TDS on Salary Payments to Non-Residents

• As per Section 192, any person responsible for paying any amount under the head salaries is required to deduct tax at source at the time of payment.
• This section unlike some other provisions, does not distinguish between payment of salary, to a resident, non-resident or expatriate.
• Thus, all payments which are taxable under the head salaries, are also covered by the provisions of TDS, irrespective of the residential status of the recipient.
• TDS will be deducted at normal slab rates on salary payments to non-residents.

Section 192A – TDS on Payment of accumulated balance of provident fund

• Section 192A stipulates that the trustees of the Employees’ Provident Fund or any person authorized under the scheme are required to deduct tax at source in case the employee fulfilsthe conditions stipulated as under:
  1. The amount from EPF has been withdrawn before completion of continuous 5 years of service, and
  2. The amount withdrawn is more than Rs 50,000.
• The Deductor is required to deduct TDS @ 10%at the time of payment of the accumulated balance due to the employee.

Section 194B – TDS on Income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort

• According to Section 194B, the person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle, card game and other game of any sort in an amount exceeding Rs. 10,000 shall, deduct income-tax thereon at 30%
• Deduction shall be done at the time of payment of such income. Where lottery or prize money, etc. is paid in instalments, the deduction of tax is to be made at the time of actual payment of each such instalment.
• Where the prize is given partly in cash and partly in kind, tax will be deductible from cash prize, with reference to the aggregate amount of cash prize and the value of the prize in kind.
• Where the winnings are wholly in kind or where they are partly in cash and partly in kind but the part in cash is not sufficient to meet the liability for tax deduction in respect of the whole of the winnings, the person responsible for paying shall, before releasing the winnings either in cash or in kind, ensure that tax has been paid in respect of the winnings.

Section 194BB – TDS on Income by way of winnings from horse races

• According to Section 194BB, any person, who is responsible for paying to any person any income by way of winnings from any horse race an amount exceeding Rs. 10,000 shall deduct income-tax at 30%
• Deduction shall be at the time of payment of such income.
• Any person here means a book maker or a person to whom a licence has been granted by the Government under any law for the time being in force for horse racing in any race course or for arranging for wagering or betting in any race course.

Section 194E – TDS on Payment to non-resident sportsmen/sports association

• Any person who pays money to a non-resident sportsman (including an athlete) or an entertainer (who is not an Indian citizen) or pays money to a sports institution or an association, an income as referred u/s 115BBA is required to deduct tax at source u/s 194E at 20% exclusive of EC and Surcharge.
• Time of deduction is earlier of, the credit of income to the account of the payee (receiver) or actual payment (in cash, cheque, draft or other modes).
• Section 115BBA provides a special tax rate @ 20% (plus EC and SHEC), Plus Surcharge as applicable on specified income arising to a Non-Resident Sportsman or Entertainer or Sports Association. However, no deduction for any expenditure incurred and allowance is given to such assessee u/s 115BBA. Specified income includes income from participating in any games/ sports/ performance or income from advertising or income from contributing articles in the newspaper. All such income should arise only in India.

Section 194EE – TDS on Payment in respect of deposits under National Savings Scheme

• Any person who pays an amount under section 80CCA(2)(a) i.e. National Savings Scheme to another person is required to deduct tax under Section 194EE.
• The rate of tax deduction u/s 194EE is 10% and the time of deduction is when the payment is made.

Section 194F – Payment on account of repurchase of unit by Mutual Fund or Unit Trust of India

• This section contains provisions relating to the repurchase of units of Mutual Fund / Unit Trust of India.
• As per section 194F, the person making payment of any amount referred to in section 80CCB (2) is required to deduct TDS @ 20%
• Section 80CCB (2) of the Income Tax Act refers to the amount which is invested by the assessee in the units being issued under a plan formulated under the Equity Linked Savings Scheme. The amount so invested has been allowed as a deduction, however, the amount invested (whole or part) is returned back to the assessee by the Fund / Trust either by way of repurchase of the units or on the termination of the plan.
• The Deductor liable to deduct TDS at the time of making payment of the requisite amount.

Section 194G –TDS on Commission, etc., on sale of lottery tickets

• Section 194G requires the person, who is paying any income by way of commission / remuneration / prize on lottery tickets to the person who has been stocking / distributing / purchasing / selling the lottery tickets, to deduct TDS @ 5%.
• Deductor is required to deduct TDS within earlier of the following prescribed dates –
  1. At the time of payment in cash / cheque / draft / any other mode; or
  2. At the time of credit of income to the account of the payee.

Section 194LB – TDS on Payment of interest on infrastructure debt fund

According to Section 194LB,if any income by way of interest is payable to a non-resident, not being a company, or to a foreign company, by an infrastructure debt fund referred to in section 10(47), the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 5%.

Section 194LBA – TDS on Certain Income from units of business trust 

Let us refer to the table given below to understand this section better

Nature of Income	Time of Deduction	Rate of TDS
A business trust is liable to deduct TDS, where any distributed income referred to in section 115UA, being of a nature referred to in section 10 (23FC)(a) is payable by the business trust to its unit holders being a non-resident (not being a company) or the foreign company	Earlier of the following – Time of credit of payment to the account of the payee; or Time of payment in cash or draft or cheque or any other mode.	5%
A business trust is liable to deduct TDS, where any distributed income referred to in section 115UA, being of a nature referred to in section 10 (23FCA) is payable by the business trust to its unit holders being a non-resident (not being a company) or the foreign company.	Earlier of the following – Time of credit of payment to the account of the payee; or Time of payment in cash or draft or cheque or any other mode.	30%

Section 194LBB – TDS on Income in respect of units of the investment fund 

• A person making payment to a unit holder in respect of units of an investment fund specified in Explanation 1 to section 115UB(a) shall be liable to deduct TDS @ 30%
• The Deductor is liable to deduct TDS either at the time of credit of income to the account of the payee or at the time of payment in cash or draft or cheque or any other mode, whichever is earlier.

Section 194LBC – TDS on Income in respect of investment in securitization trust 

• A person making payment to an investor in respect of an investment in a securitization trust specified in Explanation (d) to section 115TCA is liable to deduct TDS @30%.
• The Deductor is liable to deduct TDS either at the time of credit of income to the account of the payee or at the time of payment in cash or cheque or draft or any other mode, whichever is earlier.

Section 194LC – TDS on income by way of interest from an Indian Company or a business trust

• The Indian Company or a business trust paying interest income to a non-resident, not being a company, or to a foreign company is liable to deduct TDS @5%
• Interest income payable by the Indian Company or the business trust on the following is covered under section 194LC:
  1. Interest in respect of money borrowed by the Indian Company or the business trust in foreign currency from a source outside India
  2. Under a loan agreement between 1stJuly 2012 to 1st July 2020.
  3. By issuing long term infrastructure bonds between 1stJuly 2012 to 1st October 2014.
  4. By issuing long term bond including long term infrastructure bonds between 1stOctober 2014 to 1st July 2020.
  5. Interest in respect of money borrowed by the Indian Company or the business trust in foreign currency from a source outside India by way of issue of rupee denominated bond before 1stJuly 2020.
  6. To the extent, the interest income does not exceed the amount of interest calculated atthe rate approved by the Central Government.
• The Deductor is liable to deduct TDS within earlier of the below mentioned dates –
  1. At the time of payment thereof in cheque or cash or draft or any other mode of payment; or
  2. At the time of credit of interest income to the account of the payee.

Section 194LD – TDS on Payment of interest on rupee denominated bond of an Indian Company or Government securities to a Foreign Institutional Investor or a Qualified Foreign Investor

• Any person paying income by way of interest to a Foreign Institutional Investor or a Qualified Foreign Investor is required to deduct TDS @ 5%
• Interest income on which TDS is deductible under section 194LD means the Interest payable on or after 1st June 2013 to 1st July 2020 in respect of investment made, by a Foreign Institutional Investor or a Qualified Foreign Investor, in a rupee denominated bond of an Indian Company or a Government Security.
• The rate of interest in respect of a rupee denominated bond of an Indian Company shall not exceed the rate as notified by the Central Government.
• The Deductor liable to deduct TDS under this section, shall deduct TDS either at the time of payment in cheque or draft or cash or any other mode or at the time of payment of credit of income to the account of the payee, whichever earlier.

Section 195–TDS on Payment of any other sum to a Non-resident

• Section 195 of the Income Tax Act, 1961 lays down provisions for tax deductions for Non-Resident Indians (NRIs).
• This section focuses on tax rates and deductions on daily business transactions with a non-resident.
• Any amount generated through these business transactions is chargeable under Income Tax Act, 1961. This amount may or may not be income or profits.
• TDS rates mentioned under Section 195 of Income Tax Act, 1961 gets increased by adding the applicable education cess and surcharge. For payments made according to DTAA rates, no additional education cess or surcharge is applicable.

The following are the TDS deduction rates applicable under Section 195 of Income tax Act, 1961:

Particulars	TDS Rates
Income from investments made by a NRI	20%
Income from long-term capital gains under Section 115E for a NRI	10%
Income from long-term capital gains	10%
Short-term capital gains under Section 111A	15%
Any other income from long-term capital gains	20%
Interest payable on money borrowed in foreign currency	20%
Income from royalty payable by the Government or an Indian concern	10%
Income from royalty other than that which is payable by the Government or an Indian concern	10%
Income from fees for technical services payable by the Government or an Indian concern	10%
Any other source of income	30%

Section 196B – TDS on Income from units (including long-term capital gain on transfer of such units) to an offshore fund

Where any income in respect of units referred to in section 115AB or by way of long-term capital gains arising from the transfer of such units is payable to an Offshore Fund, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 10%.

Section 196C – TDS on Income from foreign currency bonds or GDR of an Indian company (including long-term capital gain on transfer of such bonds or GDR)

Where any income by way of interest or dividends is payable in respect of bonds or shares referred to in section 115AC to a non-resident, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 10%.

Section 196D – TDS on Income of foreign Institutional Investors from securities (not being dividend or capital gain arising from such securities)

• Under section 196D, any person who pays any amount referred to in Section 115AD to another person is responsible for deducting tax at source @20%.
• Tax is deducted either at the time of payment in cash, cheque, demand draft or another mode orduringthe time of credit to the account of the payee, whichever is earlier.

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