Non-Resident TDS FY 2026–27: Section 393(2) Rules, Rates and Compliance Explained

(Effective from 1 April 2026)

With the introduction of the Income Tax Act, 2025, the provisions governing Tax Deducted at Source (TDS) on payments to non-residents are now revised. Tax rates are fairly similar but section references and compliance procedures have been updated and businesses and professionals involved with cross-border transactions need to keep up with them.

Legal Framework

Payments to non-residents (people and foreign companies) are governed by:

Section 393(2) (replacing the earlier Section 195).

This provision requires that any amount chargeable to tax in India and paid to a non-resident is subject to TDS at applicable rates.

Key points:

• No minimum threshold – TDS applies from the first rupee in most cases.
• Applicable to all persons responsible for making such payments.

Double Taxation Avoidance Agreement (DTAA)

DTAA provisions have a profound role in determining the applicable withholding tax rate.

A lower TDS rate can be applied only if:

• Tax Residency Certificate (TRC) is obtained.
• Form 10F is furnished.
• Beneficial ownership declaration is available.

In the absence of these documents, domestic tax rates will apply.

Additional considerations:

• Surcharge and 4% cess apply under domestic law.
• DTAA rates are generally applied on a gross basis without additional surcharge and cess.

Key TDS Rates – FY 2026–27

• Salary Income (Section 392): Taxed as slab rates for non-resident taxes. TDS based on the estimated annual income.
• EPF Withdrawal: TDS at 10% where withdrawal exceeds INR 50,000. Subject to prescribed conditions.
• Interest Income:

• • NRO Account Interest: 30%

  • Securities or dividend-linked interest: 10% to 20%

  • Foreign currency loans or bonds: 5% (subject to conditions)

  • Infrastructure Debt Fund: 5%

• Royalty and Fees for Technical Services (FTS): 10% to 20% under domestic law. Often reduced to around 10% under DTAA, subject to treaty terms.
• Income of Sports Persons and Entertainers: Flat TDS rate of 20%. No basic exemption.
• Capital Gains:

  • Long-term capital gains: 12.5%

  • Listed shares (Section 112A): 12.5% on gains above exemption limits

  • Short-term capital gains (Section 111A): 20%

• Rental Income: TDS at 30%. Deduction is required on gross rental income, not net income.
• Dividend Income: 20% or DTAA rate, whichever is lower.
• Other Income: Non-resident individuals: 20%, foreign companies: 40% (plus surcharge and cess).

Practical Considerations

Property Transactions Involving Non-Residents

• The buyer is responsible for deducting TDS.
• TDS is generally 12.5% of long-term assets.

TDS should be deducted on the gross sale consideration, not on capital gains.

• This often results in cash flow constraints for the seller.

Non-Availability of PAN

If the non-resident does not have a PAN (Permanent Account Number), then higher TDS may apply, under the applicable provisions.

Foreign Companies

• Standard withholding rate: 40% plus surcharge and cess.
• DTAA provisions may significantly reduce the effective tax rate.

Compliance Requirements (From April 2026)

• Use Section 393(2) in all relevant filings and documentation.
• File Form 144 (instead of Form 27Q).
• Issue TDS certificates with updated section references.

Due Dates:

• TDS deposit: By the 7th of the following month.
• For March: By 30 April.

Additional requirements:

• Form 13, where applicable, when possible, apply for lower or nil TDS.
• Ensure TRC and Form 10F are available before payment.
• Use of wrong section reference means compliance mismatch.
• Failure to deduct TDS leads to higher interest and penalties.
• Delay in deposit or filing will lead to additional financial risk.
• Not taking DTAA provisions into account results in excess tax deduction.
• Incomplete documentation leads to higher withholding tax rates.
• Incorrect handling of property transactions involving non-residents.

Key References

• Section 393(2) – Non-resident TDS
• Section 392 – Salary
• Finance Act 2026
• Budget 2026 amendments
• Applicable DTAA agreements

The move to Section 393(2) is more than a change in numbering. It provides important procedural upgrades that need to be made in compliance and documentation.

Organizations dealing with non-resident payments should:

• Evaluate DTAA benefits carefully.
• Ensure complete and accurate documentation.
• Keep up with the process of compliance.

Proper planning and execution can help avoid excess tax deductions, penalties, and disputes.