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 for Non-Residents (FY 2026–27)
| Income Type | TDS Rate | Conditions / Notes |
|---|---|---|
| Salary Income (Section 192) | As per slab rates | Based on estimated annual income of the employee |
| EPF Withdrawal | 10% | Applicable if withdrawal exceeds ₹50,000 and subject to conditions |
| Interest Income – NRO Account | 30% | Standard rate for interest earned on NRO accounts |
| Interest – Securities / Dividend-linked | 10% – 20% | Depends on nature of security and applicable provisions |
| Interest – Foreign Currency Loans/Bonds | 5% | Subject to specified conditions |
| Infrastructure Debt Fund Interest | 5% | Concessional rate for eligible investments |
| Royalty & Fees for Technical Services (FTS) | 10% – 20% | Reduced to ~10% under DTAA (if applicable) |
| Income of Sports Persons / Entertainers | 20% (Flat) | No basic exemption allowed |
| Long-Term Capital Gains (General) | 12.5% | Applicable to most long-term assets |
| LTCG – Listed Shares (Section 112A) | 12.5% | On gains exceeding exemption limits |
| Short-Term Capital Gains (Section 111A) | 20% | Applicable on equity shares & equity-oriented funds |
| Rental Income | 30% | Deducted on gross rent (not net income) |
| Dividend Income | 20% or DTAA rate | Lower of domestic rate or treaty rate applies |
| Other Income (Individuals) | 20% | Standard rate for non-specified income |
| Other Income (Foreign Companies) | 40% + surcharge & cess | Higher rate applicable to foreign entities |
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, which 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, resulting 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.
Conclusion
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.
