TDS for the payment of non-resident payments is essential. The Importance of TDS on Non-Resident Payments. TDS = Tax Deducted at Source - tax collected at the source. If money is taxable in India, TDS must be deducted before remittance, even when a resident taxpayer pays money to a Non-Resident or foreign company.
Payments include interest paid, royalty paid, dividends paid, capital gains accruing, fees incurred for technical services and winnings from lotteries or online games. There is no minimum threshold; even minor taxable payments need TDS deduction.
The rate that will be computed is subject to a rate prescribed by the Finance Act, the Double Taxation Avoidance Agreement (DTAA) or, whichever one is lower. Compliance entails registration as a TAN, prompt deposit, filing tax returns and the issuance of TDS certificates.
Who is a Non-Resident? NON-RESIDENT
A Non-Resident is a person without the required residence conditions under Section 6 of the Income-tax Act, 1961.
Resident Criteria: Stayed in India for 182 days or more in a financial year or. Stayed 60 days or more in a year and 365 days or more in the preceding four years.
Section 195 deductors: Payers paying to a Non-Resident (other than salary) shall be required to deduct TDS. This includes:
- Individuals.
- Hindu Undivided Families (HUFs).
- Firms.
- Companies.
- Government bodies, agencies.
TDS Rates for FY 2025-26
| Income Type | TDS Rate | Section/Details |
| Interest / Dividend | 20% | Standard rate for Non-Residents |
| LTCG: Shares, Debentures, Govt Securities | 12.5% | Under Section 115E |
| LTCG: Listed Shares (u/s 112A) | 12.5% | Applied to transactions after 23-07-2024 |
| LTCG: Listed Shares (u/s 112A) | 10% | Applied to transactions before 23-07-2024 |
| Other Long-Term Capital Gains (LTCG) | 12.5% | General rate for other assets |
| STCG on Securities (FII / Fund) | 20% | Short-Term Capital Gains |
| Interest on Foreign Currency Loans | 20% | |
| Royalty / Technical Fees | 20% | |
| Winnings (Lottery, Games, Horse Races) | 30% | Includes online gaming winnings |
| Any Other Income | 30% | Residual income category |
Compliance Steps
- Obtain TAN (Tax Deduction Account Number).
- Deduct TDS at the time of payment.
- Use Challan 281 for TDS deposit by the 7th of next month.
- File quarterly TDS return Form 27Q.
- Issue TDS certificate Form 16A within 15 days of filing.
Lower or Nil TDS:
Non-resident applicants have to apply for a Certificate in (Form 13) with the Assessing Officer (which will be the other of the forms at present) and can deduct TDS at a reduced rate.
Foreign Remittance: Submit Form 15CA and Form 15CB when remitting abroad.
Effects of Non-Compliant Actions
Business expenses may be disallowed. Interest @1.5% per month until TDS deposit. If not paid then there is a penalty equal to TDS amount on the amount owed. And penalties may be imposed on businesses for nonpayment at a TDS penalty in lieu of full consideration. Penalty for short deduction (difference between correct and deducted TDS).
Bank may reject remittance
Key Takeaway
Before you pay a Non-Resident, confirm whether income is taxable in India. Deduct TDS under Section 195, deposit on time, file the necessary returns, and issue TDS certificates for compliance and for prevention of penalties.
