Comparative withholding tax rates on payments to non-residents – Income-tax Act vs DTAAs (as amended by Finance Act, 2026)

1. Overview of withholding tax on cross-border payments

When Indian residents make specified payments to non-residents, such as dividends, interest, royalty and fees for technical services (FTS), tax is required to be withheld at source. The applicable rate is determined by comparing:

  • The rate prescribed under the Income-tax Act, 1961, and
  • The rate provided in the relevant Double Taxation Avoidance Agreement (DTAA),

and then applying the more beneficial rate to the non-resident assessee.

The purpose of this comparative framework is to ensure that:

  • Non-resident assessees are not subjected to higher tax than what is provided either under domestic law or the applicable treaty; and
  • Indian payers can correctly compute withholding obligations on cross-border remittances.

This write-up recasts, in a consolidated manner, the rate structure under the Income-tax Act vis-à-vis treaty rates, as they stand after the Finance Act, 2026. It also explains important special provisions under the Act that override or supplement general rates.

Note: While this article explains the general rate framework, the actual rate for a specific transaction must always be tested against the precise wording of the relevant DTAA, statutory conditions, notifications and circulars.

2. Nature of income covered

The comparative regime broadly covers the following categories of income earned by non-residents from India:

  1. Dividend income
  2. Interest income
  3. Royalty
  4. Fees for Technical Services (FTS)

The rate structure for each of the above differs under:

  • The Income-tax Act, 1961, and
  • Individual DTAAs that India has signed with foreign jurisdictions.

Where both frameworks prescribe different rates, non-resident assessees can opt for whichever is more favourable in terms of overall tax burden, subject to satisfying treaty conditions such as:

  • Residential status in the treaty partner country
  • Beneficial ownership of income
  • Minimum shareholding thresholds
  • Nature of payer (for example, bank, financial institution)
  • Character and classification of income (especially for royalty and FTS)

3. Dividend income: Act vs treaty

3.1 Basic rule for dividend under the Income-tax Act

Dividend paid by Indian companies to non-resident assessees is taxable in the hands of the non-resident and subject to withholding at source. Under the Income-tax Act, post Finance Act, 2026:

  • The general rate applicable to dividend received by:

    • a foreign company, or
    • a non-resident non-corporate assessee
      is 20% under Section 115A.

  • However, concessional or special rates apply in specific cases (discussed below).

3.2 Special concessional provisions for dividend

The Act prescribes lower rates for particular types of dividend income:

  1. Global Depository Receipts (GDRs)

    • Dividend income from GDRs referred to in Section 115AC(1)(b) is taxable at 10%.

  2. Dividend from units in IFSC

    • Dividend received from a unit in an International Financial Services Centre (IFSC) as referred to in section 80LA(1A) is taxable at 10%, even though the general rate under Section 115A is 20%.

  3. Dividend income of Foreign Institutional Investors (FIIs)

    • Dividend arising to a Foreign Institutional Investor is taxed at 20% under Section 115AD.

These provisions apply subject to the respective statutory conditions being satisfied.

3.3 Treaty rates for dividend

Most of India’s DTAAs cap the withholding tax on dividends at lower or tiered rates, commonly in the range of:

  • 5%, 7.5%, 10%, 12.5%, 15%, 20% or 25%,

often subject to:

  • The non-resident being the beneficial owner of the dividend; and
  • The non-resident company holding a minimum percentage of shares or capital in the Indian dividend-paying company (e.g., 10%, 25%, etc.).

Examples of treaty structures include:

  • Reduced rates for substantial shareholding: Many treaties prescribe a lower rate (for instance, 5% or 10%) where the foreign company directly holds a significant percentage (say, 10% or 25%) in the Indian company.
  • Higher rate in other cases: Where the shareholding threshold or beneficial ownership condition is not met, a higher treaty rate (say, 15% or 25%) applies.

Where treaty provisions do not specifically address dividend withholding, or where the DTAA does not allocate taxing rights in a favourable way, the domestic rate under the Act becomes applicable.

4. Interest income: statutory framework vs DTAAs

4.1 General position under the Income-tax Act

Interest payable by residents to non-resident assessees is generally taxable in India. For such income, the Income-tax Act prescribes: