Comprehensive Guide to TDS on Non-Resident Payments and Lower/Nil Deduction Certificates

Cross-border payments are now routine for Indian businesses and professionals. Whenever an assessee makes any remittance to a non-resident or foreign company that is taxable in India, Section 195 of the Income Tax Act 1961 comes into play. Further, where the actual tax outgo is expected to be lower than the standard TDS rate, Section 197 offers a mechanism to obtain a lower or nil deduction certificate.

This guide reshapes the core points of the Income Tax Department / CBDT brochure into a structured, assessee-friendly reference, while preserving all critical legal references.

Part I – Understanding Section 195: TDS on Payments to Non-Residents

Scope and Purpose of Section 195

Section 195 is the primary charging provision for deduction of tax at source on payments made to:

  • A non-resident (individual, firm, LLP, etc.), or
  • A foreign company,

where such payment is chargeable to tax in India.

The obligation to deduct tax arises at the time of making payment or at the time of crediting the amount to the account of the non-resident, whichever is earlier.

Who is Required to Deduct TDS under Section 195?

Any person responsible for paying a sum to a non-resident or foreign company that is taxable in India must deduct TDS. This includes:

  • Individuals
  • Partnership firms / LLPs
  • Hindu Undivided Families (HUFs)
  • Companies
  • Trusts, AOPs, BOIs
  • Any other assessee or entity

There is no carve-out simply because the payer is an individual or not liable to tax audit. If the payment is taxable in India, the TDS obligation applies.

Categories of Payments Covered

Section 195 is intentionally wide. It covers almost every type of taxable payment (other than salary) made to a non-resident, such as:

  1. Interest (other than interest already governed by Section 194LB, Section 194LC, Section 194LD)
  2. Royalty
  3. Fees for technical services
  4. Capital gains proceeds (e.g., sale consideration or amounts attributable to capital gains)
  5. Rent
  6. Dividends (where taxable in the hands of the non-resident under the prevailing regime)
  7. Any other taxable sum (excluding salary, which is governed by Section 192)

If the income component of the payment has taxability in India under domestic law and/or a Double Taxation Avoidance Agreement (DTAA), Section 195 requires TDS.

Time of Deduction: Credit vs Payment

TDS must be deducted:

  • At the time of credit of the amount to the account of the non-resident (including credit to a “suspense account” or any other similar account), or
  • At the time of actual payment by cash, cheque, bank transfer, draft, or any other mode,

whichever event occurs first.

Note:
There is no threshold exemption limit built into Section 195. Even small amounts must be subjected to TDS if they are chargeable to tax in India.

Non-Resident’s Presence or Office in India – Is It Relevant?

Whether or not the non-resident has:

  • A branch, project office, liaison office, or
  • Any other form of presence in India,

does not affect the TDS obligation under Section 195. The only key question is: Is the payment, or any part of it, taxable in India? If yes, TDS is mandatory.

Deducting TDS Only on the Taxable Portion

In many cross-border transactions, the gross remittance may include both:

  • A component that is taxable in India, and
  • A component that is non-taxable (e.g., pure reimbursements, offshore services not taxable in India, etc.)

In such cases, the assessee can approach the Assessing Officer (AO) for determination of the appropriate proportion of the sum chargeable to tax in India.

  • This is done through an application under Section 195(2) read with Rule 29B / Rule 29BA.
  • The AO will decide what portion of the payment represents income chargeable in India.
  • TDS is then deducted only on that taxable portion, not on the entire gross amount.

Should the Non-Resident Apply for Nil or Lower TDS?

The non-resident recipient has a statutory route under Section 197 to seek:

  • Nil deduction, or
  • Deduction at a lower rate,

based on their estimated total income and tax liability in India.

The non-resident (payee) files an application to the AO, and if satisfied, the AO issues a certificate specifying the rate (or nil rate) at which the payer must deduct TDS. This certificate is binding on the payer until its validity ends or it is cancelled.