In India, for the purpose of income tax, there is “Pay as you earn scheme”As per such scheme, every person is required to pay tax through TDS/ TCS and advance tax, during the year only, in which the income has been earned.The rates of TDS are pre-determined and specified in the Income Tax Act, 1961. The aim of TDS is to collect tax from the very source of income. For resident individuals, TDS is required subject to some conditions, however, for non-resident individuals, TDS on all the payments made to non-resident individuals, which is chargeable to tax under the Act, has been made mandatory.
Let’s go into the TDS provisions in respect of various incomes of non-resident individual –
Salary incomeTDS on salary income of a non-resident individual shall be deducted u/s 192 of the Income Tax Act, 1961 at the applicable slab rates. Tax liability for the whole year shall be calculated on the prospective salary income of the non-resident and such determined tax shall be then deducted from the payment to be made of salary, in twelve monthly installments.
When to deduct TDS?TDS shall be deducted at the time of making payment of salary income.
Capital GainsTax at source is required to be deducted on sale of property by non-resident individual, irrespective of the transaction value of property on below-mentioned rates –
- Rate of TDS on sale of property held for more than two years – 20%
- Rate of TDS on sale of property held for two years or less – Applicable slab rate
Surcharge and Cess will also be levied on the above amount.
When to deduct TDS?
TDS shall be deducted whenever any payment is made to the NRI for purchase of property. Even on payment of advance, TDS is required to be deducted.
Amount on which TDS is required to be deducted?
TDS on sale of property must be deducted on the capital gains. However, for this purpose, capital gains cannot be computed by the seller himself but should be computed by the Income Tax Officer.
The seller shall make an application in Form 13 with the Income Tax Department and request them to compute the capital gains on the sales. In revert, income tax department will compute the capital gains and issue a certificate of Nil/ Lower deduction of TDS, specifying the rate at which TDS is ought to be deducted by the buyer. The seller can also furnish the details of any deduction which he is eligible to claim. Effect of such deduction will also be taken and a lower rate of TDS will be derived.
Hence, the seller will furnish such certificate to the buyer and then the buyer will deduct TDS on the rate mentioned therein. If the seller fails to obtain such certificate from the department then, TDS shall be deducted at the pre-specified rate that too on the total sales price and not on the capital gains.
Income under the head Other Sources and Business/ Profession
> Some specific Interest Incomes
On incomes of non-resident earned by way of –
- Interest from Indian company (Section 194LC)
- Interest on certain bonds and Government securities (Section 194LD)
- Interest from infrastructure debt fund (Section 194LB)
rate of TDS applicable shall be 5%. Such concessional rate is introduced to encourage investment of non-residents into above mentioned funds/ securities.
When to deduct TDS? TDS shall be deducted at the time of credit of such income to the account of the non-resident or at the time of payment, whichever is earlier. Payment can be made in any way whether in cash or by cheque, draft or any other mode.
> Any other Income
On payment of any sum to a non-resident which qualifies as income as per the provisions of Income Tax Act, 1961, tax shall be deducted on payment of such sum under the authority of Section 195 at the rate in force.
Tax has to be deducted on payments made to non-residents irrespective of any threshold limit. If income of the non-resident is taxable in India, then the payer needs to deduct TDS u/s 195.
When to deduct TDS?
TDS shall be deducted at the time of credit of such income to the account of the non-resident or at the time of payment, whichever is earlier. However, if income constitutes interest payable by Government, public sector bank or public financial institution, then deduction shall be made only at the time of payment.
Thus, proper mechanism of deduction of tax at source has been framed by the government not just to ensure that the individual pays tax on the income as and when earned, but also to make sure that no income of the non-resident escapes from being taxed, if it is liable to be taxed.
FAQs — TDS on Various Incomes of Non-Resident Individuals
1. What is the basic rule for TDS on payments to non-resident individuals?
Under Section 195 of the Income Tax Act, any payment to a non-resident that is chargeable to tax in India must have TDS deducted by the payer at the time of credit or payment, whichever is earlier. This applies even if no threshold limit is prescribed.
2. Do I need a TAN to deduct TDS on payment to a non-resident?
Yes. The payer must obtain a Tax Deduction and Collection Account Number (TAN) before deducting TDS on payments to non-residents. TAN is mandatory for depositing TDS with the government and filing TDS statements.
3. Can non-residents avoid or reduce TDS?
Yes. A non-resident can apply for a Lower/NIL TDS certificate by filing Form 13 with the Assessing Officer if they expect their overall tax liability to be lower than the standard TDS rate. Once granted, the payer deducts TDS at the rate specified in the certificate
4. Do Double Taxation Avoidance Agreements (DTAAs) affect TDS rates?
Yes. If there is a DTAA between India and the non-resident’s country of residence, the TDS rate specified in the DTAA may be lower than the rate under Indian law. In such cases, the DTAA rate applies if the non-resident furnishes a valid Tax Residency Certificate (TRC) and other required documents.
5. When is TDS required to be deducted for non-resident salary?
TDS on salary of a non-resident individual is deducted under Section 192 at applicable slab rates, calculated on estimated annual income and withheld in monthly installments at the time of each salary payment.
6. How is TDS treated for sale of property by an NRI?
For sale of property by a non-resident, TDS is required on the capital gains arising from the transaction. The buyer has to deduct TDS at specified rates and deposit it even on advance payments. However, a lower/nil deduction certificate can be obtained from the tax department to reduce TDS.
7. Is TDS required on interest income earned by non-residents?
Yes. Interest income payable to non-residents (e.g., interest on Indian company bonds or infrastructure debt funds) attracts TDS, often at concessional rates depending on the nature of investment.
8. What happens if TDS is not deducted or deposited on time?
If the payer fails to deduct TDS or deposits it late, interest and penalties may apply under the Income Tax Act. It is therefore important to deduct and deposit TDS within the prescribed timelines and file TDS returns electronically.
9. Do non-residents have to file an Indian tax return just because TDS was deducted?
Not necessarily. If all taxable income from India is fully tax-deducted at source and there is no other income or refund due, filing may not be mandatory. However, specific circumstances and treaty provisions (like DTAA) could still require filing — so professional advice is recommended.
10. Which form should the payer issue to the non-resident after deducting TDS?
After deducting TDS on payments to non-residents (other than salary), the payer issues Form 16A as evidence of tax deducted at source. This form helps the non-resident claim credit while filing their tax return.
