What is Section 195 of Income Tax Act
What is Section 195 of Income Tax Act
To curb tax evasion and facilitate smooth tax collection, the government introduced the system of tax deduction at source(TDS). As per the provisions of TDS, the tax must be deducted by the payer before making payments to other parties.
Section 195 of the Income Tax Act provides for TDS on payments to non-resident Indians. Let us explore the provisions of section 195 of the Income Tax Act, the TDS rate for NRI, and much more.
What is Section 195 of the Income Tax Act?
Section 195 of the Income Tax Act 1961 states the provisions and rules for deducting TDS on payments or incomes of non-resident Indians. This section enumerates all the aspects relating to tax deductions, rates of TDS, and the rules applicable to TDS.
TDS on income of NRIs must be deducted at the time of actual payment or crediting the income, whichever is done earlier.
Who is a Non-Resident?
Understanding who is a non-resident, as per section 6 of the Act, is essential for section 195 TDS.
A person shall be considered to be an Indian if they satisfy the following conditions:
The stay period in India must be 182 days or more in a financial year, or
One must stay in India for 60 days or more during one financial year and 365 days or more during the four preceding financial years.
Thus, individuals who do not stay for the number of days mentioned above in India will be considered non-residents in that financial year.
Who Should Deduct TDS Under Section 195?
As per the Income Tax Act, any person who makes a payment to NRI must deduct tax at source under section 195 of the Income Tax Act. The following are the persons liable to deduct tax at source:
Individuals
HUFs
Partnership firms
Foreign companies
Non-Resident Indians
Juristic individuals (corporate, govt. agency)
Individuals with income exempt from India
Section 195 of Income Tax Act TDS Rates
It is crucial to know that section 195 TDS requires all payers to deduct TDS while paying an NRI, irrespective of the amount. There is no threshold limit for TDS in the case of NRIs. Besides, the TDS rates vary as per the type of income.
| Type of Income | TDS Rate |
|---|---|
| Income from long-term capital gains | 10% |
| Income, payments, & transactions from investments | 20% |
| Other sources of long-term capital gain (includes TDS for NRI on sale of property) | 20% |
| Income accrued from long-term capital gain u/s 115E Shares of Indian company Govt-issued securities Debentures and Deposits of a Public Company in India | "10% |
| Income accrued from short-term capital gain u/s 111A | 15% |
| Interest payable on the money borrowed in foreign currency | 20% |
| Royalty or fees for technical services | 20% |
| Winnings from lottery, card games, horse races, online games, etc. | 30% |
Payment of TDS
TDS can be deducted in the following ways:
The deductor/buyer must obtain a TAN (Tax Deduction Account Number). They must also have their PAN number as well as the NRI.
Tax must be deducted at the time of making the payment.
The amount of TDS must be deposited through challan for TDS payment. It must be made on or before the 7th of the next month, in which the amount is deducted.
One can deposit the TDS online or through government authorised banks.
Once the TDS is deposited, the deductor should file a TDS return in Form 27Q. Following are the due dates for filing the TDS return:
| Quarter | Due Date for TDS Return |
|---|---|
| April to June | 30th July |
| July to Sept | 31st Oct |
| Oct to Dec | 31st Jan |
| Jan to Mar | 31st May |
Consequences of Non-Compliance with Section 195
Failure to fulfil the provisions of section 195 TDS leads to the following consequences:
If the tax deducted is not submitted or withheld for the given time, it will be disallowed as a business expense for that year and will be allowed in the year of payment.
Failure to submit the TDS after deduction attracts interest @1.5% from the date of deduction until the date it is deposited.
TDS deducted but not paid leads to a penalty equivalent to the TDS amount.
If the TDS deducted is less, then a penalty equal to the difference between the deductible amount and the amount actually deducted will be levied.
Conclusion
Section 194 of the Income Tax Act provides the rules for tax deductions for payments to NRIs. It is essential to be aware of the rules to ensure compliance and avoid any tax implications and penalties. Persons deducting tax before making payment to NRIs must deposit it with the government within the specified time.
Only after the amount is deposited with the govt NRIs claim a tax deduction while filing their income tax return. They can also claim a deduction under section 80D of the Income Tax Act if they are paying a premium for a health insurance plan in India.
Importance of Medical Insurance
Similar to how the knowledge of income tax provisions helps you to keep your income tax sorted, medical insurance plans assist you in times of medical emergencies. Whether you are an NRI or resident Indian, investing in health policies provides you with the best medical assistance when needed.
If you are looking for cashless insurance, you can choose Tata AIG as your provider. Tata AIG offers various health plans that provide comprehensive coverage and allow you to access the best medical facilities in a cashless manner at any hospital in the country.
Disclaimer / TnC
Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.
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