Tax withholding on Foreign Payments- TDS on Foreign Payments

Withholding tax is nothing but the retention tax. It is every taxpayer’s duty or obligation to withhold / retain the tax while paying rent, commission or payment for professional services at rates specified according to the current tax laws. When a person is obligated to pay to a non-resident (other than a company) or to a foreign company, required to deduct income tax there on at the rates in force. Here is an article about “the tax withholding (TDS) on foreign payments.”

Tax withholding on Foreign Payments (TDS Deduction)

Withholding tax is known as TDS Deduction. It is the responsibility of the taxpayer to withhold or deduct tax while making payments under specific heads such as rent, commission, payment in favour of professional services, salaries, contracts etc. These deductions is to be made at the rates that have been specified in the current tax regime of a particular Financial Year.

Under Section 195 of the IT Act, when a taxpayer makes a payment to a foreign company or to an NRI, by way of interest or any other amount other than salary, he shall deduct tax at source at the rate applicable at force.

Responsibility of deducting / withholding tax on Foreign Payments

Under section 195 of the Income Tax Act, the responsibility to deduct income tax on any payment made to a non resident, not being a company or to a foreign company, shall be on the person making such payment.

Deductible Payments under Section 195 of IT Act

• Amount of Interest other than the interest referred to in section 194LB, 194LC and 194LD) paid to NRI or Foreign Company.
• Any sum other than salaries chargeable under the provision of this Act.

Provisions regarding the time of the deduction of tax on foreign payments

• The taxpayer needs to deduct the TDS / withhold tax at the time of credit of such income to the account of payee or at the time of the payment, whichever is earlier.
• For this purpose it shall be deemed to be credit of such income to the account of the payee, credit to “interest payable account” or “suspense account”.
• When any Government or a public sector bank or a public financial institution is obligated to pay any interest, then the TDS shall be deducted only at the time of the payment of the interest, either in cash or by cheque or draft or any other mode.

Threshold Limit for the TDS for Foreigners

• There is no threshold limit for deducting tax at source on foreign payments.
• However, the tax shall be deducted on the amount that is chargeable to tax in India.
• Hence, if there is no sum chargeable to tax, then no tax is required to be deducted on foreign payments.
• Also, for other sums under section 195, TDS needs to be deducted on any sum chargeable under the provisions of IT Act other than salaries shall also be liable for the deductions.

Related Read: How to file Income Tax Return by NRI in India?

Rates for Tax withholding on Foreign Payments

As per the Finance Act, 2020, the rates for withholding tax under section 195 are as follows:

Important Note: The rates mentioned above shall be liable to be increased by 4% of educational cess and applicable applicable surcharge to corporate / non-corporate assessee. However, the rates mentioned in DTAA should be applied if they are more beneficial.

Suggested Read: Funding of Indian Subsidiary in India.