Part I-Section 195: TDS (Tax Deducted at Source) on Payments to Non-Residents

Here are some frequently asked questions related to Section 195 of the Income Tax Act:

Q. What is Section 195 of the Income Tax Act?

• Ans: Section 195 of the Income Tax Act mandates an individual or taxpayer to deduct TDS (Tax Deducted at Source) at the point when any payment is made to a non-resident or foreign company, which is taxable in India. This deduction of TDS should be as per the rate in effect at that point of making payment, whether the payment is made in cash, check, draft, or any other mode.

Q. Who Deducts TDS?

• Ans: TDS is compulsory to be deducted by any person, such as individuals, companies, partnerships, etc., in case any payment is made to a non-resident, provided such payments are taxable in India. The payments covered under Section 195 are interest (except under sections 194LB, 194LC, and 194LD), royalty, fees for technical services, capital Gains Proceeds, rent, dividends and any other taxable payment (other than salary) (Income from salary is covered under section 192 of the Income Tax Act.)

Q. When should TDS be deducted?

• Ans: This TDS amount should be deducted at the point when actual payment is made or when the payment amount is credited in the account of the payee (suspense accounts are also included), whichever occurs first.
• Note: There is no relaxation or exemption limit in this amount, meaning if any payment is made to a non-resident, then TDS is compulsory to be deducted, no matter how big the payment amount is.

Q. Is TDS applicable even if the nonresident has no office in India?

• Ans: Yes, TDS (Tax Deducted at Source) is compulsory to be deducted even if the person to whom payment is made (non-resident) does not possess any office in India. TDS is obligatory to be deducted if the non-resident’s income is taxable in India; all the other conditions do not survive. Also, TDS is only deducted on the part of the income that is taxable.

Q. Can non-residents apply for a zero or lower TDS rate?

• Ans: Yes, non-residents can seek a certificate allowing NIL/lower deduction under Section 197 of the Income Tax Act.

Part II - Section 197: Certificate for Lower/Nil TDS

Here are some frequently asked questions related to Section 197 of the Income Tax Act:

Q. What is Section 197 of the Income Tax Act?

• Ans: Using this section, non-residents (including NRIs, PIOs, and foreign companies) or payees request a lower or nil Tax Deduction at Source (TDS) certificate, if justified.

Q. Why is this section beneficial?

• Ans: Several times when TDS is deducted at full rates, it results in excess tax deduction, especially if the actual income is lower or there are deductions or losses. Section 197 of the Act prevents the unnecessary blockage of the funds of the taxpayer.

Q. How to request a TDS certificate under Section 197?

• Ans: Individuals can request a TDS certificate online at TRACES PORTAL under ‘Request for Form 13,’ using a Digital Signature Certificate (DSC) or an Electronic Verification Code (EVC).
• After visiting the said portal, taxpayers are first required to fill in Form 13. The Assessing Officer (AO) will first analyse your income, compliance history, and disputes related to taxation. If satisfied, the AO will thereafter issue a certificate allowing a lower/NIL TDS rate. The payer is asked to strictly adhere to the instructions mentioned in a TDS certificate.

Q. Is there any expiry date for a TDS Certificate?

• Ans: Yes, the TDS certificate does include the expiry date. It expires as per the date mentioned on it or till AO cancels it, whichever is earlier. Usually, TDS certificates issued under Section 197 of the IT Act remain valid up to March 31, the end of a financial year. If you want to continue with the certificate, you will need to furnish a new application following the aforesaid steps.