Whenever an Indian person or company pays any sum to a non-resident (or a foreign company) — whether it's interest, royalty, technical fees, rent, or any other income taxable in India — they must deduct TDS before making the payment. That's Section 195 in one sentence. Think of it as the TDS rule for international payments.
Who must deduct? Anyone — resident individual, HUF, company, partnership — who is responsible for paying a non-resident. There's no threshold limit here (unlike Section 194C or 194J). Even ₹1 of taxable income triggers the obligation. The deduction must happen at credit or payment, whichever is earlier — so the moment you book "Interest Payable" in your books for a foreign lender, TDS is due. The rate is the rate in force under the Finance Act or the applicable DTAA (Double Tax Avoidance Agreement), whichever is more beneficial to the non-resident. This is examined frequently as a 4-mark question — examiners love asking "when and at what rate."
The two escape routes students must know: First, under sub-section (2), if the payer believes only part of the payment is taxable in India (e.g., a lump-sum payment that includes both capital and income), they can apply to the Assessing Officer (AO) to determine the chargeable proportion — TDS is then only on that portion. Second, under sub-section (3), the non-resident recipient can apply to the AO for a Nil/Lower Deduction Certificate. Once granted, the payer deducts at the lower rate or nothing at all, until the certificate expires or is cancelled. Sub-section (6) adds a compliance layer: even if a payment is not taxable in India, the payer must still furnish information to the tax department (via Form 15CA/15CB in practice). The department wants to know about every rupee leaving India.
📊 Worked example
Example 1 — Full TDS on royalty payment
Rajesh & Co. Pvt. Ltd. (India) licenses software from TechCorp USA and pays a royalty of ₹25,00,000. India-USA DTAA caps royalty TDS at 15%. The domestic rate under Section 115A is 20% (plus surcharge/cess). The more beneficial rate is the DTAA rate.
| Particulars | Amount |
|---|---|
| Gross royalty payable | ₹25,00,000 |
| TDS @ 15% (DTAA rate) | ₹3,75,000 |
| Net payment to TechCorp USA | ₹21,25,000 |
Rajesh & Co. must deduct ₹3,75,000 and deposit it with the government. Form 15CA/15CB must also be filed before remitting.
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Example 2 — Partial chargeability under sub-section (2)
Ms. Iyer's company pays ₹40,00,000 to a Singapore firm for a project. Of this, ₹15,00,000 is reimbursement of actual costs (not income) and only ₹25,00,000 is the service fee (taxable). Ms. Iyer applies to the AO under Section 195(2).
AO determines chargeable proportion = ₹25,00,000 / ₹40,00,000 = 62.5%
| Particulars | Amount |
|---|---|
| Total payment | ₹40,00,000 |
| Taxable proportion (62.5%) | ₹25,00,000 |
| TDS @ 10% (assumed DTAA rate) | ₹2,50,000 |
| Net remittance | ₹37,50,000 |
Without the 195(2) application, TDS would have been ₹4,00,000 (10% on full ₹40,00,000) — costing the foreign party extra cash unnecessarily.
⚠️ Common exam mistakes
- Confusing 195 with 194J/194C — Students apply domestic TDS sections to foreign payments. Section 195 is the exclusive provision for non-resident payees; 194J/194C apply only to residents.
- Ignoring the DTAA benefit — Many students default to the domestic rate. Always check the applicable DTAA first; TDS is at the lower of domestic rate vs. DTAA rate, but only if the non-resident furnishes a Tax Residency Certificate (TRC).
- Forgetting sub-section (6) compliance — Students think if a payment isn't taxable, Section 195 doesn't apply at all. Wrong — even non-taxable payments must be reported (Form 15CA/15CB requirement). The AO must be kept informed.
- Mixing up who applies under (2) vs. (3) — Sub-section (2) application is by the payer (for partial chargeability); sub-section (3) certificate is sought by the non-resident recipient. Don't flip these in an exam answer.
- Missing the 'credit or payment, whichever is earlier' trigger — If you accrue interest payable to a foreign bank in your books on 31 March but actually pay on 15 April, TDS was due on 31 March, not 15 April. Late deduction attracts interest under Section 201(1A).
📖 Bare Act text — Section 195, Income Tax Act 1961
(click to expand)
(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode:
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.
Explanation 1.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).
(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.
(5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.
(6) The person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.
(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable.
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