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| TL;DR Summary: |
| Section 195 TDS applies to all taxable payments made to non-residents. There is no minimum threshold for TDS deduction under this section. You must deduct TDS when you credit the payment or make it, whichever is earlier. The Act rate and DTAA rate both exist, and you can choose the lower treaty rate. To claim the lower DTAA rate, you need documents like TRC and Form 10F. Forms 15CA and 15CB are mandatory before processing most foreign remittances. You do not need Form 15CB if the payment is not taxable or is under ₹5 lakh annually. Grossing up is required when your contract with the foreign party specifies a net-of-tax amount. The formula is: Gross amount = Net amount ÷ (1 – TDS rate). Non-deduction leads to interest, penalties, 100% expense disallowance, and even prosecution. |
TDS on foreign payments applies when you owe a non-resident for income taxable in India, such as consulting fees, royalties, or interest. Incorrect rates or documentation can lead to disallowed expenses, interest, and penalties after the payment is made.
This PKC guide walks through when Section195 applies, how to fix the correct TDS rate under the Act versus a tax treaty and what Form 15CA and 15CB actually certify. We also take a look at what happens when you skip deduction altogether.
When Section 195 TDS Applies to a Payment to a Non-Resident
Section 195 of the Income Tax Act, 1961 applies whenever you make a payment to a non-resident, or a foreign company, and that payment is chargeable to tax under Indian law.
It doesn’t matter whether the non-resident is an individual freelancer in the UK, a software vendor in Singapore, or a lending institution in the US. If the income is taxable in India, you deduct TDS before you pay.
The section applies to any person responsible for making the payment. This includes individuals, Hindu Undivided Families (HUFs), partnership firms, LLPs, companies (both Indian and foreign), government bodies, and banks. The obligation is not limited to resident payers. Even a non-resident making a payment to another non-resident must deduct TDS under Section 195 if the income is taxable in India.
When must you deduct?
The obligation arises at the earliest of two events, when you credit the amount to the payee’s account or when you make the payment, whichever happens first.
There is no minimum threshold exemption under Section 195. If you pay a foreign consultant ₹15,000 for a one-off report, and if that fee is taxable in India, TDS applies on the full amount.
What types of payments are covered?
The section covers all payments other than salary (handled separately under Section 192), including:
- Interest on loans or debentures taken from a non-resident
- Royalty for use of patents, trademarks, copyrights, or technical know-how
- Fees for technical services (FTS) including consultancy and managerial services
- Capital gains on transfer of Indian assets by a non-resident
- Rent for property or equipment leased from abroad
- Business profits attributable to a Permanent Establishment (PE) in India
- Any other sum that constitutes income accruing or arising in India
TDS also applies to payments made in kind, not just cash payments. If you transfer goods, property, or any other asset to a non-resident as consideration, you still have withholding obligations on the value of that consideration.
Deciding factor is taxability
A payment to a non-resident isn’t automatically taxable in India just because the payer is based here.
You need to check whether the income is deemed to accrue or arise in India under Section 9, and separately, whether a tax treaty changes that position.
For example, if you’re importing goods and paying a foreign supplier purely for merchandise, with no service or technical component attached, that payment is usually not chargeable to tax in India, and Section 195 doesn’t apply.
But the moment a service element gets bundled in, such as installation, training, or after-sales technical support, you need to examine that portion separately.
As the payer, you are responsible for determining the correct TDS treatment. If tax is not deducted, the tax department pursues the payer, not the non-resident recipient.
That is why you must review every foreign payment before processing. Identify the nature of payment, assess its treatment under Indian tax law, and check whether a tax treaty changes the outcome.
Skipping this step, even for small or routine payments, is a common source of compliance gaps.
How to Determine the Correct TDS Rate – Act Rate vs. DTAA Rate
Once you’ve established that a payment is taxable, the next question is the rate.
You have two options: the rate prescribed under the Income Tax Act, or the rate under India’s Double Taxation Avoidance Agreement (DTAA) with the recipient’s country of residence.
Rates under the Act
The Act rate varies depending on the nature of payment. For non-residents, rates are generally higher and fixed. Under Section 195, rates can range from 10% to 30% depending on the income type. For example:
- Interest on investments: 20%
- Long-term capital gains under Section 115E: 12.5%
- Long-term capital gains on listed securities under Section 112A: 10%
- Any other income: 30% (35% for foreign companies)
Rates under DTAA
The DTAA rate can be significantly lower. India has signed DTAAs with nearly 100 countries, including the US, UK, Canada, Australia, Singapore, Germany, and the UAE.
These treaties often cap withholding tax rates at 10-15% for interest, royalties, and fees for technical services, compared to the higher domestic rates
For example, under the India-Singapore DTAA, royalties may be taxed at 10% instead of the domestic rate of 20%. Under the India-Canada DTAA, interest may be capped at 15%.
Which rate should you apply?
The taxpayer can choose the more beneficial provision. If the DTAA offers a lower rate than the Act, you can apply the DTAA rate, provided you meet the documentation requirements.
| Document | Purpose |
| Tax Residency Certificate (TRC) | Proves tax residency in the treaty country |
| Form 10F | Self-declaration with details not covered in the TRC |
| No Permanent Establishment declaration | Confirms no PE in India, where relevant |
| PAN (if available) | Required in certain cases, though a PAN exemption applies for some treaty claims |
Without these documents, the payer must deduct TDS at the higher Act rate.
Banks and companies in India will apply the standard full rate if proper DTAA documentation is not provided.
Surcharge and cess also apply: When you apply a DTAA rate, surcharge and cess are not added on top of the treaty rate.
The treaty rate is a ceiling on the total tax, and adding domestic surcharge and cess on top would breach that ceiling. If you’re applying the Act rate instead, though, surcharge and cess do apply in the usual manner.
Form 41 is another recent requirement: Non-resident taxpayers claiming DTAA benefits must furnish Form 41 to claim treaty benefits. This form is required whenever treaty benefits are claimed and affects TDS deductions.
Most Favoured Nation (MFN) clause: Does not automatically apply a lower third-country rate. The Supreme Court ruled in October 2023, in the Nestle SA case, that MFN benefits require a specific government notification under Section 90(1) before they can be claimed.
If your DTAA analysis is relying on an MFN clause without checking for the relevant notification, you’re on shaky ground.
Given how easily rate selection can go wrong, most businesses turn to trusted tax advisors like PKC Management Consulting to run this analysis before every material foreign payment. Treaties get amended, notifications get issued, and rates that applied twelve months ago may not hold today.
Form 15CA and 15CB – What Each One Certifies
When you make a foreign remittance to a non-resident, you are generally required to file two forms with the Income Tax Department: Form 15CA and Form 15CB.
These forms are the government’s mechanism to track cross-border payments and ensure tax compliance.
Form 15CA is a declaration filed by the person making the remittance (the remitter). It is filed online with the Income Tax Department and submitted to the Authorised Dealer (usually your bank) before the remittance is processed.
It has four parts:
- Part A: for payments that are taxable but the aggregate remittance doesn’t exceed ₹5 lakh in the financial year
- Part B: for payments where you’ve obtained an order or certificate from the Assessing Officer under Section 195(2), 195(3), or 197
- Part C: for taxable payments exceeding ₹5 lakh, where a CA certificate (Form 15CB) is required
- Part D: for payments not chargeable to tax under the Act at all
Form 15CB is a Tax Determination Certificate issued by a Chartered Accountant (CA). It certifies that the remittance to a non-resident complies with the provisions of the Income Tax Act and any applicable DTAA.
The CA issuing Form 15CB verifies:
- Details of the remitter and the recipient
- Nature and purpose of the remittance
- Amount and currency of remittance
- Taxability under the Income Tax Act
- Applicable DTAA provisions (if any)
- Rate and amount of TDS deducted
Form 15CB is required only when two conditions are met simultaneously:
- The proposed remittance is chargeable to tax in India under the Income Tax Act
- The aggregate of remittances to the same non-resident during the financial year exceeds ₹5 lakh
When must these forms be filed?
Both forms must be filed before the remittance is made. There is no separate deadline, the timing is tied to the payment itself. You cannot make the payment first and file the forms later.
The filing process is online through the Income Tax e-filing portal. The sequence is important.
You cannot file Form 15CA Part C without first having a Form 15CB in hand, since the CA certificate’s Unique Document Identification Number (UDIN) and details feed directly into the 15CA filing.
Banks usually require both forms, along with the underlying invoice, agreement, and TRC where a treaty rate is claimed, before they release funds.
Missing or inconsistent documentation causes most remittance delays. Get the paperwork right the first time to avoid unnecessary delays, especially for time-sensitive overseas vendor payments.
Note: effective 1 April 2026, under the Income-tax Act, 2025, Form 15CA has been renamed Form 145 and Form 15CB has been renamed Form 146.
The structure, four-part framework, and ₹5 lakh threshold remain broadly the same; only the form numbers and the underlying section references, now Sections 393, 395, and 397, have changed.
When a CA Certificate (15CB) Is Not Required
Form 15CB is not required for every foreign remittance. Several scenarios exempt you from obtaining this CA certificate.
1. Remittance is not chargeable to tax in India
If the payment you are making to a non-resident is not taxable in India, Form 15CB is not required. Instead, you file Form 15CA Part D directly. The key question is whether the income is chargeable to tax under the Income Tax Act.
2. Aggregate remittance does not exceed ₹5 lakh in a financial year
If the total remittance to the same non-resident during the financial year is ₹5 lakh or less, Form 15CB is not required. You file Form 15CA Part A without needing a CA certificate. This is a self-declaration by the remitter. Note that this is the aggregate amount, you cannot split payments to stay below the threshold.
3. Lower or nil tax deduction certificate obtained
If you have obtained a certificate under Section 195(2), 195(3), or 197 from the Assessing Officer allowing deduction at a lower rate or nil rate, Form 15CB is not required. You file Form 15CA Part B.
4. Specified exempt transactions
Rule 37BB(3) of the Income Tax Rules lists 33 categories of payments for which neither Form 15CA nor Form 15CB is required at all, regardless of amount. These are cases where the government has already decided the transaction doesn’t need this level of scrutiny. These include:
- Advance payments against imports of goods
- Payment for imports settled through a letter of credit
- Refund of excess share application money
- Trade related remittances such as payments for freight, insurance, or shipping in specified cases
- Certain payments for maintenance of offices abroad
- Business travel-related remittances
5. Payments not requiring RBI approval
Individuals making remittances that do not require RBI approval are not required to furnish Form 15CA and 15CB.
Remember:
- Even when Form 15CB is not required, you may still need to file Form 15CA (Part A, B, or D depending on the situation). The exemption is from the CA certificate, not from all compliance.
- Some banks have internal policies that require a CA certificate for all foreign remittances above a certain amount, regardless of the legal exemption. Check with your bank before assuming you can skip Form 15CB.
Mistake to Avoid:
Treating a payment as exempt without documenting why. Even where no 15CB is required, banks and, later, tax officers may ask for the basis on which you concluded no TDS applied or no certificate was needed.
Keep a short internal note, the invoice, and the relevant Rule 37BB category reference on file for every payment you process without a CA certificate.
Grossing Up: What It Means When the Foreign Party Wants a Net Amount
Grossing up comes into play when a foreign party negotiates a contract on a net-of-tax basis, meaning they expect to receive the full agreed amount in hand, with the Indian payer bearing the TDS cost separately.
This is common in technical service agreements, software licensing deals, and loan arrangements where the foreign vendor has priced the deal without factoring in Indian withholding tax at all.
What is grossing up?
Grossing up means increasing the gross payment so that after deducting TDS, the net amount received by the non-resident equals the agreed amount.
Example: Suppose you agree to pay a foreign consultant ₹100,000 net of tax. The applicable TDS rate is 20%. If you simply deduct 20% from ₹100,000, the consultant receives only ₹80,000. To ensure they receive ₹100,000 net, you must gross up the payment.
The formula is:
Gross amount = Net amount ÷ (1 – TDS rate)
In this example: ₹100,000 ÷ (1 – 0.20) = ₹100,000 ÷ 0.80 = ₹125,000
You pay ₹125,000, deduct 20% TDS (₹25,000), and the consultant receives ₹100,000 net.
When does grossing up apply?
Grossing up is required when there is an agreement or arrangement where the tax is to be borne by the deductor (the payer) rather than recovered from the deductee (the recipient).
Section 195A of the Income Tax Act deals with this specifically. If the tax is borne by the payer, the amount on which TDS is calculated must be grossed up to include the tax component.
This has a direct impact on your budgeting and contract negotiation.
A contract stating “₹10 lakh, taxes to be borne by client” isn’t a ₹10 lakh cash outflow, it’s effectively ₹12.5 lakh after gross-up (assuming a 20% tax rate). If this isn’t factored in during negotiations, actual costs can exceed the original budget.
How to report grossing up
If your contract is structured on a “net of tax” basis, you must indicate this in your filings. Form 146 (where applicable) has a specific field for this, Item 26 must be marked “YES”. Failure to do so may trigger an immediate tax demand.
In Form 27Q (the quarterly TDS statement for payments to non-residents), there is a “Grossing up Indicator” field. You must indicate whether the TDS is being borne by the deductor (grossed up) or recovered from the deductee (not grossed up).
Impact on TDS calculation
Grossing up also affects TDS return reporting and Form 16A. The TDS certificate issued to the non-resident should reflect the grossed-up income figure, not just the net amount paid, since that grossed-up figure is what was legally deemed as the payee’s income for TDS purposes.
Error to avoid:
A common mistake is grossing up using the DTAA rate before confirming treaty eligibility. If the recipient later fails to provide a valid TRC, the tax must be recalculated at the higher Act rate, increasing the payer’s cost beyond what was originally budgeted.
Consequences of Not Deducting TDS on a Foreign Payment
Missing TDS on a foreign payment doesn’t just create a tax issue, it can affect expense deductions, strain cash flow, and, in serious cases, expose responsible officers to personal liability.
1. Assessee-in-default (Section 201)
If you fail to deduct TDS or deduct less than required, you become an assessee-in-default under Section 201.
You must pay mandatory interest at 1% per month from the date TDS should have been deducted until it is deducted, and 1.5% per month from the date of deduction until it is deposited with the government.
This interest cannot be waived or claimed as a business deduction and can significantly increase your total liability.
2. Disallowance of expenses (Section 40(a)(i))
If TDS is not deducted on a payment to a non-resident, 100% of the payment will be disallowed as a business expense in the year the expense was incurred.
For example, if you paid 50 lakh INR to a foreign consultant and did not deduct TDS, that ₹50 lakh is disallowed as an expense. Your taxable profit increases by 50 lakh INR, and you pay tax on that amount, at the applicable corporate tax rate. This can easily wipe out the benefit of the transaction.
If TDS is deducted but not deposited on time, the expense is disallowed for that year but can be claimed in the year when the TDS is actually paid.
3. Penalty under Section 271C
Failure to deduct TDS can attract a penalty up to 100% of the amount that should have been deducted. This is separate from and in addition to the interest under Section 201(1A).
The penalty is discretionary, meaning the tax officer weighs the facts, but a pattern of repeated non-compliance makes a favourable outcome less likely.
4. Prosecution under Section 276B
In cases of wilful failure to deposit TDS that has already been deducted, the law provides for rigorous imprisonment ranging from three months to seven years, along with a fine.
This applies specifically to cases where TDS was deducted from the payment but not deposited with the government, which the law treats more seriously than a failure to deduct in the first place, since the money was collected on the government’s behalf and then withheld.
5. Penalty for non-filing of Form 15CA/15CB
Even if no TDS is deductible, failing to file Form 15CA and 15CB (where required) attracts a penalty of ₹1 lakh. This is separate from the consequences of non-deduction of TDS.
6. Scrutiny and notices
The Income Tax Department actively uses Form 15CA and 15CB data to issue notices under Section 133(6) and Section 148A. If your foreign remittances are not properly documented, you can expect scrutiny.
7. Reputational and operational impact
Beyond the financial penalties, non-compliance can damage your relationship with the tax department.
Repeated defaults can lead to more frequent scrutiny, higher audit risk, and operational disruptions.
Your TDS obligation is independent of the non-resident’s tax position. Even if the recipient pays tax elsewhere or has no taxable presence in India, you remain liable to deduct and deposit TDS. Otherwise, you continue as an assessee-in-default.
Getting Section 195 wrong can cost far more than the TDS shortfall. Interest accrues monthly, disallowance increases your taxable income, and repeated defaults can trigger greater scrutiny of future foreign payments.
Determining the correct taxability and TDS rate before making the payment is far cheaper than dealing with the consequences later.
PKC’s Cross-Border Payment & Section 195 Advisory
Cross-border payments carry a layer of complexity domestic transactions don’t: treaty interpretation, TRC verification, grossing-up mechanics, and a compliance sequence where one wrong step delays your remittance or triggers a disallowance months later.
PKC Management Consulting has been helping businesses navigate cross-border payment complexities for over three decades. With 35+ years of experience, 100+ consultants, and a pan-India presence, PKC brings deep expertise to international tax and cross-border compliance.
Our NRI Xclusive practice is specifically designed to address the needs of non-residents and businesses making cross-border payments. Our service offerings include:
- Individual Tax Advisory including tax planning and income tax return filing
- DTAA Advisory helping clients claim treaty benefits and reduce withholding tax
- Capital Gains Advisory including land sale tax and repatriation advisory
- Corporate Tax Advisory including company law compliances, income tax audits, and filings
- International Taxation, advising on tax implications of international business activities
PKC has a track record of delivering results. We have helped clients avoid over ₹10 lakh in double taxation for a single NRI with vested RSUs from a US company. We have helped an NRI squash a demand notice, resulting in savings of ₹10 crore.
How PKC can help with your cross-border payments
Our approach is practical and client-focused. We provide prompt and professional service with 24-hour query resolution. Our international tax experts understand the nuances of cross-border transactions and can guide you through the complexities.
PKC can assist with:
- Determining Section 195 applicability: assessing whether your payment requires TDS deduction
- DTAA rate analysis: identifying the correct treaty rate and preparing documentation (TRC, Form 10F, Form 41)
- Form 15CA and 15CB certification: obtaining the required CA certificate and filing declarations
- Grossing up calculations: ensuring correct computation when contracts specify net amounts
- TDS deposit and reporting: helping with TDS payment, TAN registration, and quarterly TDS statements (Form 27Q)
- Lower tax deduction certificates: applying for Section 197 certificates where appropriate
- Remediation: assisting with past defaults, interest calculations, and penalty mitigation
Cross-border payment compliance is not a do-it-yourself exercise. The stakes are high, and the rules are complex.
Engaging a firm like PKC with deep experience in international tax can save you from costly mistakes and help you optimise your tax position legitimately.
FAQs
1. Is there a minimum amount below which Section 195 TDS doesn’t apply?
No. Unlike many domestic TDS provisions, Section 195 has no minimum threshold. If the payment to a non-resident is taxable in India, TDS applies from the first rupee, regardless of how small the amount is.
2. Can I apply the DTAA rate without a Tax Residency Certificate?
No. A valid Tax Residency Certificate from the non-resident’s home country is mandatory to claim a treaty rate. Without it, you must apply the rate prescribed under the Income Tax Act, even if the treaty rate would otherwise be lower.
3. What happens if I deduct TDS at the wrong rate?
If you deduct too little, you remain liable for the shortfall, plus interest under Section 201(1A) from the date the deduction was due. If you deduct too much, the non-resident can typically claim a refund by filing a return in India, though this adds delay and paperwork on their end.
4. Do I need Form 15CB for every foreign payment?
No. Form 15CB is required only when the payment is taxable, the aggregate remittance to that recipient exceeds ₹5 lakh in the financial year, and you haven’t obtained a lower-rate certificate from the Assessing Officer. Payments below that threshold, or those falling under the 33 exempted categories in Rule 37BB(3), don’t need it.
5. Who is responsible if TDS isn’t deducted correctly, the Indian payer or the foreign recipient?
The Indian payer. You’re treated as the “assessee in default,” which means the interest, penalty, and disallowance consequences fall on you, regardless of the non-resident’s own tax compliance in their home country.
6. Does grossing up apply automatically whenever I pay a foreign vendor?
No. Grossing up applies only when the contract specifies a net amount and the Indian payer has agreed to bear the tax cost. If TDS is deducted from the gross invoice amount as normal, with the non-resident receiving the balance after deduction, no grossing up is needed.
7. Are Forms 15CA and 15CB still the correct forms to use in 2026?
For remittances made before 1 April 2026, yes. From 1 April 2026, under the Income-tax Act, 2025, these forms have been renamed Form 145 and Form 146, respectively. The underlying requirements, four-part structure, and ₹5 lakh threshold for CA certification remain largely the same.
