TDS on Foreign Payments: What Indian Businesses & Freelancers Must Know in 2026

TDS (Tax Deducted at Source) on foreign payments is the tax an Indian payer must deduct before paying a non-resident or foreign company when that income is taxable in India. It falls under Section 393(2) of the Income-tax Act, 2025, which replaced Section 195 of the 1961 Act from 1 April 2026. Royalties and fees for technical services attract TDS at 20% plus applicable surcharge and 4% cess, unless a tax treaty gives a lower rate. Salary paid to a non-resident employee is covered by the salary TDS rules instead. For the full rate table by payment type, see our guide on Section 393 TDS rates on foreign payments.

For example, say your company pays a US consulting firm USD 10,000 for technical services that qualify as fees for included services under the India-US tax treaty. Under Indian law alone, you would deduct 20% plus 4% cess, which is USD 2,080. With the firm's Tax Residency Certificate and Form 41 on file, the treaty rate of 15% applies instead, so you deduct USD 1,500 and save USD 580 on a single payment.

Software licenses work differently. In 2021, the Supreme Court ruled in Engineering Analysis that payments for off-the-shelf software licenses, such as an Adobe Photoshop subscription bought from Adobe Inc. in the US, are not royalty under tax treaties. These payments usually attract no TDS once the vendor's treaty documents are in place.

Indian TDS does not apply when you receive foreign payments, because your overseas client is not bound by India's tax law. The client may still withhold tax under its own country's rules. For example, a US client can withhold 30% unless you submit Form W-8BEN claiming the India-US treaty. As an Indian resident, you report the income and pay tax on it in India when you file your return.

Three steps keep your foreign income clean on both sides:

• Share the right treaty form: Give US clients Form W-8BEN (individuals) or W-8BEN-E (businesses) claiming the India-US treaty, so they don't withhold tax at 30%.
• Pay advance tax in India: No tax is deducted at source on this income, so pay advance tax during the year if your total tax due is ₹10,000 or more.
• Claim credit for any foreign withholding: If a client still withholds tax abroad, claim credit for it under the DTAA when you file your Indian return, so the same income isn't taxed twice.

The lower of the two rates applies: the TDS rate under Indian law or the rate in the Double Taxation Avoidance Agreement (DTAA), the tax treaty India has signed with the vendor's country. Under Indian law, royalties and fees for technical services paid to a non-resident attract 20% TDS, plus surcharge for foreign companies earning over ₹1 crore and 4% health and education cess. A DTAA rate is final, so no surcharge or cess is added on top. To use the treaty rate, you need the vendor's Tax Residency Certificate (TRC) and Form 41 on file before you make the payment.

To claim the DTAA rate on a foreign payment, first confirm that India has a tax treaty with the vendor's country of residence, then collect three documents from the vendor before you pay: a Tax Residency Certificate (TRC), Form 41 (formerly Form 10F) and a No Permanent Establishment (PE) declaration. With these on file, you deduct TDS at the treaty rate and report it in Form 145 (formerly Form 15CA) before the payment goes out.

Tax Residency Certificate (TRC): The TRC is an official certificate issued by the local tax authority of your vendor’s country. It proves that your client is a tax resident of the country and is eligible for DTAA benefits. Think of it as the foreign version of the PAN Card.

You file Form 145 (formerly Form 15CA) online before most payments to a non-resident. A CA certificate in Form 146 (formerly Form 15CB) is needed only when the payment is taxable in India and above ₹5 lakh in the financial year, unless you hold a certificate from the tax officer. Which part of Form 145 you file depends on the payment:

• Part A: Taxable payment of up to ₹5 lakh in the financial year. No CA certificate needed.
• Part B: Taxable payment covered by a lower or nil deduction certificate or order from the tax officer. No CA certificate needed.
• Part C: Taxable payment above ₹5 lakh in the financial year. Get Form 146 from a CA first, then file Form 145.
• Part D: Payment that isn't taxable in India, such as an off-the-shelf software license covered by a tax treaty.

Some payments need neither form, such as payments for imported goods, which are on the exempt list in the Income-tax Rules, 2026. Missing the filing or getting the details wrong can attract a penalty of ₹1 lakh.

Exporters and freelancers receiving foreign payments stay compliant by tagging every payment with the correct RBI purpose code, keeping a Foreign Inward Remittance Advice (FIRA) for each payment, and filing GST returns that report the work as an export of services, usually under a Letter of Undertaking (LUT) so no IGST is charged. These records are what your CA, your bank and the GST department will ask for, so keep them together for every payment you receive.

Use the correct purpose code: A purpose code is an alphanumeric code issued by the RBI. This code must be attached to every incoming and outgoing international payment to clarify the intended use of funds and regulate the cross-border flow. For example, P0802 is the purpose code used when Indian companies or professionals receive a cross-border payment for software consultancy or implementation services. 

Maintain FIRA, eBRC and IEC records: The Foreign Inward Remittance Advice (FIRA) proves you have received a foreign payment in India. The Electronic Bank Realisation Certificate (eBRC) is digital proof that you have received payment for the goods or services you exported. The Import Export Code (IEC) is a 10-character code, the same as your business PAN, that goods exporters need for customs clearance. Service exporters and freelancers need one only to claim export benefits under the Foreign Trade Policy.

File GST returns correctly: Report your work as an export of services in your GST returns. Under Section 2(6) of the IGST Act, a supply counts as an export of services only when all five conditions are met:

• Supplier: You are located in India.
• Recipient: Your client is located outside India.
• Place of supply: The place of supply of the service is outside India.
• Payment: You receive payment in convertible foreign exchange, or in Indian rupees where the RBI permits it.
• Separate entities: You and your client are not branches or establishments of the same entity.

Exports of services are zero-rated, so file a Letter of Undertaking (LUT) each financial year to invoice without charging IGST.

While there is no TDS on incoming foreign payments, traditional banks can chip away a portion of your hard-earned money. To start with, banks don’t offer the best exchange rates.

They charge a forex markup as high as 3% on the prevailing exchange rate, ultimately reducing your payout. Moreover, there are inward remittance fees, SWIFT charges,  often passed on by the sender to the receiver, and intermediary bank fees eating into your profits.

This is where Skydo steps in as a smarter, quicker, and more cost-effective solution. With Skydo, you can create virtual accounts in key geographies like the US, UK, EU, and Australia right from India.

These virtual accounts work as local digital addresses, so your clients pay you as if they are making a domestic transfer. This way, they bypass the SWIFT charges.

Skydo also offers live exchange rates with no hidden markups. The fee structure is transparent, so you always know how much will be deducted from your incoming payment. 

After you receive the payment, the amount is credited to your bank account within 48 hours.

Sounds interesting? Why don’t you sign up for a quick demo and get a first-hand experience?