TDS on Foreign Payments: Section 195 Rates & Rules (2026)
TL;DR - Summary
- What is TDS on foreign payments under Section 195? - TDS under Section 195 is tax deducted by an Indian payer when paying a non-resident if the payment is chargeable to tax in India.
- What are the applicable TDS rates on foreign payments? - The applicable TDS rate depends on the payment type and tax law. A lower rate may apply under a DTAA if the payment qualifies.
- Who deducts TDS, and does it apply when an Indian freelancer receives money from abroad? - An Indian person or business making a taxable payment to a non-resident deducts TDS; Section 195 does not apply merely because an Indian freelancer receives payment from a foreign client.
- How can you claim lower rates under DTAA? - A foreign payee can establish treaty eligibility by providing the required documents, including a Tax Residency Certificate and Form 10F where applicable.
- What compliance steps must an Indian business follow? - An Indian business must obtain a TAN where required, deduct TDS at the applicable rate, deposit the tax by the deadline, file the prescribed TDS statement, issue the TDS certificate and complete applicable remittance reporting.
What Is TDS on Foreign Payments Under Section 195?
TDS on foreign payments is tax that an Indian payer must deduct at source under Section 195 of the Income Tax Act, 1961, when making a payment to a non-resident or foreign company if the payment is chargeable to tax in India. The payer must deduct tax at the applicable rate when the amount is credited to the recipient's account or paid, whichever occurs first.
The obligation rests with the person making the payment, whether an individual, Hindu Undivided Family (HUF), firm, Limited Liability Partnership (LLP), company, or government body. For example, if an Indian advertising firm pays ₹12 lakh to a US-based digital marketing agency for services taxable in India, it must deduct TDS at the applicable rate before remitting the balance. The actual rate depends on the nature of the payment and applicable tax provisions, including any relevant tax treaty.
💡 QUICK INSIGHT
Section 195 concerns payments made by an Indian payer to a non-resident. If you are an Indian freelancer receiving payment from a foreign client for services performed from India, Section 195 does not apply merely because the payment comes from abroad.
Does TDS Apply When You Receive Foreign Payments in India?
No. Section 195 of the Income Tax Act, 1961, governed tax deduction at source (TDS) on payments made by Indian residents to non-residents when the income was chargeable to tax in India. It did not apply merely because an Indian freelancer or exporter received payment from a foreign client. The direction of payment matters, i.e., Section 195 covered qualifying payments to non-residents, not incoming payments from overseas clients.
For transactions from 1 April 2026, the corresponding withholding provisions are covered under Section 393 of the Income-tax Act, 2025.
However, Indian businesses making payments to foreign vendors must assess whether the payment is taxable in India before determining their TDS obligations.
- Import of Goods: Payments for goods purchased from foreign suppliers generally do not attract TDS when the transaction does not give rise to income taxable in India. The treatment depends on the transaction and the applicable tax provisions.
- Business Payments to Non-Residents: If a foreign vendor earns business income, the existence of a permanent establishment (PE) in India can affect its taxability. However, the absence of a PE does not automatically exempt every type of payment from Indian tax.
- Royalty and Fees for Technical Services (FTS): These payments may be taxable in India even if the foreign recipient has no PE. The applicable domestic tax provisions and Double Taxation Avoidance Agreement (DTAA) determine the tax treatment and rate.
Before making payments to foreign vendors, Indian businesses should assess the nature of the income, its taxability, and any applicable treaty benefits. A Tax Residency Certificate (TRC) and a no-PE declaration may support a claim for treaty benefits where relevant, but neither document automatically eliminates a TDS obligation.
Which Payments Attract TDS Under Section 195?
Payments to non-residents that are chargeable to tax in India may attract TDS under Section 195 of the Income Tax Act, 1961. These include interest, dividends, royalties, fees for technical services, professional fees, commission, brokerage, and taxable capital gains. For payments from 1 April 2026, the corresponding withholding provisions fall under Section 393 of the Income-tax Act, 2025.
The following factors determine whether TDS applies:
- Interest and Dividends: Payments to foreign lenders and non-resident shareholders may attract TDS at the applicable rates.
- Royalties and Software Licences: Payments for intellectual property rights, copyright licences, and certain software arrangements may be taxable as royalties.
- Technical and Professional Services: Fees for technical services (FTS), consultancy, and professional services may attract TDS when the income is taxable in India.
- Commission and Brokerage: Payments to foreign agents and brokers may attract TDS depending on where the income arises and the applicable tax provisions.
- Capital Gains: Gains earned by non-residents from selling assets in India, including property, may attract TDS.
For property sold by an NRI, the applicable withholding depends on the nature of the gains and the relevant tax provisions. For transfers on or after 23 July 2024, the long-term capital gains rate is generally 12.5% for property held for more than 24 months. Short-term gains are subject to the applicable rate. The buyer must determine the correct withholding amount, including applicable surcharge and cess.
Not every payment to a foreign vendor attracts TDS. Payments for imported goods may fall outside the withholding requirement if the transaction does not generate income taxable in India. Similarly, a foreign vendor's business income may not be taxable in India if the vendor has no permanent establishment (PE) here and the applicable tax treaty supports that treatment. A Tax Residency Certificate (TRC) and a no-PE declaration may support a treaty claim, but do not automatically exempt a payment from TDS.
Software and cloud-service payments require particular care. In Engineering Analysis Centre of Excellence Ltd. v. CIT (2021), the Supreme Court held that payments for certain standardised software did not qualify as royalties under the relevant provisions and tax treaties. However, cloud services, SaaS subscriptions, and licensing arrangements may receive different tax treatment depending on the rights granted and contract terms. Consult a chartered accountant if the classification is unclear.
TDS is generally deducted when the payment is credited to the non-resident's account or paid, whichever occurs first. The obligation can apply to individuals, Hindu Undivided Families (HUFs), firms, Limited Liability Partnerships (LLPs), companies, and government bodies making qualifying payments.
Related Reading: Foreign Exchange Management Act (FEMA).
What Are the TDS Rates on Foreign Payments?
There is no single TDS rate for foreign payments. The applicable rate depends on the type of income, the recipient's tax status, and whether India has a Double Taxation Avoidance Agreement (DTAA) with the recipient's country. Where permitted, the payer generally applies the more beneficial rate under Indian tax law or the applicable DTAA, subject to the treaty's conditions and documentation requirements.
TDS Rates on Different Foreign Payments
The following table provides indicative rates under Indian domestic tax law and examples of treaty rates. Actual rates depend on the transaction, the recipient's status, and the applicable treaty.
| Payment Type | Standard Rate Under Indian Tax Law | DTAA Rate Examples |
|---|---|---|
| Fees for technical services (FTS) | 20% + applicable surcharge and 4% health and education cess | USA: generally 15% for fees for included services; Singapore: generally 10% |
| Royalty, including software and IP licensing | Generally 20% + applicable surcharge and cess | Often 10% to 15%, depending on the treaty and type of royalty |
| Interest | Generally 20% for specified interest income, although special rates apply to certain borrowing arrangements | Often 10% to 15%, depending on the treaty and type of interest |
| Dividend income | Generally 20%; 10% applies to specified dividend income from an IFSC unit | Treaty rate where applicable |
| Long-term capital gains on specified listed securities | Generally 12.5% for transfers on or after 23 July 2024, subject to applicable conditions | Treaty treatment depends on the asset and treaty |
| Other long-term capital gains | Generally 12.5% for transfers on or after 23 July 2024 | Treaty treatment depends on the asset and treaty |
| Short-term capital gains on specified listed equity securities | 20% for transfers on or after 23 July 2024, subject to applicable conditions | Treaty treatment depends on the asset and treaty |
| Business income with no taxable presence in India | Generally nil if the income is not taxable in India | Generally nil where the applicable treaty protects the income from Indian taxation |
| Import of goods | Generally nil if the transaction does not generate income taxable in India | Depends on the transaction and applicable treaty |
| Other taxable income | Generally 30% for relevant non-resident income; 35% may apply to foreign companies, depending on the category | Treaty rate where applicable |
Note: These are indicative rates, not a substitute for checking the specific provision and treaty. Domestic rates may also vary according to the type of income. Applicable surcharge and cess must be considered when using domestic rates. Where a DTAA caps the tax rate, the treaty provisions and eligibility requirements determine the applicable rate.
The domestic rate of 20% can increase when applicable surcharge and the 4% health and education cess are added. Where a beneficial treaty rate applies, the tax generally cannot exceed the treaty's applicable limit, subject to the treaty's terms and eligibility requirements.
If the foreign recipient does not provide a Permanent Account Number (PAN), a higher withholding rate may apply under the applicable provisions. Under Section 206AA of the Income Tax Act, 1961, the general rule is to deduct tax at the highest of the applicable rates, including 20%, subject to exceptions for certain non-residents and prescribed circumstances.
How Does TDS Grossing Up Work?
Under Section 195A of the Income Tax Act, 1961, grossing up applies when the payer agrees to bear the tax on behalf of the non-resident and the recipient is entitled to receive a fixed net amount.
For example, if a foreign contractor must receive ₹1,00,000 after TDS at 15%, the gross amount is calculated as:
Gross amount = ₹1,00,000 ÷ (1 − 0.15) = ₹1,17,647
The payer must therefore deposit approximately ₹17,647 as TDS, while the contractor receives ₹1,00,000. The payer's total cost is approximately ₹1,17,647.
⚠️ WATCH OUT
Under Section 40(a)(i) of the Income Tax Act, 1961, an Indian business may lose the deduction for an expense payable to a non-resident if the payment is chargeable to tax in India and the required TDS is not deducted or deposited within the prescribed time. For example, if a ₹10 lakh payment is fully disallowed and the business's applicable tax rate is 25%, the additional tax could be approximately ₹2.5 lakh, before considering other applicable provisions.
How Can You Claim Lower TDS Rates Under DTAA?
You can claim lower Tax Deducted at Source (TDS) rates under a Double Taxation Avoidance Agreement (DTAA) by verifying your foreign vendor's tax residency, collecting the required documents and applying the relevant treaty provisions before making the payment. Follow these four steps to determine whether your payment qualifies for a lower rate.
- Obtain a Tax Residency Certificate (TRC): Ask your foreign vendor for a TRC issued by their country's tax authority for the relevant financial year. It proves their tax residency and helps establish eligibility for DTAA benefits.
- Collect Form 10F: Your foreign vendor must file Form 10F on India's income tax e-filing portal if their TRC does not contain all the required details under Rule 21AB.
- Obtain a No-PE Declaration: Ask the vendor to confirm whether they have a Permanent Establishment (PE) in India. This helps determine whether their business profits are taxable in India under the applicable treaty. However, a No-PE declaration does not automatically exempt royalties or fees for technical services from TDS.
- Apply the Applicable Tax Rate and Complete the Reporting: Compare the domestic tax rate with the applicable DTAA rate. If the vendor qualifies for treaty benefits, apply the lower eligible rate and complete the required tax and remittance formalities.
You must also complete the applicable withholding, tax deposit and remittance reporting requirements. Under India's tax framework effective from 1 April 2026, Forms 145 and 146 replace the earlier Forms 15CA and 15CB, respectively. The applicable reporting route depends on the nature and amount of the remittance and the prescribed conditions. A certificate from a chartered accountant may be required in specified cases.
If the necessary documents are unavailable, do not assume that the lower treaty rate applies. Check the applicable withholding requirements before making the payment. Where excess tax has been deducted, the foreign vendor may be able to claim a refund by filing an Indian income tax return, subject to the applicable rules.
What Are the DTAA Rates for Payments to Different Countries?
DTAA rates depend on the country, the nature of the payment and the conditions specified in the relevant treaty. The following examples illustrate why you should check the applicable agreement before deducting TDS.
| Country | How the DTAA may apply |
|---|---|
| USA | The treaty generally provides a 15% rate for qualifying fees for included services, subject to the applicable conditions. |
| UK | Treaty rates can include 10% or 15% for specified categories, depending on how the payment is classified. |
| Singapore | A 10% rate may apply to qualifying fees for technical services under the relevant treaty provisions. |
| UAE | Business profits may not be taxable in India when the vendor has no PE here, subject to the treaty's conditions. This does not automatically exempt every service payment. |
These are examples, not universal rates for all professional services.
For instance, a payment for ordinary consultancy may be treated differently from a payment for technical services or royalties. Confirm the payment category and applicable treaty before choosing the rate.
The documentation requirements also depend on the vendor's circumstances. A TRC and Form 10F, where required, help establish treaty eligibility, while a No-PE declaration may be relevant when assessing business profits. Keep the supporting documents and payment records for compliance purposes.
You can also learn how to claim foreign tax credit with Form 67 to understand how eligible taxpayers can claim credit for taxes paid abroad.
What Are the Compliance Requirements Under Section 195?
The compliance requirements under Section 195 include obtaining a TAN, deducting TDS at the correct rate, depositing the tax on time, filing TDS returns and submitting the required remittance documents.
- Obtain a TAN: Obtain a Tax Deduction Account Number (TAN) under Section 203A of the Income-tax Act, 1961, before deducting TDS, unless an exception applies.
- Collect PAN Details: Collect the payer's and non-resident payee's PAN details. If the payee does not furnish their PAN, Section 206AA may require TDS at a higher rate, generally at least 20%, subject to applicable exceptions.
- Determine the Correct TDS Rate: Compare the applicable domestic rate, including surcharge and cess where applicable, with the relevant DTAA rate. Collect the required documents, such as a Tax Residency Certificate (TRC), Form 10F and a No-PE declaration, when claiming treaty benefits.
- Deposit TDS on Time: Deposit the deducted tax by the 7th of the following month. For non-government deductors, TDS deducted in March is generally due by 30 April.
- File the Quarterly TDS Return: Use Form 27Q under the old framework. For transactions governed by the Income-tax Act, 2025, effective 1 April 2026, Form 144 is the corresponding quarterly statement for non-salary TDS on payments to non-residents.
- Issue the TDS Certificate: Issue Form 16A within the prescribed deadline under the old framework. Check the applicable certificate requirements under the Income-tax Rules, 2026, for transactions governed by the new framework.
- Submit the Remittance Declaration: File Form 15CA before remitting money abroad where required under the old framework. Form 145 replaces Form 15CA for remittances governed by the new framework, subject to applicable exemptions.
- Obtain the Accountant's Certificate: Form 15CB is required in specified cases involving taxable remittances exceeding ₹5 lakh in a financial year. Form 146 replaces Form 15CB under the new framework and applies in specified cases, not automatically to every remittance above ₹5 lakh.
Consequences of Non-Compliance
Failure to deduct TDS, deposit it on time or complete the required reporting can result in expense disallowances, interest and penalties.
- Section 40(a)(i): Under the old Act, certain payments to non-residents may be disallowed as business expenses if the required TDS is not deducted or deposited by the prescribed deadline. For example, disallowing a ₹10 lakh expense could result in ₹2.5 lakh in additional income tax at an illustrative corporate tax rate of 25%. The expense may become deductible later when the statutory conditions are met.
- Section 201(1A): Interest generally applies at 1% per month or part of a month from the date TDS was deductible until deduction, and 1.5% per month or part of a month from deduction until deposit.
- Section 271C: A penalty equal to the tax not deducted or paid may apply, subject to the statutory conditions.
- Section 271-I: A penalty of ₹1 lakh may apply under the old Act for failure to furnish, or furnishing inaccurate, information required under Section 195(6).
- Late TDS returns: A fee of ₹200 per day may apply, subject to statutory limits. A separate penalty of ₹10,000 to ₹1 lakh may apply under Section 271H in applicable cases.
- Late Form 16A Issuance: A penalty of ₹500 per day may apply under the old Act, subject to the prescribed conditions and limits.
These section references relate to the Income-tax Act, 1961. Check the corresponding provisions under the Income-tax Act, 2025 for transactions governed by the new framework.
Recent Updates
The long-term capital gains tax rate for qualifying transfers of capital assets changed from 20% to 12.5% for transfers on or after 23 July 2024, subject to applicable provisions. The general indexation benefit was also removed, subject to specified exceptions. This change is relevant to qualifying property transactions involving non-residents, not to every payment covered by Section 195.
Note: The exemption list for Forms 15CA and 15CB expanded from 28 to 33 specified payment categories, including certain import payments, effective 1 April 2016. This was not a Budget 2024 update. For current remittances, check the applicable exemptions under the Income-tax Rules, 2026.
✅ PRO TIP
Indian freelancers and exporters receiving foreign payments should ask their clients whether the client's country requires withholding tax on payments to Indian vendors. This is separate from Indian TDS and may affect the amount received and eligibility for foreign tax credit.
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Related reading: TCS on foreign remittance
What is the TDS rate on foreign payments?
There is no single TDS rate for foreign payments. Under the Income-tax Act, 1961, royalty and fees for technical services are generally taxed at 20%, while interest and other income may be subject to different rates. Applicable surcharge and cess may also apply. A lower rate may be available under a Double Taxation Avoidance Agreement (DTAA), depending on the payment type and treaty conditions. For payments credited or made from 1 April 2026, refer to Section 393 of the Income-tax Act, 2025.
Is TDS applicable on all international transactions?
What are the TDS rules for consultants on foreign payments?
Is there a threshold limit for TDS under Section 195?
Is TDS deducted on import of goods from a foreign supplier?
