Non-Resident Taxation explained: this guide covers what Non-Resident Taxation means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
India taxes non-residents only on India-sourced income under Section 5(2) of the Income Tax Act 2025 (ITA 2025). However, the interaction of domestic tax law with 90+ Double Taxation Avoidance Agreements (DTAAs) creates a complex but structured framework that non-residents must navigate.
Scope of Non-Resident Taxation (Section 5(2))
A non-resident is taxable in India on:
- Income received (or deemed received) in India during the tax year
- Income that accrues or arises in India (or deemed to accrue/arise)
Specifically, income is deemed to accrue/arise in India (Section 9) when it arises from:
- Business connection in India
- Property situated in India
- Asset or source of income in India
- Salary for services rendered in India
- Dividends from Indian company
- Interest paid by Indian resident/PE
- Royalty/FTS paid by Indian resident/PE
Double Taxation Avoidance Agreement (DTAA) — Key Articles
| Article | Title | Key Provision |
|---|---|---|
| Article 4 | Resident | Tie-breaker rules for dual residency (PoEM, habitual abode) |
| Article 5 | Permanent Establishment | Definition of PE; construction PE (6+ months); service PE |
| Article 7 | Business Profits | Non-resident business profits taxable in India only if through PE |
| Article 10 | Dividends | Source state WHT limited (e.g., 5%/15% in most DTAAs) |
| Article 11 | Interest | WHT limited (10%/15%); may exempt certain interest |
| Article 12 | Royalties and FTS | WHT 10%-15% typically; India often insists on 10% with FTS article |
| Article 13 | Capital Gains | Some DTAAs allow CG only in residence country; some allow source taxation |
| Article 15 | Income from Employment | Salary taxable where services rendered (183-day rule exception) |
Permanent Establishment (PE) Types
- Fixed place PE: Office, factory, branch, workshop, mine, construction site (if > 6/12 months)
- Agency PE: Person habitually concluding contracts on behalf of the enterprise in India
- Service PE: Employees providing services in India for > 90 or 183 days (depending on DTAA)
- BEPS additions (via MLI): Anti-fragmentation — cannot split a single project to stay below PE threshold
Section 195 — Withholding Tax on Non-Resident Payments
- Every person paying any sum to a non-resident which is chargeable to tax in India must deduct TDS at source
- Applicable rate: Higher of DTAA rate (with Form 10F + TRC) or domestic rate under ITA 2025
- If payment is not taxable in India: No TDS (but Form 15CA/15CB filing required for cross-border payments)
- Payor can apply to AO for NIL/Lower TDS certificate (Section 197A equivalent)
Common Section 195 TDS Rates
| Payment Type | Domestic Rate | Typical DTAA Rate |
|---|---|---|
| Royalty / FTS | 20% | 10%-15% |
| Interest | 20% | 10%-15% |
| Dividends | 20% | 5%-15% |
| Capital gains (LTCG equity) | 12.5% | Per Article 13 |
How to Claim DTAA Benefits in India
- Obtain Tax Residency Certificate (TRC) from country of residence
- File Form 10F with Indian deductor (or on income tax portal)
- Submit TRC + Form 10F to Indian payer before payment
- Payer deducts TDS at DTAA rate (not domestic rate)
- Non-resident files India ITR (if applicable) claiming DTAA relief and FTC for taxes paid in residence country
GAAR and Anti-Avoidance
- GAAR (General Anti-Avoidance Rules) — Section 96 ITA 2025: Can override DTAA benefits if arrangement is impermissible avoidance arrangement
- MLI Principal Purpose Test (PPT): Treaty benefits denied if obtaining the benefit was one of the principal purposes of an arrangement
- Beneficial ownership required for WHT reduction under DTAA
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