Key Highlights
- TDS on non-resident payments: Section 396, ITA 2025 (old Section 195)
- Applicable on any payment that is chargeable to tax in India
- Can apply DTAA rates (lower than domestic) with TRC + Form 10F
- Form 15CA (online declaration) + Form 15CB (CA certificate) mandatory for most remittances
- Nil/lower TDS certificate available under Section 398
- Non-deduction makes payer "assessee in default" — liable for full tax + interest + penalty
Legal Reference
Section 396 (TDS on non-residents), Section 398 (lower/nil certificate), Chapter XIX, ITA 2025 | Form 15CA/15CB (FEMA/IT compliance) | Corresponds to Section 195, ITA 1961
1. Payments Requiring TDS Under Section 396
| Payment | Domestic Rate | Common DTAA Rate |
|---|
| Royalty / Fees for Technical Services | 10-20% | 10-15% (varies by country) |
| Interest (general) | 20% | 10-15% (varies) |
| Dividend | 20% | 10-15% (varies) |
| NRI rental income | 30% | Generally 30% domestic rate applies |
| Capital gains on property (LTCG) | 20% | DTAA may exempt or reduce |
2. DTAA Override
If India has a DTAA with the non-resident country, the payer can use the lower DTAA withholding rate. Requirements: (a) Tax Residency Certificate (TRC) from non-resident country; (b) Form 10F (if TRC is incomplete). For example, under India-Netherlands DTAA, royalties may be taxed at 10% vs 20% domestic rate.
3. Form 15CA and 15CB
Form 15CA: Online declaration by remitter on IT Portal before remittance — certifies TDS compliance or exemption. Form 15CB: CA certificate required when remittance exceeds Rs 5 lakh per transaction. The bank processes the foreign remittance only after receiving these forms. Exempt remittances (imports, travel up to prescribed limits, EMIs on ECBs) do not need 15CB.
4. Lower / Nil TDS Certificate (Section 398)
The non-resident or Indian payer can apply to the AO for a lower or nil TDS certificate under Section 398 of ITA 2025 — useful when DTAA provides zero tax or when the non-resident has losses in India offsetting the income. Prevents unnecessary TDS and avoids refund proceedings for the non-resident.
5. Consequences of Non-Deduction
- Payer becomes "assessee in default" (Section 407)
- Must pay the full tax not deducted
- Interest at 1% per month from payment date (Section 415)
- Penalty equal to TDS amount (Section 440)
- 30% disallowance of the expense in payer income computation
6. Why TaxClue
Non-resident TDS involves international tax treaty analysis, DTAA rate determination, and Form 15CA/15CB filing. Getting it wrong creates significant liability for the Indian payer. TaxClue handles all cross-border payment TDS compliance. Contact us for expert non-resident TDS advisory under ITA 2025.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
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❓ Frequently Asked Questions
What is Section 396 TDS for non-residents under ITA 2025?
Section 396 of the Income Tax Act, 2025 (equivalent to old Section 195) requires the Indian payer to deduct TDS on any payment to a non-resident or foreign company that is chargeable to tax in India. This covers interest, royalties, capital gains, rent, dividends, professional fees, and other income. The TDS must be deducted at the applicable domestic rate or DTAA rate — whichever is more beneficial to the non-resident.
Can DTAA rates be used instead of domestic TDS rates?
Yes. If India has a DTAA with the non-resident's country of residence, the payer can apply the lower DTAA withholding rate. To do this, the non-resident must provide a valid Tax Residency Certificate (TRC) from their country and Form 10F (if the TRC lacks required details). DTAA rates for royalties and interest are commonly 10-15%, compared to 20% under domestic law.
What is Form 15CA and when is it required?
Form 15CA is an online declaration filed by the Indian remitter on the Income Tax Portal before making a foreign payment. It certifies either that the payment is taxable and TDS has been deducted, or that it falls under an exemption. Form 15CB is a CA certificate providing the legal basis for the TDS computation — required when the remittance exceeds Rs 5 lakh. The bank requires these documents before processing the international transfer.
What happens if I forget to deduct TDS on a non-resident payment?
Failure to deduct TDS on a non-resident payment makes the Indian payer an 'assessee in default' under Section 407 of ITA 2025. The payer must then pay the entire tax that should have been deducted, plus interest at 1% per month under Section 415, plus a penalty up to the TDS amount under Section 440. The payment may also be disallowed as a business expense (30% disallowance rule) in the payer's own income computation.
How to get nil TDS on a non-resident payment?
Apply to the Assessing Officer under Section 398 of ITA 2025 for a nil or lower TDS deduction certificate. The applicant must demonstrate that the income is either not chargeable to tax in India (due to DTAA or domestic exemptions) or that the non-resident has losses or other deductions that eliminate the tax liability. Once issued, the certificate allows the payer to remit funds without deducting TDS or at a reduced rate.
