Section 195 — TDS on Payments to Non-Residents & Foreign Companies

Q: What TDS applies on payment for a foreign software license or SaaS subscription?

TDS on foreign software payments depends on classification: (1) If payment is for a perpetual/shrink-wrap software license (standard product, not customised): Per Supreme Court ruling in Engineering Analysis Centre (2021), this is NOT royalty — no TDS under Section 195/194J. (2) If payment is for a customised/tailored software or granting the right to use (not just copy): Treated as Royalty — TDS at 10–20% under Section 195 (or DTAA rate). (3) SaaS / cloud subscriptions (no IP transfer, just service): Classified as Fees for Technical Services (FTS) — TDS at 10–20% (or DTAA rate). In practice, many companies pay SaaS subscriptions without TDS citing the Engineering Analysis ruling, but this involves risk — obtain a tax opinion.

Q: How does Section 195(2) application for lower TDS work?

If the payer believes only a portion of the payment is taxable income in India, they can apply to the Assessing Officer (AO) under Section 195(2) for a determination of the appropriate TDS amount. Process: (1) File application before making the payment, describing the nature of payment and why full amount is not income. (2) AO issues an order specifying the TDS rate or amount. (3) Payer deducts TDS as per AO's order. Separately, the payee (NR/foreign entity) can apply under Section 197 to the AO for a Nil / lower deduction certificate. Section 197 certificate is then given to the Indian payer, who deducts at the certificate rate. Both routes protect the payer from being treated as "assessee in default" later.

Updated: 3 June 2026 | Section 195 Income Tax Act | Form 15CA / 15CB | DTAA Benefit

Section 195 requires any person making a payment to a non-resident or foreign company to deduct TDS if the payment is chargeable to tax in India. Default TDS rate: 30% for individuals (40% for foreign companies). Reduced to 20% for royalties and fees for technical services. DTAA can further reduce rates — but the NR must furnish a Tax Residency Certificate + Form 10F. All foreign remittances > ₹5 lakh (in taxable categories) need Form 15CA + Form 15CB (CA certificate).

Form 15CA/CB

Mandatory for foreign remittances above ₹5 lakh in taxable categories.
Form 15CB = CA certificate on nature and taxability of payment. Form 15CA = online declaration filed on income tax portal citing the 15CB. Banks require both before processing SWIFT transfers.

Section 195 TDS Rates — Default vs DTAA

Payment Type	Default TDS Rate	DTAA May Reduce To	Forms Required
Interest payments to NR	20% + surcharge + cess	10–15% (most DTAAs)	Form 15CA + 15CB
Royalties (software, patents)	20% + surcharge + cess	10–15%	Form 15CA + 15CB
Fees for Technical Services (FTS)	20% + surcharge + cess	10–15%	Form 15CA + 15CB
Business income / other income	30% (individual) / 40% (company)	Depends on PE clause in DTAA	Form 15CA + 15CB
Capital gains on Indian property	20–30% (depends on type)	May be exempt under DTAA	Form 15CA + 15CB
Dividend from Indian company	20% + surcharge + cess	5–15% (many DTAAs)	Form 15CA Part A or C
Salary to NR employee (Indian source)	Slab rate applicable to NR	Employment Article of DTAA	Form 15CA if > ₹5L

Who Must Deduct TDS under Section 195?

Any person — resident individual, company, partnership, or even another non-resident — who makes a payment to a non-resident or foreign company that is chargeable to tax in India must deduct TDS under Section 195. This includes: Indian companies paying overseas software vendors, importers making advance payments, Indian individuals remitting money for foreign services, and Indian subsidiaries paying management fees to foreign parent companies.

Form 15CA and 15CB — Process Step by Step

Determine if Payment is Taxable in India
Check if the foreign payment falls under Indian income tax jurisdiction. Refer to Section 5 (scope of total income for NR) and the applicable DTAA. If not taxable in India at all, some Rule 37BB exempt categories apply — no 15CA/15CB needed.
Obtain Form 15CB from CA
Engage a Chartered Accountant to issue Form 15CB — a certificate confirming the nature of remittance, applicable TDS rate, and DTAA provisions. The CA must obtain the foreign entity's TRC and Form 10F before certifying.
File Form 15CA on Income Tax Portal
Login to incometax.gov.in → e-File → Income Tax Forms → Form 15CA → Part C (for payments > ₹5L with 15CB). Enter remittance details and the 15CB acknowledgement number. Download the filed 15CA with system-generated acknowledgement number.
Submit to Bank
Provide your bank with: (a) Signed copy of Form 15CA, (b) Form 15CB signed by CA, (c) SWIFT/wire transfer instructions. The bank will not process the remittance without these documents.
Deposit TDS and File Return
Deduct TDS as computed, deposit via Challan 281 using Section 195 code by the 7th of next month (or 30 April for March). File quarterly TDS return Form 27Q for non-resident payments.

DTAA Benefit — Documents Required from NR / Foreign Entity

Document	Purpose	Issued By
Tax Residency Certificate (TRC)	Proves the foreign entity is tax resident of the treaty country	Foreign country's tax authority
Form 10F (self-declaration)	Declares DTAA eligibility; required if TRC doesn't contain all prescribed details	Filed by NR on Indian IT portal
PAN (if obtained in India)	Avoids higher TDS under Section 206AA	Indian Income Tax Department
Declaration of no PE in India	Establishes that business income is not taxable in India	Signed declaration from foreign entity

Lower or Nil Deduction Certificate — Section 197

A non-resident payee expecting nil or reduced TDS can apply to the Indian Assessing Officer under Section 197 for a lower deduction certificate. The AO examines the DTAA, nature of income, and past tax compliance before issuing the certificate. The Indian payer deducts TDS at the rate stated in the certificate. This is commonly used by large MNCs receiving royalties or interest from Indian subsidiaries.

Frequently Asked Questions

Is Form 15CA and 15CB mandatory for all foreign bank remittances?

Not for all remittances. The rules are: (1) Remittances up to ₹5 lakh per financial year for specified exempt purposes (e.g., travel, education, medical treatment, gift) — File only Part A of Form 15CA (no 15CB needed). (2) Remittances covered by RBI's specified list of 33 categories (Rule 37BB) that are not taxable — No 15CA/15CB required. (3) Remittances that are taxable and exceed ₹5 lakh — File Form 15CB (CA certificate) first, then file Form 15CA Part C referencing the 15CB. (4) Remittances that are taxable but ≤ ₹5 lakh — File only Part B of Form 15CA (no CA certificate needed). Banks will insist on 15CA/15CB before processing any SWIFT remittance exceeding the threshold.

How can a foreign company or NRI claim DTAA benefit to reduce TDS under Section 195?

To claim Double Taxation Avoidance Agreement (DTAA) benefit: (1) Obtain a Tax Residency Certificate (TRC) from the tax authority of the country of residence. (2) Fill and submit Form 10F to the Indian payer (self-declaration of DTAA eligibility). (3) Provide PAN (if obtained) or submit Form 10F with a declaration of non-applicability of PAN. (4) The Indian payer then deducts TDS at the DTAA rate (often lower than the default 20–30%). Note: Without TRC and Form 10F, the payer must deduct TDS at the higher domestic rate. The beneficial DTAA rate does not apply automatically — the foreign entity must furnish these documents to the Indian payer.

What is the TDS rate on salary paid by an Indian company to an employee working abroad?

If an Indian company pays salary to an employee who is a Non-Resident (NR) in India (i.e., stayed in India < 182 days in the FY), TDS under Section 192 applies at slab rates but only on income "accrued or arising" in India. Salary for services rendered outside India is generally not taxable in India for an NR. However, if any portion of the salary relates to Indian source income (e.g., equity-based comp for India work), Section 195 / 192 applies. Additionally, if the employee is a resident of a country with which India has a DTAA, the DTAA Employment Article governs which country has taxing rights. Always consult a CA for cross-border salary TDS — it depends on residency, DTAA, and contract structure.

What TDS applies on payment for a foreign software license or SaaS subscription?

TDS on foreign software payments depends on classification: (1) If payment is for a perpetual/shrink-wrap software license (standard product, not customised): Per Supreme Court ruling in Engineering Analysis Centre (2021), this is NOT royalty — no TDS under Section 195/194J. (2) If payment is for a customised/tailored software or granting the right to use (not just copy): Treated as Royalty — TDS at 10–20% under Section 195 (or DTAA rate). (3) SaaS / cloud subscriptions (no IP transfer, just service): Classified as Fees for Technical Services (FTS) — TDS at 10–20% (or DTAA rate). In practice, many companies pay SaaS subscriptions without TDS citing the Engineering Analysis ruling, but this involves risk — obtain a tax opinion.

How does Section 195(2) application for lower TDS work?

If the payer believes only a portion of the payment is taxable income in India, they can apply to the Assessing Officer (AO) under Section 195(2) for a determination of the appropriate TDS amount. Process: (1) File application before making the payment, describing the nature of payment and why full amount is not income. (2) AO issues an order specifying the TDS rate or amount. (3) Payer deducts TDS as per AO's order. Separately, the payee (NR/foreign entity) can apply under Section 197 to the AO for a Nil / lower deduction certificate. Section 197 certificate is then given to the Indian payer, who deducts at the certificate rate. Both routes protect the payer from being treated as "assessee in default" later.

TDS Payment Online (Challan 281) TAN Registration NRI Income Tax DTAA — Double Taxation Relief TDS Return Filing Form 26AS FEMA Compliance

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