TDS on Payments to Non-Residents: Section 195 / 393 Complete Guide for FY 2026-27

If your business pays a foreign freelancer, subscribes to a SaaS tool billed from overseas, pays royalty for licensed technology, or remits interest on an external commercial borrowing, you have a TDS obligation under Section 195. Unlike TDS on domestic payments, Section 195 has no threshold. If the payment is taxable in India, you must deduct TDS regardless of the amount.

This is the section that catches Indian SMEs off guard. You pay a US-based designer Rs 80,000 for a logo, or subscribe to a UK software tool for Rs 2 lakh per year, and you may owe TDS plus Form 15CA/15CB compliance before the bank processes the remittance.

This guide covers every rate, every form, every compliance requirement, and the practical scenarios most small and mid-size businesses encounter.

When Does Section 195 Apply

Section 195 applies when all three conditions are met:

1. The payer is any person in India. This includes individuals, HUFs, firms, LLPs, companies, trusts, and any other entity. Unlike Section 194C or 194J, there is no turnover exemption for individuals and HUFs. If you are an individual freelancer paying a foreign sub-contractor, Section 195 applies to you.

2. The payee is a non-resident. A non-resident is any person who is not a resident of India under Section 6 of the Income Tax Act. This includes NRIs, foreign nationals, foreign companies, and foreign entities.

3. The payment is chargeable to tax in India. The income must be taxable in India under the Income Tax Act. If the income is not taxable in India (for example, business profits of a foreign company with no permanent establishment in India, absent a specific deeming provision), no TDS is required.

The third condition is the critical one. Not every payment to a non-resident is taxable in India. Whether the income is taxable depends on the nature of the payment, the source of income, and the applicable DTAA.

TDS Rates Under Section 195 for FY 2026-27

The rates below are base rates under the Income Tax Act. Surcharge and 4% health and education cess are added on top. Effective rates after surcharge and cess are shown in the last column.

For Non-Resident Individuals and HUFs (NRIs)

For Foreign Companies

Note on surcharge for foreign companies: Surcharge is 2% if the income or payment exceeds Rs 1 crore, and 5% if it exceeds Rs 10 crore. For most SME-level payments, the surcharge is nil or 2%.

No PAN penalty: If the non-resident does not have a PAN, the TDS rate is the rate prescribed above or 20%, whichever is higher (Section 206AA). However, Section 206AA does not apply if the non-resident provides their Tax Identification Number (TIN) from their country of residence along with their name and contact details, and the payment is covered by a DTAA.

Royalty vs Fees for Technical Services: The Key Distinction

For SMEs paying foreign vendors, the classification of the payment as royalty or fees for technical services is critical because it determines taxability in India.

What Counts as Royalty (Section 9(1)(vi))

• Payment for the use of or right to use a patent, invention, model, design, or secret formula
• Payment for the use of or right to use a trademark
• Payment for the use of or right to use a copyright (literary, artistic, scientific)
• Payment for the use of or right to use any industrial, commercial, or scientific equipment (other than payments for which the equipment user has been treated as an owner under Section 32)
• Payment for the transfer of all or any rights in respect of the above
• Payment for imparting information concerning technical, industrial, commercial, or scientific knowledge

What Counts as Fees for Technical Services (Section 9(1)(vii))

• Payment for managerial services
• Payment for technical services
• Payment for consultancy services

This includes any services that involve human effort and technical expertise. A foreign consultant advising your business on supply chain optimization falls under FTS.

SaaS Subscriptions: Are They Royalty?

This is the most common question for SMEs. In March 2021, the Supreme Court ruled in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT that payments for the use of software (where no copyright is transferred, only a licence to use) do not constitute royalty under the Income Tax Act. This means:

• Standard SaaS subscriptions (AWS, Google Workspace, Slack, Zoom, etc.) where you are merely an end-user are likely not royalty under the Income Tax Act.
• However, the position under various DTAAs may differ. Some older DTAAs define "royalty" more broadly and may include software payments.
• If the SaaS vendor is from a country whose DTAA with India includes software in the royalty definition, TDS may still apply.

The safe approach: get a professional opinion for each foreign SaaS vendor, particularly if the annual spend exceeds Rs 5 lakh.

DTAA Benefits: Reducing TDS Rates

India has Double Taxation Avoidance Agreements with over 90 countries. If the non-resident payee is a tax resident of a treaty country, you can apply the lower of the domestic rate or the DTAA rate.

Common DTAA Rates

Important: DTAA rates do not attract surcharge and cess. If the domestic rate is 20% + surcharge + cess = 20.80%, but the DTAA rate is 15%, you deduct at 15% flat.

Documents Required to Apply DTAA Rate

To apply the lower treaty rate, you must obtain:

1. Tax Residency Certificate (TRC): Issued by the tax authority of the non-resident's country of residence. It confirms the payee is a tax resident of that country.
2. Form 10F: A self-declaration by the non-resident containing details such as their nationality, tax identification number, period of residential status, and address.
3. No Permanent Establishment (PE) declaration: Where relevant, a declaration that the non-resident does not have a permanent establishment in India.

Without these documents, you must deduct TDS at the higher domestic rate.

Form 15CA and Form 15CB: Foreign Remittance Compliance

Whenever you make a payment to a non-resident, you may need to file Form 15CA (an online declaration) with the Income Tax Department before the bank processes the remittance. The bank will not process the payment without the Form 15CA acknowledgement.

When Form 15CA Is Required

Form 15CA is required for all payments to non-residents that are chargeable to tax in India. Certain payments that are purely non-taxable (like imports of goods) are exempt.

Form 15CA Parts

Form 15CB: The CA Certificate

For aggregate taxable remittances exceeding Rs 5 lakh per payee per financial year, you must obtain Form 15CB from a Chartered Accountant. The CA certifies:

• The nature of the payment
• The applicable TDS rate (under the Act or DTAA)
• Whether TDS has been correctly deducted and deposited
• The DTAA article and rate applied (if applicable)
• The TRC and Form 10F details

Form 15CB is filed online on the Income Tax portal. The CA must have a valid digital signature certificate.

Exempt Payments (No Form 15CA Required)

The CBDT has notified a list of payments that do not require Form 15CA/15CB. These include:

• Import of goods (covered under customs)
• Payments for personal purposes (gifts within LRS limits, education, medical treatment abroad)
• Certain specified payments under Rule 37BB

Penalty for Non-Compliance

Failure to furnish Form 15CA or providing incorrect information attracts a penalty of Rs 1 lakh under Section 271-I.

Form 27Q: Quarterly TDS Return for Non-Resident Payments

All TDS deducted under Section 195 (and Sections 196A through 196D) must be reported in Form 27Q, the quarterly TDS return for payments to non-residents.

Filing Due Dates

TDS Deposit Due Dates

TDS deducted during a month must be deposited by the 7th of the following month. For March deductions, the due date is 30 April.

Deposit using Challan 281 (now through the Protean/TIN-NSDL portal or the Income Tax portal's e-Pay Tax facility). Use the correct nature of payment code. For Section 195 payments, the code is 195 under Form 27Q.

TDS Certificate: Form 16A

After filing Form 27Q, you must issue Form 16A to the non-resident payee within 15 days of the due date for filing the TDS return. Form 16A is generated from the TRACES portal.

Practical Scenarios for Indian SMEs

Scenario 1: Paying a US-based Freelance Designer

You hire a US-based graphic designer for Rs 3 lakh. The designer has no permanent establishment in India.

• Nature: Fees for technical services (design consultancy involves human effort)
• Domestic rate: 20% + cess = 20.80%
• India-US DTAA rate for FTS: 15% (no surcharge/cess on DTAA rate)
• Documents needed: TRC from US IRS, Form 10F
• If documents provided: Deduct at 15% = Rs 45,000
• If no TRC/Form 10F: Deduct at 20.80% = Rs 62,400
• Form 15CA: Part A (under Rs 5 lakh aggregate)
• Form 27Q: Report in the quarter the payment is made

Scenario 2: Annual SaaS Subscription to a Singapore Company

You pay Rs 8 lakh per year for a project management SaaS tool from a Singapore company.

• Nature: Following the Supreme Court's Engineering Analysis ruling, standard SaaS subscriptions (end-user licences without copyright transfer) are not royalty under domestic law. However, the India-Singapore DTAA defines "royalty" more broadly.
• If treated as not taxable: No TDS. File Form 15CA Part D for each remittance.
• If treated as royalty under DTAA: India-Singapore DTAA royalty rate is 10%. Deduct at 10%.
• Recommendation: Consult a CA. For payments above Rs 5 lakh, you need Form 15CB anyway, and the CA will determine the correct classification.

Scenario 3: Interest on ECB from a German Bank

Your company pays Rs 25 lakh in interest on an External Commercial Borrowing from a German bank.

• Nature: Interest
• Domestic rate for interest on foreign currency borrowing: 5% + cess = 5.20% (if covered under Section 194LC)
• India-Germany DTAA rate for interest: 10%
• Apply lower rate: 5.20% (domestic is lower)
• Form 15CA: Part C (above Rs 5 lakh, CA certificate required)
• Form 15CB: Required from a CA

Scenario 4: Royalty to a UK Company for Patent Use

You pay Rs 15 lakh per year for a patent licence from a UK company.

• Nature: Royalty
• Domestic rate: 20% + surcharge + cess. For a foreign company with income up to Rs 1 crore, effective rate is approximately 20.80%.
• India-UK DTAA rate for royalty: 15%
• Apply lower rate: 15% (DTAA rate, no surcharge or cess)
• TDS: Rs 2,25,000
• Form 15CA: Part C
• Form 15CB: Required

Section 195(2) and 195(3): Reducing or Nil TDS

Section 195(2): Application to Assessing Officer

If you believe the entire payment is not taxable in India (for example, business profits with no PE), you can apply to the Assessing Officer under Section 195(2) for a determination of the taxable portion. The AO will issue an order specifying the amount on which TDS is to be deducted. This is useful when only part of the payment is taxable.

Section 195(3): Nil or Lower TDS Certificate

The non-resident payee can apply under Section 197 for a lower or nil deduction certificate if they expect their total tax liability to be lower than the TDS being deducted.

Consequences of Non-Compliance

The 30% disallowance under Section 40(a)(i) is the most painful consequence for businesses. If you pay Rs 10 lakh to a foreign vendor without deducting TDS, Rs 3 lakh of that expense is disallowed in your profit and loss computation, increasing your taxable income.

Transition to Income Tax Act 2025: Section 393(2)

From April 1, 2026, the Income Tax Act 2025 consolidates all TDS provisions into Section 393. The old Section 195 is now part of Section 393(2), Table Serial No. 17, which serves as the residuary provision for TDS on payments to non-residents.

What Changes

• Section number: 195 is absorbed into Section 393(2).
• Unified table: All TDS provisions (resident and non-resident) are in a single section with three tables. Table 1 covers residents, Table 2 covers non-residents, and Table 3 covers any person.
• Rate structure: The rates themselves have not changed. The table references "rates in force", which means the Finance Act rates or DTAA rates, whichever is lower.

What Does NOT Change

• The principle that any person paying a non-resident must deduct TDS on taxable income.
• DTAA benefits and the requirement for TRC and Form 10F.
• Form 27Q, Form 15CA/15CB compliance.
• The 30% disallowance under Section 40(a)(i) for non-deduction.

From Q1 FY 2026-27, your Form 27Q filings must reference the new section numbers. The CPC will reject old section codes.

Checklist: TDS on Non-Resident Payments

Use this checklist before making any payment to a non-resident:

• Determine if the payment is taxable in India (nature of income, source rules, DTAA)
• Classify the payment: royalty, FTS, interest, capital gains, or other income
• Check the applicable DTAA rate (if any)
• Obtain TRC and Form 10F from the non-resident (to apply DTAA rate)
• Calculate TDS at the lower of domestic rate (with surcharge and cess) or DTAA rate (flat)
• Deduct TDS before making the payment
• Deposit TDS by the 7th of the following month (Challan 281)
• File Form 15CA on the Income Tax portal before the bank remits
• Obtain Form 15CB from a CA (if aggregate remittances exceed Rs 5 lakh)
• File Form 27Q by the quarterly due date
• Issue Form 16A to the non-resident within 15 days of the Form 27Q due date

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Section 195 references in this guide are based on the Income Tax Act 1961 as applicable for FY 2025-26 (AY 2026-27). From FY 2026-27 (Tax Year 2026-27), Section 393(2) of the Income Tax Act 2025 applies. Rates and rules have been verified against the Income Tax Department rate charts, ClearTax, Tax2win, and TDSMAN. DTAA rates cited are from the text of the respective treaties; always verify against the latest CBDT notifications for any amendments. For SaaS and software payment classification, the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) is the governing precedent under domestic law.