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Withholding Tax

Withholding Tax falls in the nature of machinery provisions applicable to the payer of the income to enable easy collection and recovery of tax and is independent of the charging provisions which are applicable for the recipient of the company.

In short, under the withholding tax rules, it is the obligation of the taxpayer to withhold tax when making payments under specific categories at the rates specified in the current tax slabs. The specific categories includes rent, commission, payment for professional services, salaries, contracts, etc.

Non Resident Withholding Taxes

There are different rates for NRIs. They differ according to whether a country has a DTAA agreement with India or not. The Double Tax Avoidance Agreement (DTAA) is a tax treaty signed between two or more countries to help taxpayers avoid paying double taxes on the same income.

Section 195 of the Income Tax Act, 1961, governs the rules and regulations regarding payments made to a non-resident. It states, “Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode.

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.”

The following points are taken into consideration when payments are made to a non-resident Indian:

  • The NRI should have a permanent establishment in the country
  • The NRI is looking for tax refunds withheld in the country
  • Investors earning capital gains, interests etc. sourced from India
  • The NRI is receiving fees or royalties from technical services sourced in India
  • The NRI is receiving capital gains from transfer or sale of Indian assets
  • The NRI is involved in offshore transaction with share transfers in an Indian business
  • The NRI is earning any form of income from India

The rates of withholding taxes with respect to countries without DTAA with India are as follows:

  1. Interests earned at 20%

  2. Dividends paid by domestic companies at 0%

  3. Technical services at 10%

  4. Royalties at 10%

  5. Other services for individuals at 30% of income

  6. Other services for companies at 40% of net income

Click here to know more about countries with DTAA agreement with India, the withholding rates are:

Rates of Withholding Tax

The withholding tax rates for payments by resident companies are:

Nature of PaymentPayment Threshold for Withholding TaxWithholding Tax Rate
Specified types of interestNone10%
Non-specified types of interestRs. 5,00020%
Professional or technical servicesRs. 30,00010%
Commissions and brokerageRs. 5,00010%
Rent of plant, machinery, or equipmentRs. 1,80,0002%
Rent of land, building, or furnitureRs. 1,80,0002%
Contractual payments (except for Individuals / HUF)Rs. 30,000 (single payment) Rs. 75,000 (aggregate payment)2%
Contractual payments to Individuals / HUFRs. 30,000 (single payment) Rs. 75,000 (aggregate payment)1%
Royalty / Fees for Technical ServicesRs. 30,00010%

Difference Between Withholding Tax and TDS

TDS or Tax Deducted at Source is the amount that is to be deducted at the time of making payment to the concerned person while withholding tax. This is the amount deducted in advance i.e. before paying the amount to the payee. The withholding tax is deducted for paying the tax to the government. TDS is entitled to the people of India while withholding tax, which is applicable for payments to NRIs.

How is the Assessment of Non Resident Assessee Done?

A non-resident assessee may be accessed directly or through an agent. Persons who are considered as “Agents” of a non-resident assessee are as under:

  1. Employee or trustee of non-resident

  2. An individual who has any business connection with the non-resident

  3. An individual through whom or from whom the non-resident is receiving any income

  4. An individual who has acquired or purchased any capital asset in India from a non-resident

Withholding Tax Returns Filing Due Date

The returns are filed quarterly and contain the details of every payee and tax deducted for that particular quarter.

Withholding Tax Payment Due Date

The withholding tax that is deducted is to be paid by the 7th day of the month in which withholding tax has been deducted. For the month of March, the due date for payment of withholding tax is 30th April.

Withholding Tax Certificate

The Withholding Tax Certificate is furnished by the payer to the payee for every quarter. This certificate can also be downloaded from the TRACES website.

PAN Card and Filing of Returns

It is mandatory for a foreign company to register with the Income Tax Department and obtain a Permanent Account Number (PAN). If the PAN (Permanent Account Number) of the foreign company is not made available, the Withholding Tax rate will be the higher of:

  1. 20%, or

  2. The rate specified in the relevant provisions of the Income Tax Act, 1961, or

  3. The rates in force

FAQs on Withholding Tax

What is the Withholding Tax threshold limit for non-specified types of interest?

The Withholding Tax threshold limit for non-specified types of interest is Rs. 5,000.

What is the Withholding Tax threshold limit for interest received from banks, co-operative societies, or deposits with post offices?

The Withholding Tax threshold limit for interest received from banks, co-operative societies, or deposits with post offices is Rs. 10,000.

Do foreign companies receiving royalties need PAN?

Yes, foreign companies need to obtain a PAN if they are receiving commission/ fees/royalties/interest from the Indian companies.