TDS on Payments to Non-Residents Under Section 393(2) of the Income Tax Act, 2025 — Rates, DTAA & Compliance

TDS on Payments to Non-Residents Under Section 393(2) of the Income Tax Act, 2025

Any Indian business or individual making a payment to a non-resident — a foreign consultant, an overseas parent company, a non-resident property seller, a foreign vendor — has a TDS obligation that is often stricter and less forgiving than domestic TDS. Under the Income Tax Act, 2025, this obligation now lives in Section 393(2), the “Table 2” framework governing all payments to non-residents, replacing the old Section 195 along with several other 194-series provisions specific to non-residents (194E, 194LB, 194LC, and more).

The Core Rule: Section 393(2)

Section 393(2) requires any person — resident or non-resident, individual or entity — making a payment to a non-resident that is chargeable to tax in India, to deduct tax before remittance, regardless of whether the payer has any business presence in India. This is a wide net: unlike most domestic TDS provisions, there is no minimum threshold and no exemption for individuals not liable to audit — the obligation applies to virtually anyone making a taxable cross-border payment.

Key Payment Categories & Rates Under Table 2

Where a payment doesn’t fall neatly into a specified category, the general rate under Sl. No. 17 (20%, or the DTAA rate if beneficial) typically applies to any sum chargeable to tax. Surcharge and health & education cess are added to the TDS rate for non-resident payments (unlike most domestic TDS, where cess is excluded) — this is one of the few places the “TDS excludes cess” rule of thumb doesn’t apply.

The DTAA Advantage

India has Double Taxation Avoidance Agreements (DTAAs) with over 90 countries, and many of these prescribe rates on royalty, technical fees, interest, or dividends that are lower than the domestic 20% rate. A payer can apply the DTAA rate instead of the domestic rate — but only if the non-resident payee furnishes:

•             A Tax Residency Certificate (TRC) from their home country’s tax authority

•             A self-declaration (the Indian equivalent of Form 10F) confirming details not captured in the TRC — PAN (or a declaration of non-availability), nationality, tax identification number, and period of residency

•             Where applicable, a declaration that they don’t have a Permanent Establishment in India that the income is attributable to

Without these documents, the payer must apply the higher domestic rate, even if a lower DTAA rate would otherwise be available.

Compliance Steps for the Payer

1.          Determine taxability first. Not every payment to a non-resident is chargeable to tax in India — this depends on the nature of income, the place of accrual, and applicable treaty provisions. This determination often requires professional judgment.

2.          Obtain the CA certificate and file the remittance declaration. Foreign remittances generally require a Chartered Accountant’s certificate — now Form 146 (successor to Form 15CB) — certifying the nature of the payment, the applicable rate, and tax deducted. The remitter then files Form 145 (successor to Form 15CA), a declaration submitted to the authorised dealer/bank before the remittance is processed. Form 146 is not required in every case — certain small-value or specifically exempted remittances are excluded.

3.          Deduct tax at the correct rate — domestic rate under Section 393(2), or the DTAA rate if the payee has furnished a valid TRC and declaration.

4.          Deposit the TDS by the 7th of the following month (30th April for March deductions).

5.          File the quarterly non-resident TDS return — Form 144 (successor to Form 27Q) — by the standard quarterly due dates (31 Jul, 31 Oct, 31 Jan, 31 May).

6.          Issue a TDS certificate to the non-resident payee, so they can claim credit for the Indian tax withheld (relevant for their home-country tax filing as well, subject to that country’s foreign tax credit rules).

Reducing TDS Through a Lower-Deduction Certificate

If a non-resident believes the 20% (or DTAA) rate results in TDS well above their actual Indian tax liability — common in cases like property sales, where TDS applies on the full sale consideration rather than the actual capital gain — they can apply to the Indian tax authorities for a certificate authorising a lower or nil rate of deduction. This mechanism, earlier under Section 197 (Form 13), is now governed by Section 395(1) of the new Act, using Form 128. Where such a certificate is obtained and referenced correctly in Form 145, the Chartered Accountant’s certificate in Form 146 is not separately required for that remittance — reducing the compliance burden.

Example: NRI Property Sale

An NRI sells property in India for ₹1.5 crore, with an indexed long-term capital gain of ₹40 lakh (actual LTCG tax roughly ₹8.3 lakh after cess). Without a lower-deduction certificate, the buyer must deduct TDS at roughly 20.8% (including cess) on the entire ₹1.5 crore — about ₹31.2 lakh — since the buyer has no way of independently verifying the seller’s cost basis. By obtaining a Section 395(1) certificate (Form 128) in advance, the NRI can have TDS aligned with the actual liability of ~₹8.3 lakh, preserving over ₹20 lakh in cash flow that would otherwise be locked up for months awaiting a refund.

Consequences of Getting It Wrong

Frequently Asked Questions

Q1. Is there any minimum threshold below which TDS on non-resident payments doesn’t apply? Generally no — unlike most domestic TDS provisions, Section 393(2) doesn’t carry a blanket minimum-amount exemption. Applicability turns on whether the payment is chargeable to tax in India, not on the amount.

Q2. Can an individual (not running a business) also be liable to deduct TDS under Section 393(2)? Yes. The obligation to deduct under Section 393(2) extends to any person making a chargeable payment to a non-resident, regardless of whether they are in business — for example, an individual buying property from an NRI seller.

Q3. What is the difference between Form 145 and Form 146? Form 145 (successor to Form 15CA) is the remitter’s own declaration filed before the remittance. Form 146 (successor to Form 15CB) is the Chartered Accountant’s certification of taxability and correct TDS, which typically must accompany certain categories of Form 145 filings.

Q4. Does a DTAA automatically override the domestic TDS rate? No — the payer must apply whichever rate is beneficial to the taxpayer, but only where the payee has furnished the required documentation (TRC and declaration). Without documentation, the domestic rate under Section 393(2) applies by default.

This guide covers payments to non-residents made on or after 1st April 2026. Remittances up to 31st March 2026 continue to be governed by Section 195 of the Income Tax Act, 1961, and the erstwhile Forms 15CA/15CB.

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