Section 195 TDS: How Tax Is Withheld on Rent, Interest and Property Payments Made to NRIs

An NRI's Indian tax is very often settled before the NRI ever sees the money. Section 195 of the Income-tax Act 1961 puts the duty to withhold on the person making the payment, not on the person receiving it. A tenant crediting rent to a landlord who lives in Dubai, a buyer paying for a flat whose seller lives in Toronto, a bank crediting interest to an NRO account — each is a "person responsible for paying", and each carries the deduction obligation personally.

The provision is deliberately wide. Any sum chargeable to tax under the Act, other than salary, is caught, and the tax must come out at the time of credit to the payee's account or at the time of payment, whichever is earlier. Salary is carved out because Section 192 covers it separately. What is not carved out is a small-value floor: Section 195 has no basic-exemption threshold of the kind Section 194-I (Rs 6 lakh a year) and Section 194-IB (Rs 50,000 a month) hand to domestic payers.

This article deals with the payer's side of the Section 195 duty — when it bites, on what amount, and which forms close it out.

FEMA / DTAA Position

Section 195(1) requires any person paying a non-resident any interest or other sum chargeable under the Act, other than salary, to deduct income-tax at the rates in force. The trigger is the earlier of credit or payment, so a landlord's rent accrued in the books on 31 March is caught on 31 March even if the money leaves the tenant's account in April.

The section builds in two escape valves. Under Section 195(2), a payer who considers that the whole of the sum would not be chargeable income in the payee's hands may apply to the Assessing Officer to determine the appropriate proportion, and deducts only on that proportion. Sub-sections 195(3) to 195(5) run the other way, letting the payee apply for a certificate authorising receipt of the sum without deduction, valid until its expiry date or cancellation. Section 195(6) then requires the payer to report the remittance in the prescribed form — the Form 15CA and Form 15CB pair dealt with below.

Treaty relief does not happen automatically at the withholding stage. A Double Taxation Avoidance Agreement rate applies only if the payee furnishes a Tax Residency Certificate, Form 10F and a PAN. Absent that documentation the payer applies the domestic rate in force, and the payee recovers the difference by filing a return. The ceilings in the six treaties Oquilia models are these:

The dividend figures are portfolio rates: the United States and Canada treaties drop to 15% only where the recipient holds at least 10% of the voting stock.

One misreading is worth killing early. Gains on Indian assets are not switched off by any of these six treaties; India retains its taxing right and the rate that matters is 12.5%. The Singapore protocol of 2017 removed the old shelter for shares acquired after 1 April 2017, and the India-Canada treaty says the same in its Article 13.

The foreign-exchange layer is governed by a different statute. Section 6 of FEMA 1999 treats the movement of the funds as a capital account transaction requiring permission unless specifically permitted, which is why the remittance stage carries its own paperwork.

Tax Treatment in India

Three payment types account for most Section 195 obligations falling on ordinary Indian payers, and the difference between them turns on whether the payee is resident.

Rent to an NRI landlord

The two rent-withholding sections aimed at domestic transactions both stop at the water's edge. Section 194-IB opens with an individual or HUF "responsible for paying to a resident" rent above Rs 50,000 for a month, at 5%. Section 194-I carries its own Rs 6 lakh annual threshold, 10% on land and building and 2% on plant and machinery, and applies to resident payees. A tenant whose landlord is an NRI falls outside both and lands in Section 195, where there is no Rs 50,000 cushion.

That tenant also becomes a deductor in the full statutory sense. Section 203A requires every person deducting tax under Chapter XVII-B who has no tax deduction account number to apply for one, and to quote it in every challan and certificate. The quarterly return for payments to non-residents is Form 27Q.

The arithmetic is where the pain sits. Withholding under Section 195 runs on the gross rent, while the landlord's actual liability is computed after Section 24 deductions — a flat 30% of annual value under Section 24(a), plus interest on borrowed capital under Section 24(b). An NRI landlord carrying a home loan can face withholding several times the eventual tax. The fix is a Section 197 certificate, and our NRI rental income tax calculator shows the gap between gross withholding and net liability.

Sale of immovable property

Section 194-IA is the section buyers expect, and for an NRI seller it does not apply at all. Its text covers a transferee paying "to a resident transferor", at 1% of the consideration or stamp duty value, and it switches off entirely where both consideration and stamp duty value are under Rs 50 lakh. Buy from an NRI and the 1% route disappears; Section 195 applies from the first rupee.

On an NRI sale, tax under Section 195 is computed on the capital gain, plus surcharge and cess — not on the headline sale price. Getting to the gain is the difficulty, because the buyer cannot verify the seller's cost of acquisition. This is the gap Section 195(2) exists to close: the buyer applies to the Assessing Officer, the officer determines the chargeable proportion, and the buyer deducts on that. Without such an order the safe course is to withhold on the whole sum.

The rate applied to the gain follows the Budget 2024 regime, effective 23 July 2024.

The surcharge is capped at 25% in the new regime under Section 115BAC, which has been the default regime since FY 2023-24. The capital gains calculator will run the acquisition-date test for a specific property, and the NRI tax calculator applies the surcharge and cess layers on top.

The PAN trap

Section 206AA is the provision that turns an administrative gap into a cash-flow event. Where the payee does not furnish a PAN, tax is deducted at the highest of three figures: the rate specified in the relevant provision, the rate in force, or 20%. A treaty ceiling of 12.5% or 15% is simply overridden. Rule 37BC softens this for non-residents, but narrowly — it covers interest, royalty, fees for technical services and payments on transfer of any capital asset, and only where the deductee furnishes the details and documents the rule prescribes. Rent is not on that list.

Tax Treatment Abroad

Indian tax withheld under Section 195 is not a dead cost for most NRIs — it is creditable in the country of residence under the treaty's elimination-of-double-taxation article. The India-United States treaty handles it in Article 24 and the India-Australia treaty in Article 23, and Canada gives the credit through Section 126 of its own Income Tax Act. The credit is claimed by the payee abroad; nothing the Indian payer does creates it automatically.

What the Indian payer does control is the evidence. The foreign credit claim rests on proof that Indian tax was deducted and deposited, and that proof exists only once the deductor files Form 27Q and issues the resulting TDS certificate. A payer who deducts but never files leaves the payee with money gone in India and no document to claim it abroad. Deposits also appear in the payee's Form 26AS trail.

Timing rarely lines up. India's tax year runs 1 April to 31 March, while several residence jurisdictions tax on a calendar year, so tax withheld in February is often claimed abroad in a different foreign tax year. Our foreign tax credit calculator sets the Indian deduction against a foreign liability. Where the treaty ceiling is lower than what was actually withheld — 12.5% on interest for a UAE-resident payee against a domestic rate applied for want of a TRC — the excess is not recovered abroad. It is recovered by filing an Indian return.

Repatriation Mechanics

Deducting the tax is only half the transaction. Moving the net amount out of India is governed by FEMA and by the reporting duty in Section 195(6).

The reporting runs through Form 15CA, filed by the person responsible for paying a non-resident or a foreign company under Rule 37BB. Per the Income Tax Department's guidance, it has four parts:

1. Part A — remittance does not exceed Rs 5 lakh in the financial year.
2. Part B — remittance exceeds Rs 5 lakh and an order or certificate under Section 195(2), Section 195(3) or Section 197 has been obtained.
3. Part C — remittance exceeds Rs 5 lakh and a Form 15CB certificate has been obtained from a chartered accountant as defined in Section 288.
4. Part D — the remittance is not chargeable under the Act.

The Rs 5 lakh figure is an aggregate for the financial year, not a per-transaction test, so a sequence of small rent remittances crosses it. Part B rewards the payer who obtained the Section 195(2) or Section 197 order: it replaces the accountant's certificate.

The funds themselves move through the NRI's account structure. Rent, dividends and sale proceeds are credited to an NRO account, which is the rupee account for Indian-source income, and are then remitted out under the USD 1 million per financial year route — the mechanics of which we set out in our piece on repatriating inherited property and asset sale proceeds. The USD 250,000 Liberalised Remittance Scheme limit is not available here, because LRS is open only to resident individuals. Section 6 of FEMA 1999 is the source of that division. Our repatriation calculator works through the annual limit against a given balance.

Banks will not process the outward remittance without the Form 15CA acknowledgement, and where Part C applies, the Form 15CB certificate as well. In practice the withholding, the certificate and the remittance are one workflow, not three.

FAQ

Does Section 195 apply if the tenant is an ordinary salaried individual?

Yes. Section 195 makes no exception for the size or status of the payer. An individual tenant paying rent to an NRI landlord must deduct, obtain a tax deduction account number under Section 203A, and file Form 27Q. The Rs 50,000 a month cushion in Section 194-IB applies only where the landlord is resident.

Is there a minimum payment below which no tax need be deducted?

No. Unlike Section 194-I (Rs 6 lakh a year) or Section 194-IA (Rs 50 lakh), Section 195 carries no threshold. The only question is whether the sum is chargeable to tax in the payee's hands; if it is, deduction is due at credit or payment, whichever is earlier.

The buyer does not know the NRI seller's cost of acquisition. What then?

That is what Section 195(2) is for. The buyer applies to the Assessing Officer to determine the proportion of the consideration that is chargeable and deducts only on that. Without the order, deducting on the gross consideration is the position that protects the buyer.

Can the NRI get the deduction reduced instead?

Yes, through Section 197. The payee applies in Form 13, and if the Assessing Officer is satisfied that the total income justifies a lower rate or no deduction, the certificate binds the payer. This is the standard route for an NRI landlord whose Section 24(a) deduction of 30% and Section 24(b) interest cut the real liability well below the gross withholding.

What happens if the NRI has no PAN?

Section 206AA applies and tax is deducted at the highest of the rate specified in the relevant provision, the rate in force, or 20%. Any treaty ceiling is overridden. Rule 37BC carves out interest, royalty, fees for technical services and payments on transfer of a capital asset, on furnishing the prescribed details; it does not cover rent.

Which documents does the payee have to give the payer for a treaty rate?

Three: a Tax Residency Certificate from the residence country, Form 10F, and a PAN. Without all three the payer applies the domestic rate in force, and the payee recovers the difference by filing an Indian return.

Is Form 15CB always required?

No. Form 15CB, certified by a chartered accountant as defined in Section 288, is needed for Part C of Form 15CA, which applies where remittances exceed Rs 5 lakh in the financial year and no order under Section 195(2), Section 195(3) or Section 197 exists. Remittances up to Rs 5 lakh use Part A; non-chargeable remittances use Part D.