TDS on Foreign Payments: A Comprehensive Guide for Businesses

As Indian companies expand globally and deal more frequently with overseas vendors, consultants, and service providers, foreign payments have become a routine part of business. However, these transactions come with important tax responsibilities that cannot be overlooked.

Under Section 195 of the Income Tax Act, Tax Deducted at Source (TDS) on payments to non-residents is a key compliance requirement.

This guide simplifies the rules, highlights key challenges, and explains when TDS applies so you can handle international payments confidently and stay compliant.

What Is TDS on Foreign Payments and Section 195?

TDS on foreign payments represents India’s mechanism to collect tax on income accruing to non-residents. Under Section 195 of the Income Tax Act, any person making a payment to a non‑resident must deduct tax at source if that sum is chargeable to tax in India.

The provision serves multiple purposes:

• Ensures tax collection upfront before funds leave India.
• Places compliance responsibility on the Indian payer.
• Applies to all payments except salary.
• Triggers at the time of credit or actual payment, whichever is earlier.

Who Qualifies as a Non-Resident for TDS Purposes?

Determining who qualifies as a non-resident becomes crucial for TDS compliance. Section 6 of the Income Tax Act sets clear residency tests that directly impact your TDS obligations.

An individual becomes a non-resident if they fail both primary tests:

• If stay in India is less than 182 days during the financial year.
• If stay is less than 60 days in the current year and less than 365 days in preceding four years combined.

Special rules apply to specific categories:

• Indian citizens leaving for employment abroad need only 182 days of presence to qualify as a resident.
• An Indian citizen or person of Indian origin (PIO) visiting India during the year will be treated as a resident if their total income (excluding foreign-source income) exceeds ₹15 lakh in that year.
• Where income exceeds ₹15 lakhs in a financial year, the 60-day threshold is replaced with 120 days.
• Foreign companies remain non-resident unless they have a Place of Effective Management in India.

Who Is Responsible for Deducting TDS on Foreign Payments?

The Income Tax Act designates the payer (also known as the deductor) as the party obligated to withhold tax.

Entities responsible for TDS deduction include:

• Indian companies paying foreign vendors.
• Partnership firms engaging overseas consultants.
• Hindu Undivided Families (HUFs) making foreign investments.
• Individuals paying for foreign technical services.
• Even foreign companies with Indian operations making payments to other non-residents.

The obligation to deduct TDS applies whenever the payment is taxable in India  there is no threshold limit or turnover-based exemption.

Explore Razorpay’s Global Payment Solutions

What Types of Foreign Payments are Subject to TDS?

Common payment types subject to TDS include interest payments to foreign lenders, fees for technical services (FTS), capital gains from asset transfers, and dividends to foreign shareholders. Business income attributable to Indian operations also falls within the scope.

How to Determine Applicable TDS Rates for Foreign Payments?

The applicable rate depends on two primary sources: domestic tax law and international tax treaties, with businesses needing to navigate both frameworks.

Understanding Rates Under the Income Tax Act

The Finance Act prescribes default TDS rates for different income categories, creating a baseline for all foreign payments.

• Variable Rate Structure  Different income types attract different TDS rates, ranging from 10% to 30% depending on the nature of payment.
• Additional Levies  Surcharge and education cess increase the effective TDS rate beyond the basic percentage.
• Section 206AA Penalty  Non-furnishing of Permanent Account Number (PAN) by the payee triggers higher TDS at 20% or the prescribed rate, whichever is higher.
• Regular Updates  Finance Act amendments can change rates annually, requiring constant vigilance.

Leveraging Double Taxation Avoidance Agreements (DTAA)

India’s extensive DTAA network offers opportunities to reduce TDS burdens through treaty benefits. These bilateral agreements prevent double taxation while promoting international trade and investment.

• Preferential Rates  DTAA rates often prove more beneficial than domestic law, sometimes reducing TDS to 0-15%.
• Documentation Requirements  Claiming treaty benefits requires Tax Residency Certificate (TRC) from the payee’s home country.
• Form 10F Submission  Non-residents must furnish prescribed declarations confirming treaty eligibility.
• Country-Specific Analysis  Each DTAA contains unique provisions requiring careful review for optimal tax treatment.

The Compliance Journey: Procedures for TDS on Foreign Payments

Under Section 195, foreign payments require a clear compliance sequence: set up essential registrations, validate payee details, and then deduct and report tax. This ensures accuracy and seamless cross-border transactions.

Mandatory Registrations and Details

Before initiating any foreign remittance, the deductor must complete foundational compliance steps:

• TAN Registration  Obtain Tax Deduction and Collection Account Number (TAN) under Section 203A before first deduction.
• PAN Collection  Secure the non-resident payee’s PAN to avoid penalties.
• KYC Maintenance  Maintain accurate records of both payer and payee details for reporting purposes.

Deduction, Deposit, and Due Dates

The operational phase requires strict adherence to prescribed timelines and procedures.

• Deduction Timing  Deduct TDS at credit or payment, whichever occurs earlier.
• Government Deposit  Use Challan 281 for depositing TDS to government accounts.
• Monthly Deadlines  Deposit TDS by the 7th of the following month for most transactions.
• Record Keeping  Maintain challan copies and payment records for audit trails.

Filing TDS Returns and Issuing Certificates

Post-deduction compliance involves quarterly reporting and certificate issuance to complete the process.

• Quarterly Returns  File Form 27Q electronically for all non-resident payments.
• Filing Deadlines  Q1 by July 31st, Q2 by October 31st, Q3 by January 31st, Q4 by May 31st.
• Certificate Issuance  Issue Form 16A within 15 days of quarterly return due date.
• Digital Delivery  Provide digital copies to non-residents for their tax credit claims.

Navigating Exemptions and Applying for Lower or Nil TDS

Understanding exemptions and lower deduction certificates can significantly reduce compliance burden and improve cash flow.

When is TDS Not Applicable?

Several scenarios eliminate TDS obligations entirely, though careful analysis ensures legitimate exemption claims.

• Non-Taxable income  Payments not chargeable to tax in India escape TDS requirements.
• Statutory Exemptions  Specific Income Tax Act provisions exempt certain income categories.
• Treaty Exemptions  Some DTAAs grant complete exemption for particular income types.
• Business Connection Absence  Income without Indian source or business connection remains non-taxable.

Applying for a Lower or Nil TDS Certificate (Form 13 / 15E)

When standard exemptions don’t apply, formal applications can secure official certificates for reduced TDS.

• Application Routes  Non-residents use Form 13 while payers can apply via Form 15E to the Assessing Officer.
• Eligibility criteria  Lower tax liability, treaty benefits, or loss situations support applications.
• AO Examination  Tax authorities review supporting documents before issuing certificates under Sections 195(2)/195(3) or Sections 197.

Critical Forms for Foreign Remittances: Form 15CA and Form 15CB

Beyond TDS certificates, foreign remittances require additional declarations that banks mandate before processing outward payments. These forms create transparency in cross-border transactions while ensuring tax compliance.

Understanding Form 15CA

Form 15CA serves as the remitter’s declaration, confirming tax compliance before banks release foreign payments.

• Universal Requirement  Form 15 CA must be filed for most foreign remittances, subject to certain conditions and exemptions. 
• Online Filing  Submit through income tax e-filing portal before approaching banks.
• Part Selection: Choose appropriate parts (A/B/C/D) based on transaction amount and nature.
• Bank Verification  Authorised dealers verify Form 15CA before executing remittance.

The Role of Form 15CB (CA Certificate)

Chartered Accountants provide independent verification through Form 15CB for higher-value transactions. 

• Threshold Triggers  Required when annual aggregate payments exceed ₹5 lakh to the same payee.
• CA Certification  Chartered Accountant verifies payment nature, treaty applicability, and TDS compliance.
• Documentary Support  CA reviews contracts, invoices, and tax positions before certification.
• Bank Requirement  Banks refuse remittances without Form 15CB for applicable transactions.

Penalties for Non-Compliance With Information Disclosure

Failing to file required forms can attract penalties, separate from those for incorrect TDS deduction.

• Section 271-I Penalties  Failure to furnish Forms 15CA/15CB attracts penalties up to ₹1 lakh.
• Transaction Blocking  Banks halt remittances without proper form submission.
• Retrospective issues  Past non-compliance increases the chances of scrutiny and penalties.

TDS vs. TCS on Foreign Remittances: Understanding the Key Differences

When money moves outside India, two different tax mechanisms may apply  TDS and Tax Collected at Source (TCS). Understanding their differences helps you avoid confusion and stay compliant.

What Is Tax Collected at Source?

TCS is a tax that sellers or authorised dealers collect from buyers at the time of certain transactions, especially when the money is being sent abroad.

• It is collected by the seller from the buyer under section 206C of the Income Tax Act.
• Under Section 206C(1G), TCS applies to foreign remittances and overseas tour packages.
• TCS mainly applies when residents send money abroad under the Liberalised Remittance Scheme (LRS)  whether for education, investments, or foreign travel.

Comparing TDS and TCS on Foreign Transactions

Understanding these distinctions prevents compliance errors and double taxation.

Common Challenges and Consequences of Non-Compliance

Despite clear procedures, businesses frequently encounter compliance challenges leading to serious consequences.

Understanding Financial Penalties and Interest

Non-compliance triggers multiple financial consequences beyond the basic TDS amount.

• If TDS is not deducted or deposited, the related business expense may be disallowed under Section 40(a)(ia)  meaning you cannot claim it as a deductible expense, increasing your taxable income.
• Interest of 1.5% per month or part thereof applies for late payment of TDS, calculated from the date it was deducted until the date it is actually deposited.
• If TDS is deducted but not paid, or if short deduction occurs, penalties may apply  including fines equal to the TDS amount under sections such as Section 221 and Section 271C.

Avoiding Common Mistakes in Foreign Payment TDS

Businesses can prevent compliance issues by steering clear of these frequent errors:

• Using the wrong TDS rate because of confusion over income nature or incorrect interpretation of DTAA benefits.
• Skipping TDS on bundled payments, such as imports that include service components (like installation or technical support).
• Not collecting or validating the non-resident’s PAN, which can lead to higher deduction rates and reporting issues.
• Missing deposit and filing deadlines, resulting in interest, penalties, and audit exposure.
• Poor documentation, including missing invoices, contracts, or TDS proofs  making refunds or audits difficult.

How Razorpay MoneySaver Export Account Simplifies Foreign Payments and TDS Compliance

As foreign payments grow, managing cash flows and compliance together becomes harderthis is where the Razorpay MoneySaver Export Account helps streamline international receipts and supports cleaner TDS processes.

How it supports global transactions and compliance:

• Accepts Payments From 180+ Countries in 135+ Currencies: Enables businesses to collect export proceeds easily, reducing delays and reconciliation gaps.
• Multi-Currency Business Accounts for Exporters: Overseas clients can pay through local currency bank transfers (ACH, SEPA, FPS, SWIFT), while Razorpay handles conversion and settlement.
• Lower Cost than Traditional Banking Channels: Bank transfers can be processed at fees as low as ~1%, helping exporters maximise revenue while managing compliance-linked costs efficiently.
• Automated Documentation (eFIRC/FIRC): Export proceeds come with digital Foreign Inward Remittance Certificatesvaluable evidence for compliance, refund claims, and regulatory reporting.

Conclusion

Understanding Section 195, applying DTAA benefits correctly, and recognising when TDS or TCS applies are essential steps for avoiding costly errors and ensuring seamless cross-border payments. Staying ahead of compliance shields businesses from penalties, disallowances, and cash-flow disruptions.

With the right regulatory awareness and modern payment tools, businesses can handle foreign payment TDS efficiently and scale internationally with confidence.

FAQs

1. Is TDS applicable to payments for imported goods?

TDS generally doesn’t apply to direct import of goods unless the payment includes service components like installation, technical fees, or royalty elements.

2. What is the difference between TDS and TCS on foreign remittances?

TDS under Section 195 is deducted by Indian payers on taxable incomes paid to non-residents. TCS under Section 206C is collected by banks or sellers from Indian residents for specific transactions like overseas tour packages or foreign remittances exceeding thresholds.

3. What are the consequences of not deducting TDS on foreign payments?

Failure to deduct TDS can lead to interest, penalties, disallowance of expenditure, and increased tax liability during assessments.

4. How do Double Taxation Avoidance Agreements (DTAA) impact TDS on foreign payments?

DTAAs between India and other countries provide relief through lower TDS rates or exemptions for certain income types. Businesses can apply beneficial DTAA rates instead of domestic rates, provided the non-resident furnishes Tax Residency Certificate and Form 10F.

5. Are there any threshold limits for TDS on foreign payments under Section 195?

No monetary threshold exists for TDS under Section 195. TDS applies whenever payment to a non-resident is chargeable to tax in India, regardless of amount, unless specifically exempted or covered by DTAA provisions.

6. What forms are required for making foreign remittances from India?

Forms 15CA and 15CB are essential for foreign remittances. Form 15CA is the remitter’s declaration filed online. Form 15CB is a Chartered Accountant certificate confirming TDS compliance, required for taxable remittances above ₹5 lakh.