Section 195 of the Income Tax Act, 1961, is basically concerned about the Tax Deducted at Source (TDS) for the non-resident people of India. This section basically highlights the tax rates and deductions related to all business transactions.
What is section 195 of IT Act?
Tax Deducted at Source is the first way of collecting taxes. Section 195 of the Income Tax act is a section that covers the TDS on Non-resident payments. This section identifies the tax rates and deductions on business transaction with a non-resident from a day –to-day basis.
Under Section 195, the income is chargeable under Income Tax Act. Any sum is charged and the certificate for remittance is mandatory.
Any sum chargeable to tax is the amount that is paid which bears the character of income and gross amount, the whole of which may or may not represent income or profits.
The Act lays out a provision to avoid a revenue loss as a result of tax liability in the hands of a foreign resident, by deducting the same amount from payments made to them at source.
Payer is the person who is remitting the payment to a non-resident payee. The payer can be individuals, Hindu Undivided Family, firms, non-residents, foreign companies, persons having exempt income in India and any juristic person irrespective of whether that person has income chargeable to tax in India or not.
Payee is a non-resident whose residential status is as per Section 6 of the Act.
TDS under section 195:
The following are the ways to be followed to deduct TDS under Section 195:
- TAN (Tax Deduction Account Number): Buyer should first obtain TAN under section 203A of the Income Tax Act, 1961 before deducting TDS. TAN can be obtained by applying buy filling up the Form 49B. This form is also available online. Buyer should also have his own PAN number and PAN number of the NRI seller.
- TDS must be deducted at the time of making the payment to the NRI. The information about the TDS being deducted and the rate at which it was deducted should be mentioned in the sale deed between the NRI seller and the buyer.
- The TDS deducted by the buyer should be deposited through Form number or challan for TDS payment on or before the 7thof next month in which the TDS is deducted.
- The TDS can be deposited through banks that are authorised by government of India or the Income Tax Department to collect Direct Taxes. The deposit has to be made by the buyer.
- After the TDS has been deposited, the buyer has to electronically file TDS return by submitting Form 27Q. TDS returns are filed quarterly. TDS deducted during the first quarter from 1stApril to 30th June must be filed on 15th TDS deducted during the second quarter from 1st July to 30th September must be filed on 15th October. TDS deducted during the third quarter from 1st October to 31st December must be filed on 15th January. TDS deducted during the fourth quarter from 1st January to 31st March must be filed on 15th May.
- After the TDS returns have been filed, buyer can issue TDS certificate or Certificate of Deduction of Tax which is Form 16A to NRI seller. This certificate should be issued to the seller within 15 days from the due date of TDS returns for the quarter.