Direct Tax Laws & International Taxation · Deduction, Collection and Recovery of Tax

TDS on Payments to Non-Residents: CA Final Direct Tax

Updated 5 October 2026 · Fact-checked

When you pay a non-resident or foreign company any sum chargeable to tax in India, you must deduct tax at the rate in force. That is the Act rate or the lower treaty rate, if the payee proves eligibility. Check chargeability, find the rate, apply treaty relief, gross up if you bear the tax, then deduct.

Understand TDS on Payments to Non-Residents

A non-resident is taxed in India only on income that accrues or arises in India, or is received here. The government cannot easily chase a foreign payee later. So the law makes the payer collect the tax first. This is withholding tax, and in the exam it is the TDS rule for payments to non-residents.

The rule applies to any sum chargeable to tax in India paid to a non-resident (including a foreign company). Typical payments are interest, royalty, fees for technical services, and capital gains. It does not turn every remittance into taxable income. If the sum, or part of it, is not income chargeable in India, there is nothing to deduct on that part.

The tax is deducted at the rate in force. That means the rate under the Act for that income (for example the special rate for royalty and fees for technical services, interest and capital gains) or the rate under the applicable tax treaty (DTAA), whichever is more beneficial to the payee. To use the treaty rate, the payee normally has to give a tax residency certificate and the prescribed treaty particulars.

Deduction is made at the time of credit to the payee's account or payment, whichever is earlier. Unlike many resident-payment provisions, this rule has no minimum threshold of its own, so you do not skip deduction only because the sum is small. Tax is deducted on the chargeable sum. However, the prescribed remittance reporting, the chartered accountant's certificate and any exemptions depend on the nature and amount of the remittance. Check the conditions given in the question.

If the exact taxable part of the payment is unclear, the payer or payee can apply to the Assessing Officer for a determination or lower deduction certificate. Failure to deduct makes the payer an assessee in default and attracts interest and disallowance consequences.

Key rules to remember

Basic TDS on non-resident payment: TDS = Income chargeable in India × Rate in force; Rate in force = Act rate (plus surcharge and 4% cess where applicable) or treaty rate, whichever is more beneficial to the payee.
Rate with cess (no surcharge): Effective rate = Base rate × 1.04; Example: 20% becomes 20.8%. Surcharge applies only above the prescribed income limits and differs for companies and others.
Treaty choice: Rate applied = lower of (Act rate, Treaty rate); Needs a tax residency certificate and the prescribed particulars from the payee. Without them, deduct at the Act rate.
Gross-up where payer bears the tax: Gross income = Net amount × 100 ÷ (100 − Effective rate); Tax = Gross income − Net amount. Use the effective rate including cess. Check that any surcharge limit is not crossed on the grossed-up figure.
Composite payments: TDS only on the portion that is income chargeable in India; Example: on a capital asset sale, tax the gain element, not the full price.
Time of deduction: Earlier of credit to payee's account or payment; Credit to a suspense account also counts as credit.

How to solve TDS on Payments to Non-Residents questions

Use the same sequence for every case on payments to a non-resident or foreign company.

1Confirm the payee is a non-resident or foreign company, and read what the payment is for (royalty, technical fees, interest, capital gains, other).
2Decide how much of the sum is chargeable to tax in India. Ignore the non-taxable part, such as reimbursement of pure cost or a capital repayment, if the facts say so.
3Find the Act rate for that income, then add surcharge if the limits are crossed and 4% cess.
4Check for a treaty. Is the payee a resident of a treaty country, and has it given a tax residency certificate and the prescribed particulars? If yes, compare and use the lower rate.
5Check who bears the tax. If the payer bears it, gross up the net amount using the effective rate.
6Compute TDS = chargeable income × applicable rate. Note the time of deduction (earlier of credit or payment).
7State the compliance points the question asks for: remittance information, chartered accountant's certificate, default consequences, lower deduction certificate.
8Write the answer as provision, facts, computation and conclusion.

Quickest way: Four-line withholding check

When to use it: Use when the question is a short MCQ or a small computation and the facts are clear.

Write the income type and the rate given in the question beside it, for example royalty at the stated rate.
Multiply by 1.04 for cess. Add surcharge only if the amount crosses the limit.
If a treaty rate is given and a TRC is mentioned, compare and pick the lower. If the TRC is not mentioned, use the Act rate.
If the payer bears the tax, divide the net sum by (1 − effective rate) and take the tax from the grossed-up figure.

Common mistakes in TDS on Payments to Non-Residents

Applying the treaty rate even though no tax residency certificate or particulars are given.
Students see a treaty in the facts and assume relief is automatic.
Fix: Treat treaty relief as conditional. Use it only when the facts say the payee has furnished the required documents. Otherwise deduct at the Act rate and say so.
Deducting tax on the entire remittance when only part is income.
Students apply the rate mechanically to the gross payment.
Fix: First split the payment into taxable income and the rest, such as cost reimbursement or the cost element in a capital transfer, and apply the rate only on the taxable part.
Forgetting cess, or adding surcharge when the limit is not crossed.
Students memorise base rates only and do not test the income limit.
Fix: Always multiply by 1.04. Check the income against the surcharge limit for a company or non-company before adding surcharge.
Not grossing up when the agreement says the payer will bear the tax.
Students treat the agreed amount as already gross.
Fix: If the payer bears the tax, the agreed amount is net. Compute gross = net × 100 ÷ (100 − effective rate).
Taking the deduction time as the payment date only.
Students think of TDS as a cash event.
Fix: Deduct at the earlier of credit or payment. A credit in the books to the payee, even a suspense account, triggers it.
Applying the resident TDS threshold limits to non-residents.
Students mix the resident-payment provisions with this one.
Fix: Treat non-resident withholding as a separate rule. It has no minimum threshold like the resident provisions, so do not skip deduction because the sum is small. But remittance reporting, the chartered accountant's certificate and exemptions depend on the nature and amount of the remittance, so check those conditions separately.

Worked examples

Example 1

Alpha Ltd, an Indian company, credits ₹40,00,000 as royalty to Beta Inc., a foreign company resident in a treaty country. The royalty is chargeable to tax in India. Beta Inc. has given a tax residency certificate and the prescribed particulars. Assume, for this question only, that the Act rate on the royalty is 20% plus 4% cess, and no surcharge applies as the income is below ₹1 crore. The treaty rate is 10%, and this is the all-inclusive effective rate, with no separate surcharge or cess. Compute TDS.

Show the solution

The payee is a foreign company, the payment is royalty, and the full ₹40,00,000 is chargeable to tax in India.
Act rate with cess (rate assumed in the question): 20% × 1.04 = 20.8%. TDS at the Act rate = ₹40,00,000 × 20.8% = ₹8,32,000.
Treaty rate: 10% all-inclusive. Beta Inc. has given the tax residency certificate and particulars, so the treaty is available.
Treaty rate 10% is lower than 20.8%, so it is more beneficial. TDS at the treaty rate = ₹40,00,000 × 10% = ₹4,00,000.

Answer: Alpha Ltd should deduct TDS of ₹4,00,000 at the treaty rate of 10%. Without the tax residency certificate and particulars, the deduction would be ₹8,32,000 at 20.8% on the assumed Act rate.

Example 2

Gamma Pvt Ltd agrees to pay Delta GmbH, a non-resident company with no treaty benefit available, ₹9,00,000 as fees for technical services, net of Indian tax. Gamma will bear the tax. Assume, for this question only, that the rate is 20% plus 4% cess and no surcharge applies. Compute the grossed-up income and TDS.

Show the solution

The agreed ₹9,00,000 is net of tax, and Gamma bears the tax, so gross-up is needed.
Effective rate (assumed rate with cess) = 20% × 1.04 = 20.8%. The payee therefore keeps 100 − 20.8 = 79.2% of the gross.
Gross income = ₹9,00,000 × 100 ÷ 79.2 = ₹11,36,363.64 (rounded to two decimals).
TDS = ₹11,36,363.64 × 20.8% = ₹2,36,363.64.
Check: ₹11,36,363.64 − ₹2,36,363.64 = ₹9,00,000. Delta is a foreign company and the grossed-up income of about ₹11.36 lakh is below ₹1 crore, so no surcharge applies.

Answer: Grossed-up fees are ₹11,36,363.64 and TDS to be deducted and deposited is ₹2,36,363.64. Gamma pays Delta ₹9,00,000.

Exam tips

Read the payee's status and the nature of the payment first. The rate depends on both.
If a treaty is mentioned, look for the tax residency certificate or particulars in the facts before using the treaty rate. Mention this condition in your answer.
Show cess and the surcharge test as separate lines in your working. Markers give marks for each step even if the final number slips.
When the payer bears the tax, write the gross-up formula in the answer before substituting values.
In descriptive answers, add the compliance angle: remittance information, a chartered accountant's certificate, and the consequence of failure to deduct.

Practice questions from Deduction, Collection and Recovery of Tax

TDS on Payments to Non-Residents in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

TDS on Payments to Non-Residents: frequently asked questions

What is the TDS rate on royalty and fees for technical services paid to a non-resident?

The Act prescribes special rates for such income. The rate depends on the type of income, the payee and the tax year, and it is increased by surcharge where applicable and 4% cess. Questions often assume a rate, such as 20% in the examples on this page. A tax treaty may give a lower rate. In an exam, use the rate given in the question or the rate in the ICAI material for that tax year.

Does TDS apply to every payment made to a foreign company?

No. The rule applies to sums chargeable to tax in India. If the payment is not income in India, or only part of it is, you deduct only on the chargeable part. You can also ask the Assessing Officer for a determination or lower deduction certificate in doubtful cases.

How do I use a tax treaty benefit in TDS on a non-resident?

Check that the payee is a tax resident of a treaty country and has given a tax residency certificate and the prescribed particulars. Compare the treaty rate with the Act rate and apply the lower one. Use the treaty rate as the question gives it, and say whether it is stated to be inclusive of surcharge and cess.

What happens if the payer does not deduct tax on a payment to a non-resident?

The payer is treated as an assessee in default, with interest on the tax not deducted or deposited. The expense can also be disallowed in computing the payer's business income until the tax is deducted and deposited, as the Act provides.