Direct Tax Laws & International Taxation · Non Resident Taxation

Withholding Tax on Payments to Non-Residents

Updated 5 October 2026

Withholding tax on non-resident payments means the payer deducts tax from a sum chargeable to tax in India (other than salary) paid to a non-resident or foreign company. Exempt sums are outside it. Check chargeability, find the rate in force (domestic or treaty, whichever is more beneficial), apply it to the income element, deduct at credit or payment, and deposit.

Understand Withholding Tax on Payments to Non-Residents

A non-resident is taxed in India only on income that is received here, or accrues or arises here, or is deemed to do so. Collecting tax from a person who sits abroad is hard. So the law makes the Indian payer the collection agent. The payer deducts tax before paying and deposits it with the government.

The obligation arises when you pay or credit a sum chargeable to tax in India to a non-resident (not being a company) or to a foreign company. Salary is excluded because it has its own deduction rules. The payer is the person responsible for making the payment. The test is whether the sum is chargeable in India, not whether the payment is of a type listed for residents.

The provision covers only sums chargeable in India. Specific exceptions exist, for example sums that are exempt and payments covered by other specific provisions. Check these before you apply deduction. Do not assume that every payment to a non-resident suffers deduction.

The main difference from TDS on residents is this. For residents, the law lists payment types with threshold limits and fixed rates. For non-residents, there are generally no thresholds. Any chargeable sum attracts deduction, and the rate is the rate in force. That means the rate in the Finance Act, or the rate in the applicable tax treaty, whichever is more beneficial to the non-resident, provided the treaty conditions are met (such as a tax residency certificate and the prescribed details). Where the treaty rate applies, you deduct tax at the treaty rate. The treaty rate is the ceiling on the tax, so do not add surcharge and cess on top of it unless the treaty or the question says otherwise.

The payer must also ask what part of the payment is income. Reimbursement of pure cost with no income element, or a sum not chargeable in India, need not suffer deduction on the full amount. Two different certificate routes exist, and you must not merge them:

Payer's application: if the payer is unsure how much of the payment is chargeable, the payer can apply to the Assessing Officer to determine the appropriate proportion of the sum that is chargeable. Tax is then deducted only on that proportion.
Payee's application: the payee (the non-resident) can apply for a certificate allowing deduction at a lower rate or no deduction.

These are separate provisions of the Income-tax Act, 2025. Quote the section numbers only after checking them in the Act or the ICAI material.

Timing and consequences matter. Deduct at the time of credit to the payee's account or at payment, whichever is earlier. Credit to any account, whether called a suspense account or by any other name, counts as credit. For non-government deductors, deposit the tax by the 7th of the next month (30 April for tax deducted in March). This due date is the same as for other TDS. If you fail to deduct or deposit, you become an assessee in default, interest is charged, and 30% of the sum payable to the non-resident is disallowed in your own computation. This applies to a sum on which tax was not deducted, or was deducted but not deposited on or before the due date for filing the return of income. It applies where the sum is an expenditure otherwise deductible in computing business or professional income, and where you were required to deduct tax in the first place.

The disallowance is not permanent. If you later deduct and deposit the tax, that 30% is allowed as a deduction in the tax year in which the tax is deducted and deposited. There is no disallowance where no deduction was required, for example because the sum is not chargeable in India. If a question says the payee has already paid the tax on the sum and filed the return, check the Act or ICAI material for relief before you apply the disallowance.

Key rules to remember

Who deducts and on what: Deduction applies to: any sum chargeable to tax in India (not salary) payable to a non-resident (non-company) or foreign company; No threshold limit for the payment. The test is chargeability in India. Exempt sums and other specific exceptions are outside the provision.
Tax to deduct: Tax = Income element chargeable in India × Rate in force; Rate in force = Finance Act rate or treaty rate, whichever is more beneficial, with treaty conditions met. Add surcharge and cess to a domestic rate only where the question says the rate is exclusive of them and they apply. Where the treaty rate applies, deduct at the treaty rate. It is the ceiling on the tax, so do not add surcharge and cess on top of it unless the treaty or the question says otherwise.
Time of deduction: Earlier of: credit to payee's account or payment; Credit to any account, whether called a suspense account or by any other name, counts as credit. For non-government deductors, deposit the tax by the 7th of the next month. For tax deducted in March, deposit by 30 April. This due date is the same as for other TDS.
Gross-up where payer bears the tax: Gross sum = Net amount × 100 ÷ (100 − rate %); Tax = Gross sum − Net amount. Use when the agreement says the payment is net of Indian tax.
Default consequences: Interest on late deduction: 1% per month or part month, from the date the tax was deductible to the date of deduction. Interest on late deposit after deduction: 1.5% per month or part month, from the date of deduction to the date of deposit. Disallowance = 30% of the sum payable to the non-resident on which tax was not deducted, or was deducted but not deposited on or before the due date for filing the return of income; The disallowance applies to the sum on which the default occurred, not to every expenditure. For deducted tax, the test is deposit on or before the due date for filing the return of income. It applies only where that sum is an expenditure otherwise deductible in computing business or professional income and tax was required to be deducted. Fees for technical services paid by a business are such an expenditure. If the tax is later deducted and deposited, 30% of that sum is allowed as a deduction in the tax year in which this is done, so the disallowance is not permanent. No disallowance arises where no deduction was required, for example where the sum is not chargeable in India. If a question says the payee has already paid the tax and filed the return, check the Act or ICAI material for relief. It is a provision of the Income-tax Act, 2025 (it corresponds to old s. 40(a)(i)); quote the 2025 Act section only after checking it.
Payer's application: appropriate proportion: Payer applies to the Assessing Officer to determine the appropriate proportion of the sum chargeable to tax; Used when the payer is unsure how much of the payment is income chargeable in India. Deduct on the proportion determined. It corresponds to old s. 195(2). Confirm the Income-tax Act, 2025 section before citing.
Payee's application: lower or nil deduction: Payee applies for a certificate of lower or nil deduction; This is a separate provision from the payer's application (it corresponds to old s. 197). Deduct as per the certificate. Confirm the Income-tax Act, 2025 section before citing.

How to solve Withholding Tax on Payments to Non-Residents questions

Use this order for any question on TDS on payments to non-residents. Write each step in your answer.

1Check the payee: is the recipient a non-resident or a foreign company? If the payment is salary, use the salary TDS rules instead.
2Check chargeability: is the sum received, accrued or deemed to accrue in India? Look for business connection, source in India, royalty or fees for technical services, interest, capital gains. If it is not chargeable, no deduction arises.
3Identify the income element: remove pure reimbursements, or any part not chargeable. Note if the Assessing Officer has determined an appropriate proportion on the payer's application, or has given the payee a lower or nil deduction certificate.
4Identify the rate in force: find the domestic rate for that income, and the treaty rate if the payee furnishes a tax residency certificate and other required details. Apply the lower, if the payee wants the treaty.
5Check whether the payment is net of tax. If the payer bears the tax, gross up the sum before applying the rate.
6Compute tax: income element × rate. Add surcharge and cess to a domestic rate if the question includes them. For a treaty rate, deduct at the treaty rate and do not add surcharge and cess on top of it unless the treaty or the question says otherwise.
7Fix the time of deduction (earlier of credit or payment) and the due date of deposit.
8State the consequence of default: interest, assessee in default, and 30% disallowance of the sum on which tax was not deducted, or was deducted but not deposited on or before the due date for filing the return of income. Note that the 30% is allowed in the year the tax is later deducted and deposited.

Quickest way: Four-line exam method

When to use it: Use for MCQs and for short written parts where the facts are brief and time is tight.

Ask: non-resident payee and chargeable in India? If no, the answer is no deduction.
Take the lower of domestic and treaty rate if a treaty is mentioned with the supporting documents.
If 'net of tax' appears, divide by (1 − rate) before computing.
Write the tax figure, then one line on time (earlier of credit or payment) and one on default consequences.

Common mistakes in Withholding Tax on Payments to Non-Residents

Applying a threshold limit before deducting tax on non-resident payments
Students carry over the annual limits from TDS on residents.
Fix: For non-residents, deduct on any chargeable sum. Thresholds of the resident table do not apply.
Deducting tax on the whole payment without checking chargeability
Students see 'payment to non-resident' and stop reading.
Fix: First test whether the sum is chargeable in India, then deduct only on the income element.
Using the Finance Act rate when a cheaper treaty rate is available
The treaty documents are mentioned in the last line of the question.
Fix: Read the whole question. If the payee has furnished a tax residency certificate and other details, apply the lower of the two rates.
Forgetting gross-up when the payment is 'net of tax'
Students multiply the net sum by the rate directly.
Fix: Gross sum = net × 100 ÷ (100 − rate). Tax is the gross sum minus the net sum.
Deducting on the date of payment alone
Students think of cash payment as the trigger.
Fix: Deduct at credit or payment, whichever is earlier. An advance credit in the books triggers deduction.
Ignoring the payer's own consequences
Students stop after computing tax.
Fix: Add a line on interest, assessee in default status and the 30% disallowance of the sum on which tax was not deducted, or was deducted but not deposited on or before the due date for filing the return of income.
Merging the payer's application and the payee's certificate into one provision
Both lead to a lower deduction, so they look alike.
Fix: Keep them apart: the payer applies to fix the appropriate proportion of the chargeable sum; the payee applies for a lower or nil deduction certificate.

Worked examples

Example 1

An Indian company, X Ltd, credits ₹15,00,000 to a non-resident consultant on 10 June as royalty chargeable to tax in India. The domestic rate is 20% plus 4% cess. The consultant is a tax resident of a treaty country whose treaty rate on royalty is 10%. The consultant has furnished a tax residency certificate and the other prescribed details. The question does not say that surcharge or cess is to be added to the treaty rate. The payment is made on 25 June. Compute the tax to be deducted and state when.

Show the solution

Payee is a non-resident and the royalty is chargeable in India, so deduction applies. There is no threshold.
Domestic rate with cess = 20% × 1.04 = 20.8%.
Treaty rate = 10%. The conditions are met, so the more beneficial rate applies. The treaty rate is the ceiling on the tax, and neither the treaty nor the question asks for surcharge or cess on top of it, so tax is deducted at 10%. 10% is lower than 20.8%, so the treaty rate is the rate in force.
Tax = ₹15,00,000 × 10% = ₹1,50,000.
Timing: the earlier of credit (10 June) and payment (25 June) is 10 June. Deduct on 10 June.

Answer: Tax to be deducted is ₹1,50,000 (treaty rate of 10%, with no surcharge or cess added on top, and lower than 20.8%), at the time of credit on 10 June. The net amount payable is ₹13,50,000.

Example 2

Y Ltd agrees to pay a foreign company ₹10,00,000 net of Indian tax for fees for technical services chargeable in India. Y Ltd will bear the tax. The rate in force is 20%. Ignore surcharge and cess. Compute the gross sum, the tax to be deducted, and say what happens if Y Ltd does not deduct or deposit the tax.

Show the solution

Net amount is ₹10,00,000 and the payer bears the tax, so gross up.
Gross sum = ₹10,00,000 × 100 ÷ (100 − 20) = ₹10,00,000 × 100 ÷ 80 = ₹12,50,000.
Tax = ₹12,50,000 − ₹10,00,000 = ₹2,50,000. Check: 20% of ₹12,50,000 = ₹2,50,000.
The sum payable and the expenditure claimed by Y Ltd is ₹12,50,000, because the tax paid for the payee is part of the cost. Fees for technical services paid by a business are expenditure otherwise deductible in computing business income, and tax was required to be deducted, so the 30% disallowance can apply to this sum.
If Y Ltd fails to deduct, it is an assessee in default. It pays interest at 1% per month or part month from the date the tax was deductible to the date of deduction, and 30% of the sum payable to the foreign company on which tax was not deducted is disallowed. If it deducts but does not deposit on or before the due date for filing the return of income, the same 30% disallowance applies to that sum, and interest from the date of deduction to the date of deposit is 1.5% per month or part month.
The disallowance is 30% of ₹12,50,000 = ₹3,75,000. It is not permanent: if Y Ltd later deducts and deposits the tax, this ₹3,75,000 is allowed as a deduction in the tax year in which the tax is deducted and deposited.

Answer: Gross sum ₹12,50,000; tax to be deducted and deposited ₹2,50,000. On default, because the fees are business expenditure otherwise deductible and tax was required to be deducted, 30% of the sum payable (₹12,50,000) is disallowed, that is ₹3,75,000. This applies if tax was not deducted, or was deducted but not deposited on or before the due date for filing the return of income. Interest and assessee-in-default status also follow. If the tax is later deducted and deposited, the ₹3,75,000 is allowed as a deduction in that tax year.

Exam tips

Always open your answer with the two-part test: payee is non-resident, and the sum is chargeable in India.
When a treaty is mentioned, check for the residency certificate and other documents before applying the treaty rate. State that the treaty rate is the ceiling on the tax, and that you deduct at the treaty rate without adding surcharge and cess unless the treaty or the question says otherwise.
Look for 'net of tax' or 'tax to be borne by the payer' in the question. Gross-up questions are common.
In written answers, use provision-facts-conclusion form and end with the consequence of non-compliance.
In case-scenario MCQs, check whether part of the payment is a reimbursement or not chargeable before computing tax.
Keep the payer's application (appropriate proportion) and the payee's lower or nil deduction certificate separate in your answer.

Practice questions from Non Resident Taxation

Withholding Tax on Payments to Non-Residents: frequently asked questions

How is TDS on non-resident payments different from TDS on residents?

For residents, the law lists specific payments with thresholds and fixed rates. For non-residents, any sum chargeable in India (other than salary) attracts deduction, with no threshold. The rate is the rate in force, which can be reduced by a tax treaty.

Which rate applies when a tax treaty is available?

The non-resident can opt for the Finance Act rate or the treaty rate, whichever is more beneficial. For the treaty rate, the payee must meet the treaty conditions and furnish the tax residency certificate and other prescribed details. Where the treaty rate applies, tax is deducted at that rate. It is the ceiling on the tax, so surcharge and cess are not added on top of it unless the treaty or the question says otherwise.

What if the payer is not sure how much of the sum is taxable?

The payer can apply to the Assessing Officer to determine the appropriate proportion of the sum chargeable to tax, and then deduct tax as determined. This reduces the risk of default. It is different from the payee's own application for a lower or nil deduction certificate.

What happens if the payer does not deduct tax?

The payer becomes an assessee in default and pays interest on the tax not deducted. Also, 30% of the sum payable to the non-resident on which tax was not deducted is disallowed in its own computation, where the sum is business expenditure and tax was required to be deducted. The same applies if tax was deducted but not deposited on or before the due date for filing the return of income. If the tax is later deducted and deposited, that 30% is allowed as a deduction in the tax year in which this is done.