Taxation · Tax Deduction or Collection at Source and Advance Tax

TDS on Payments to Non-Residents

Updated 4 October 2026 · Fact-checked

Any person paying a non-resident a sum chargeable to tax in India, other than salary, must deduct tax at the rates in force. The general provision has no monetary threshold, though specific provisions exist. To solve it: confirm the income is taxable in India, choose the Act or treaty rate, add surcharge and cess, then compute.

Understand TDS on Payments to Non-Residents

When an Indian payer sends money abroad, India may have the right to tax that income. The payer is the easiest point to collect it. So the law makes the payer deduct tax before paying. This is TDS on payments to non-residents.

The rule covers any sum chargeable to tax in India paid to a non-resident (including a foreign company). Salary is excluded because it has its own TDS rules. Typical payments are interest, royalty, fees for technical services (FTS), and other sums such as commission or capital gains. The Income-tax Act, 2025 keeps the same scheme as the old law, under new section numbers.

The key difference from resident TDS: the general non-resident provision has no monetary threshold, and there is no fixed list of rates for most sums. The payer deducts at the rates in force. That means the rate in the Finance Act for that tax year, or the rate in the tax treaty (DTAA) with the payee's country. The payee may opt for whichever is more beneficial. Treaty benefit is not automatic. To claim it, the non-resident normally gives a tax residency certificate and the other details the law requires, such as Form 10F, and must meet the beneficial ownership conditions.

Some payments have special provisions with their own rates or conditions, such as certain interest on foreign-currency borrowings and bonds, income of investment funds, and certain payments to non-resident sportspersons or associations. If the question names such a payment, use the specific rate given and follow the facts in the question.

The payer must first check that the sum is actually taxable in India. If only part of the sum is income chargeable in India, the payer can apply to the Assessing Officer to decide the right amount of tax to deduct. A non-resident can also seek a lower or nil deduction certificate. The payer files a remittance declaration and, where required, an accountant's certificate (Forms 15CA and 15CB) before remitting.

Key rules to remember

Who deducts and on what: Payer of any sum chargeable to tax in India (other than salary) to a non-resident or foreign company → deduct tax at rates in force; The general provision has no monetary threshold. Specific provisions and exceptions exist, so follow the facts in the question. The payer can be any person who pays the sum.
Rate to apply: The payee may opt for the more beneficial of the Act rate and the DTAA rate, subject to the required documents (tax residency certificate, Form 10F, beneficial ownership); Treaty benefit is an option for the payee, not automatic. Use the rate given in the question.
Tax to deduct: TDS = Gross sum chargeable × rate, plus surcharge and health and education cess as applicable; If the question says the rate is inclusive of surcharge and cess, do not add them again.
Time of deduction: Deduct at the time of credit to the payee's account or at the time of payment, whichever is earlier; Credit to a suspense account also counts as credit.
Gross-up when payer bears the tax: Gross sum = Net sum × 100 ÷ (100 − rate %); Use when the payer agrees to pay the amount net of tax. TDS = Gross − Net.
Resident vs non-resident: Resident: section-wise threshold and fixed rate. Non-resident (general provision): no monetary threshold, rate in force, treaty relief possible; Salary is excluded from this rule; it follows salary TDS.

How to solve TDS on Payments to Non-Residents questions

Use the same sequence for every question on non-resident payments. It keeps your answer in provision-facts-conclusion order.

1Check the payee. Is the person a non-resident or a foreign company? If a resident, use the resident TDS provisions instead.
2Check the nature of the payment: interest, royalty, FTS, commission, capital gain or other sum. Exclude salary.
3Decide whether the sum is chargeable to tax in India (for example, income deemed to accrue or arise in India). If not, no deduction is needed.
4Find the rate: use the rate in the question. If a treaty rate is given and the payee has the required documents and opts for it, apply the more beneficial of the Act and treaty rates.
5Compute TDS on the gross amount. Add surcharge and cess only if the question does not say the rate includes them.
6If the payer bears the tax, gross up the net amount first, then compute TDS on the grossed-up sum.
7State the time of deduction (earlier of credit or payment) and the compliance: deposit, return and remittance forms.
8Write the conclusion with the amount deducted and the net amount paid.

Quickest way: Rate-in-force check for MCQs and written answers

When to use it: Use when time is short and the question gives the payee, the payment and a rate.

Underline the payee's residential status first. Resident or non-resident decides the whole route.
For the general non-resident provision, expect no threshold. If an option relies on a threshold, check whether the question's facts point to a specific provision before rejecting it.
Pick the lower of the Act and treaty rates when both are given and a treaty is claimed with documents.
Check whether the rate is already inclusive of surcharge and cess before adding them.
Spot gross-up words such as 'net of tax' or 'tax to be borne by the payer' and use Net × 100 ÷ (100 − rate).
In written answers, use four lines: provision, facts, working, conclusion. This earns step marks even if the rate is slightly off.

Common mistakes in TDS on Payments to Non-Residents

Applying a resident threshold to a non-resident payment
Students remember resident limits such as annual thresholds and assume they apply everywhere.
Fix: For payments chargeable to tax in India under the general non-resident provision, deduct from the first rupee. Use thresholds only for resident TDS sections, and follow the question's facts if a specific provision applies.
Always using the Act rate and ignoring the treaty
The treaty detail is given in a side line and gets missed.
Fix: Whenever a DTAA rate is mentioned, compare it with the Act rate and apply the more beneficial one, subject to the payee giving the required documents.
Deducting tax on a sum that is not taxable in India
Students link every foreign payment to TDS without checking the charging rules.
Fix: First check that the income accrues or arises, or is deemed to, in India. If not, there is no TDS. Mention this check in your answer.
Computing TDS on the net amount when the payer bears the tax
Students apply the rate directly to the figure in the question.
Fix: Gross up first: Gross = Net × 100 ÷ (100 − rate). Then TDS = Gross × rate.
Forgetting surcharge and cess, or adding them twice
Questions differ on whether the stated rate includes them, and students do not read the wording.
Fix: Read the question. Add them if the rate is stated before surcharge and cess. Skip them if it says inclusive.
Applying non-resident TDS to salary
The rule says 'any sum', so students include everything.
Fix: Remember the exclusion: salary follows the salary TDS rules, even when paid to a non-resident.

Worked examples

Example 1

An Indian company credits ₹10,00,000 as royalty to a foreign company, which is a non-resident and has no permanent establishment in India. The royalty is chargeable to tax in India. Assume the rate under the Act is 20% plus 4% cess (ignore surcharge). The DTAA with the foreign company's country provides a 10% rate, and the foreign company has furnished the required documents. The treaty rate of 10% is to be applied without adding surcharge or cess. Compute the TDS and the net payment.

Show the solution

Provision: royalty paid to a non-resident that is chargeable to tax in India needs TDS at rates in force, with no threshold under the general provision.
Facts: the payee is a non-resident foreign company, the royalty is taxable in India, and the treaty rate is lower than the Act rate with documents furnished.
Act rate with cess: ₹10,00,000 × 20% = ₹2,00,000; cess 4% = ₹8,000; total ₹2,08,000.
Treaty rate: ₹10,00,000 × 10% = ₹1,00,000, with no surcharge or cess added, as the question states.
The treaty rate is more beneficial, so deduct ₹1,00,000.
Net payment = ₹10,00,000 − ₹1,00,000 = ₹9,00,000.

Answer: TDS to be deducted is ₹1,00,000 at the treaty rate of 10%. The net payment to the foreign company is ₹9,00,000.

Example 2

An Indian company agrees to pay a non-resident ₹4,50,000 as fees for technical services, net of tax. The tax is to be borne by the Indian company. Assume the effective rate of TDS, including cess, is 20%. Compute the gross amount, TDS and the total cost to the Indian company.

Show the solution

Provision: when the payer bears the tax, the payment is grossed up so that the tax is deducted from the gross sum.
Facts: net amount payable is ₹4,50,000 and the effective rate is 20%.
Gross sum = ₹4,50,000 × 100 ÷ (100 − 20) = ₹4,50,000 × 100 ÷ 80 = ₹5,62,500.
TDS = ₹5,62,500 × 20% = ₹1,12,500.
Check: ₹5,62,500 − ₹1,12,500 = ₹4,50,000, which equals the net amount agreed.
Total cost to the Indian company = ₹4,50,000 paid to the non-resident + ₹1,12,500 deposited with the government = ₹5,62,500.

Answer: Gross FTS is ₹5,62,500. TDS is ₹1,12,500. The non-resident receives ₹4,50,000, and the total cost to the company is ₹5,62,500.

Exam tips

Write the provision, facts and conclusion in separate lines. Examiners give marks for identifying that the payee is a non-resident and that the sum is chargeable in India.
Always say 'rates in force' and 'more beneficial of Act rate and treaty rate, subject to documents' when a treaty is mentioned. Use the rate the question gives, and do not rely on memory of rates.
Do not quote section numbers unless you are certain of the Income-tax Act, 2025 numbers. State the rule in words instead.
In MCQs, watch for gross-up wording and for whether the rate is inclusive of cess. These are the two most common traps.
Mention Forms 15CA and 15CB and the deposit and return compliance in one line when the question asks about remittance or procedure.

Practice questions from Tax Deduction or Collection at Source and Advance 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

Is there a threshold limit for TDS on payments to non-residents?

Generally no, for the general non-resident provision. For a sum chargeable to tax in India paid to a non-resident, tax is deducted from the first rupee at the rates in force. Specific provisions and exceptions exist, so follow the facts in the question. Thresholds you remember belong mostly to resident TDS sections.

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

For residents, each section has its own threshold and fixed rate. For non-residents, one general rule applies to any sum chargeable to tax in India (except salary), at the rates in force, with treaty relief possible. Compliance also includes remittance forms.

Which rate applies if a tax treaty exists?

The payee may opt for the Act rate or the treaty rate, whichever is more beneficial. The payee needs to give the required documents, such as a tax residency certificate. In exams, apply the lower rate when the question mentions a treaty and the documents are furnished.

What if the payer agrees to bear the tax on royalty or FTS?

Then the net amount is grossed up. Gross sum = Net × 100 ÷ (100 − rate). TDS is calculated on the gross sum, and the payer's cost is the gross sum.