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Direct Tax Laws and International Taxation · Interest and Fees

Special Provisions and Return Filing Exemptions for Non-Residents

Updated 11 October 2026 · Fact-checked

Section 207 of the Income-tax Act, 2025 taxes specified income of non-residents and foreign companies at special rates. No deduction of expenses is allowed against that income. Chapter VIII deductions are restricted. A return need not be filed if total income is only such income and TDS was deducted at a rate not less than the section rate.

Understand Special Provisions and Return Filing Exemptions

Section 207 gives special flat rates for certain income of a non-resident (not being a company) or a foreign company: dividends, specified interest, income from specified units, and royalty and fees for technical services (FTS) under approved agreements. All other income is taxed at rates in force.

The flat rate is applied on the gross income. Sub-section (5) says no deduction in respect of any expenditure or allowance is allowed under sections 28 to 58, 60 and 61 and section 93 when computing income under sub-sections (1) and (2). So you cannot claim expenses, depreciation or head office expenses against this income. The tax is on the receipt itself.

Sub-section (6) deals with Chapter VIII deductions. If the gross total income consists only of the income at serial numbers 1 to 7 of the sub-section (1) table, no deduction is allowed under Chapter VIII and Schedule XV. If there is other income as well, you first reduce the gross total income by the serial 1 to 7 income. The Chapter VIII deduction is then allowed as if the reduced amount were the gross total income. Sub-section (7) says this does not apply to the deduction for a Unit of an International Financial Services Centre under section 147.

Sub-section (8) gives a compliance relief. The assessee need not furnish a return under section 263(1) if two conditions are both met. First, total income in the tax year consisted only of income under sub-section (1) (serial 1 to 7) and sub-section (2) (serial 1 and 2). Second, tax deductible at source under Chapter XIX-B has been deducted at a rate not less than the rate in sub-sections (1) and (2). TDS then works as the final tax.

Note that serial 8 of sub-section (1), which is the remaining income, and serial 3 of sub-section (2) are not covered by the return exemption. If the person has any such income, the exemption is lost.

Key rules to remember

No deduction rule
Taxable amount = gross income; no deduction under sections 28 to 58, 60, 61 and 93
Applies to income referred to in section 207(1) and (2). Rate is applied on gross receipts.
Section 207(1) rates
Dividend 20%; IFSC unit dividend 10%; foreign currency interest from Government or Indian concern 20%; infrastructure debt fund interest 5%; specified foreign currency units 20%
Interest at serial 5 and 6 follows rates in section 393(2). Serial 8 (rest of income) is at rates in force.
Section 207(2) rates
Royalty 20%; FTS 20%
Needs a Government or Indian concern payer, an agreement after 31 March 1976, and approval or consistency with industrial policy as stated in the section.
Chapter VIII deduction rule
Only serial 1 to 7 income: no deduction. Mixed income: deduction on (GTI − serial 1 to 7 income)
Section 147 IFSC Unit deduction is outside this restriction.
Return exemption
Total income only from 207(1) serial 1-7 and 207(2) serial 1-2, AND TDS rate ≥ section rate → no return under section 263(1)
Both conditions must be met.

How to solve Special Provisions and Return Filing Exemptions questions

Use this order for any problem on a foreign company or non-resident with Section 207 income.

  1. 1Classify each receipt: dividend, interest, units, royalty, FTS or other income.
  2. 2Check the conditions for each item, such as payer, agreement date and approval for royalty and FTS.
  3. 3Take the gross receipt. Ignore expenses, depreciation and head office expense for Section 207 income.
  4. 4Apply the specified rate to each item. Tax the remaining income at rates in force.
  5. 5Apply the Chapter VIII rule: no deduction if only serial 1 to 7 income; otherwise compute deduction on GTI reduced by that income.
  6. 6Check the return exemption: is total income only from the listed items, and was TDS at a rate not less than the section rate?
  7. 7State the conclusion clearly: tax payable and whether a return is required.

Quickest way: Three-question check

When to use it: For MCQs and short case questions on deductions or return filing.

  1. Is every item of income in the listed serial numbers of 207(1) or 207(2)? If any other income exists, return exemption fails.
  2. Was TDS deducted at a rate equal to or higher than the section rate? If lower, return is required.
  3. Remember expenses are never deducted, and Chapter VIII deduction is barred on the listed income.

Common mistakes in Special Provisions and Return Filing Exemptions

  • Deducting expenses from royalty or FTS before applying 20%.

    Students treat it like business income.

    Fix: Section 207(5) bars deductions under sections 28 to 58, 60, 61 and 93. Apply the rate on gross receipts.

  • Claiming the return exemption when the person also has other income.

    Students remember only the TDS condition.

    Fix: Both conditions are needed. Total income must consist only of listed income.

  • Ignoring the TDS rate condition.

    Students assume any TDS is enough.

    Fix: TDS must be at a rate not less than the rates in sub-sections (1) and (2). Lower TDS means a return is needed.

  • Denying all Chapter VIII deductions in a mixed income case.

    Students over-apply the first part of sub-section (6).

    Fix: Denial is total only when GTI consists solely of serial 1 to 7 income. Otherwise reduce GTI and allow deduction on the balance.

  • Applying 20% on royalty without checking conditions.

    Students memorise the rate only.

    Fix: Check the payer, agreement date and approval or industrial policy condition under sub-section (2).

Worked examples

Example 1

Zenith Corp, a foreign company, receives royalty of ₹40,00,000 from an Indian concern under an approved agreement made in 2020. It spent ₹10,00,000 on earning it. It has no other income in India. TDS of ₹8,00,000 was deducted. Compute the tax and state whether a return is required.

Show the solution
  1. Royalty falls in section 207(2) as the agreement is after 31 March 1976 and approved.
  2. Expenses of ₹10,00,000 are not allowed under section 207(5). Taxable amount is ₹40,00,000.
  3. Tax at 20% = ₹40,00,000 × 20% = ₹8,00,000, before any surcharge or cess as applicable.
  4. Total income consists only of listed income. TDS of ₹8,00,000 is 20% of the income, which is not less than the section rate.
  5. Both conditions of section 207(8) are met.

Answer: Tax is ₹8,00,000 on gross royalty with no expense deduction. Return under section 263(1) is not required.

Example 2

Orion Ltd, a foreign company, has dividend income of ₹5,00,000 from an Indian company (not an IFSC unit) and other income of ₹3,00,000 taxable at rates in force. TDS on the dividend was at 20%. Can it claim a Chapter VIII deduction of ₹1,00,000 eligible on its income, and is a return required?

Show the solution
  1. Dividend is serial 1 of section 207(1), taxed at 20%: ₹5,00,000 × 20% = ₹1,00,000.
  2. GTI includes serial 1 to 7 income, so section 207(6)(b) applies. Reduce GTI by ₹5,00,000. Remaining amount is ₹3,00,000.
  3. The deduction is allowed as if ₹3,00,000 were the gross total income, so the ₹1,00,000 deduction can be claimed if otherwise eligible, as it does not exceed ₹3,00,000.
  4. Return exemption: total income includes other income of ₹3,00,000 not listed in the exemption.
  5. So section 207(8)(a) is not satisfied.

Answer: Chapter VIII deduction can be claimed against the ₹3,00,000 other income, subject to its own conditions. A return is required.

Exam tips

  • Write the sub-section number with each rule, such as 207(5) for no deduction and 207(8) for the return exemption.
  • In case questions, list facts against both conditions of the return exemption before concluding.
  • Show gross income and the flat rate computation separately from other income taxed at rates in force.
  • Do not quote surcharge or cess figures unless the question gives them.

Practice questions from Interest and Fees

Special Provisions and Return Filing Exemptions in other exams

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

Special Provisions and Return Filing Exemptions: frequently asked questions

Is return filing mandatory for a non-resident with only royalty income?

Not if the royalty falls under section 207(2) and TDS was deducted at a rate not less than the section rate. Total income must consist only of the listed income. If any other income exists, a return is required.

Can expenses be deducted from royalty income of a foreign company?

No. Section 207(5) bars deductions under sections 28 to 58, 60, 61 and 93 when computing income under sub-sections (1) and (2). The rate applies on gross receipts.

Are Chapter VIII deductions allowed against Section 207 income?

Not if gross total income consists only of serial 1 to 7 income of sub-section (1). If there is other income, the deduction is computed on gross total income reduced by that income. The IFSC Unit deduction under section 147 is excluded from this restriction.

What rate applies to royalty under Section 207?

Section 207(2) provides 20% on royalty and FTS, subject to its conditions. Sub-section (3) adjusts the conditions for copyright in books to an Indian concern and computer software to a resident.