Direct and Indirect Taxation · Tax Deducted at Source and Tax Collected at Source

TDS on Payments to Non-Residents for CMA Inter

Updated 10 October 2026 · Fact-checked

When you pay interest, royalty, fees for technical services or any other sum chargeable to tax in India to a non-resident or foreign company, you deduct tax at the time of credit or payment, whichever is earlier. Use the rate in force or the lower DTAA rate, add surcharge and cess if applicable, and deposit the tax.

Understand TDS on Payments to Non-Residents

A non-resident is taxed in India only on income that is received in India or accrues or arises in India, or is deemed to. The payer is the easiest point to collect this tax, because the non-resident may have no office or assets here. So the law makes the payer deduct tax before sending the money abroad.

Under the Income-tax Act, 2025, the TDS provisions are collected in section 393, and the rules for payments to non-residents sit within it. The duty applies to any person who pays a sum chargeable to tax to a non-resident (other than a company) or to a foreign company. Typical sums are interest, royalty, fees for technical services, commission and other income taxable in India. Salary is handled under its own rules.

The general non-resident provision has no basic-exemption threshold. The key test is chargeability. Even a small payment can attract TDS if the sum is chargeable. Specific provisions may carry their own conditions or exceptions, so always follow the facts and instructions given in the question.

If the amount is not taxable in India in the payee's hands, there is nothing to deduct. If only part of the payment is income (for example, a composite payment with a reimbursement element), tax is deducted only on the income part. So always ask first: is this sum taxable in India under the scope and deemed-accrual rules?

The rate depends on the type of income (interest, royalty, fees for technical services and so on). It is the rate in force under the Finance Act for that income, plus surcharge (if applicable) and 4% health and education cess, unless the question or treaty states that the rate is inclusive. A DTAA (tax treaty) applies only if the payee is a resident of a country with which India has a treaty. In that case the non-resident can choose the treaty rate when it is lower. The payee usually has to provide a tax residency certificate and the prescribed particulars. Without these you apply the domestic rate.

If the payer agrees to bear the tax himself, the tax is itself income of the payee. You then gross up the net amount to find the gross income on which TDS is computed. Failure to deduct or deposit leads to interest, penalty and possible disallowance of the expense, as covered in the defaults topic.

Key rules to remember

Who deducts and when: Deduct at the time of credit to the payee's account or at the time of payment, whichever is earlier; Applies to any person paying a sum chargeable to tax to a non-resident (not a company) or a foreign company. The general provision has no basic-exemption threshold; the test is chargeability. Specific provisions may have their own conditions or exceptions.
TDS amount: TDS = Taxable sum × (Rate in force + surcharge, if applicable) + Cess at 4% on tax and surcharge; Deduct at the rate in force plus surcharge (if applicable) and 4% health and education cess, unless the question or treaty states that the rate is inclusive. Use the rate given in the question.
DTAA benefit: Rate used = Lower of domestic rate and treaty rate (if payee is a resident of the treaty country and gives tax residency certificate and required details); Check whether the treaty rate is stated as inclusive of surcharge and cess. If it says so, add nothing more.
Gross-up when payer bears tax: Gross sum = Net sum × 100 ÷ (100 − Effective TDS rate %); Tax = Gross sum − Net sum. Use this only when the payer agrees to bear the tax.
Composite payment: TDS base = Only the portion that is income chargeable to tax in India; A reimbursement of pure cost, or a sum not taxable in India, is outside the base.

How to solve TDS on Payments to Non-Residents questions

Use this order for any question on payments to non-residents. It keeps you from missing a condition and gives the examiner clear steps to mark.

1Check the payee: is the person a non-resident or a foreign company? If the payee is resident, use the resident TDS rules instead.
2Identify the nature of the payment (interest, royalty, fees for technical services, commission, other sum) and check whether it is chargeable to tax in India.
3Separate the taxable part from any non-income part, such as a pure reimbursement or a sum not taxable in India.
4Note the date of credit and date of payment. The earlier one is the point of deduction.
5Pick the rate. Use the rate in force given in the question. If the payee is a resident of a treaty country and gives a tax residency certificate, use the lower of treaty and domestic rate.
6Add surcharge (if applicable) and 4% cess on the tax, unless the question or treaty states the rate is inclusive. State your assumption in one line.
7If the payer bears the tax, gross up the net amount first, then compute TDS on the grossed-up figure.
8Write the final TDS, the net amount remitted, and a line on deposit and compliance.

Quickest way: Four-line check for non-resident TDS problems

When to use it: Use when time is short, especially in a 14-mark question with several payments to foreign parties.

Make a small table with columns: payment, taxable in India (Yes/No), base, rate, TDS.
Mark any non-taxable or pure reimbursement payments as Nil at once and move on.
For each taxable payment, use the lower of treaty and domestic rate where a DTAA benefit is allowed. Add surcharge (if applicable) and 4% cess on the tax, unless the question or treaty says the rate is inclusive.
If the tax is borne by the payer, multiply the net sum by 100 and divide by (100 − rate). Total the TDS at the end.

Common mistakes in TDS on Payments to Non-Residents

Applying a threshold limit before deducting tax, as is done for many resident payments.
Students mix the resident TDS rules with the non-resident rules.
Fix: Remember the general non-resident provision has no basic-exemption threshold. The test is whether the sum is chargeable to tax in India. Apply a specific condition or exception only if the question gives it.
Deducting tax on the whole composite payment, including a pure reimbursement or a non-taxable portion.
Students take the invoice total as the base without separating the income element.
Fix: Split the payment first. Deduct tax only on the portion that is income chargeable to tax in India.
Using the treaty rate without a tax residency certificate, or using the treaty rate when it is higher than the domestic rate.
Students think a DTAA always applies automatically.
Fix: Apply the DTAA only if the payee is a resident of the treaty country and supplies the required documents, and use whichever rate is lower.
Leaving out surcharge and cess, or adding them when the question already gives an inclusive rate.
The rate is read without checking the wording of the question.
Fix: Cess at 4% (and surcharge, if applicable) is added by default. Leave it out only if the question or treaty states the rate is inclusive. State your assumption clearly in the answer.
Grossing up wrongly by adding the tax percentage to the net sum, for example net × 110%.
Students treat the tax as a mark-up on the net amount.
Fix: Use net × 100 ÷ (100 − rate). The tax is a percentage of the gross sum, not of the net sum.
Deducting tax only when cash is paid, ignoring the earlier credit entry in the books.
Students link TDS to the cash movement alone.
Fix: Check both dates. Tax is deducted at the earlier of credit to the payee's account and payment.

Worked examples

Example 1

Bharat Tech Ltd., an Indian company, credits ₹10,00,000 as royalty to Alpha Inc., a foreign company with no DTAA benefit available. Assume the rate in force is 20% and health and education cess is 4% on the tax. Ignore surcharge. Compute the tax to be deducted and the net amount remitted.

Show the solution

Alpha Inc. is a foreign company, and royalty for use of rights in India is chargeable to tax in India. So tax must be deducted.
Base for deduction: ₹10,00,000, since the whole sum is royalty.
Tax at 20%: ₹10,00,000 × 20% = ₹2,00,000.
Cess at 4% on tax: ₹2,00,000 × 4% = ₹8,000.
Total TDS = ₹2,00,000 + ₹8,000 = ₹2,08,000.
Net amount remitted = ₹10,00,000 − ₹2,08,000 = ₹7,92,000.

Answer: TDS to be deducted is ₹2,08,000 and the net amount remitted is ₹7,92,000. The tax must be deposited and reported within the prescribed due dates.

Example 2

Kaveri Industries Ltd. agrees to pay Mr. John, a non-resident, fees for technical services of a net ₹5,00,000 after bearing all Indian tax itself. A DTAA applies and Mr. John gives a valid tax residency certificate. Assume the treaty rate of 10% is lower than the domestic rate and is all-inclusive (no separate cess or surcharge). Compute the gross fee and the TDS.

Show the solution

The payer bears the tax, so the net sum must be grossed up. The tax itself is income of the payee.
The DTAA benefit is available because the treaty rate (10%) is lower than the domestic rate and the certificate is given. So use 10%.
Gross sum = Net sum × 100 ÷ (100 − 10) = ₹5,00,000 × 100 ÷ 90 = ₹5,55,555.56 (rounded).
TDS = ₹5,55,555.56 − ₹5,00,000 = ₹55,555.56.
Check: 10% of ₹5,55,555.56 = ₹55,555.56. Net to Mr. John = ₹5,55,555.56 − ₹55,555.56 = ₹5,00,000. This matches the agreed net sum.

Answer: Gross fee is ₹5,55,555.56 and TDS is ₹55,555.56. The company's total cost is ₹5,55,555.56, and Mr. John receives ₹5,00,000. Round as per the instruction in the question.

Exam tips

Start the answer with a one-line check of chargeability. Many marks go to saying why tax is or is not deductible.
State every assumption on rate, surcharge and cess. If the question gives a rate, use it without argument.
In multi-payment questions, use a table. Show Nil rows for non-taxable payments so the examiner sees you considered them.
For DTAA questions, mention the tax residency certificate and show the comparison of treaty and domestic rate before choosing.
For MCQs, watch for traps: no basic-exemption threshold under the general non-resident provision (chargeability is the test), deduction at earlier of credit or payment, and gross-up with net × 100 ÷ (100 − rate).

Practice questions from Tax Deducted at Source and Tax Collected at Source

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 minimum limit below which TDS on payments to non-residents is not deducted?

The general non-resident provision has no basic-exemption threshold. The test is whether the sum is chargeable to tax in India. If it is, tax is deducted even for a small amount. Specific provisions may carry their own conditions or exceptions, so follow the facts given in the question.

Can I apply the DTAA rate when paying a foreign company?

Yes, if the payee is a resident of a country with which India has a treaty and the treaty rate is lower than the domestic rate. The payee must usually give a tax residency certificate and the prescribed particulars. Without them, apply the domestic rate.

When exactly should TDS be deducted on a payment to a non-resident?

Deduct at the time of credit to the payee's account or at the time of payment, whichever is earlier. If you book the expense in the payee's account first, that is the deduction point even though no cash has moved.

What if the payer agrees to bear the tax on behalf of the non-resident?

Then you gross up the net amount. Gross sum = Net × 100 ÷ (100 − rate). TDS is calculated on the gross sum. The tax paid for the payee is treated as part of the payee's income.