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Non-Resident Taxation Series | June 2026
Every Indian entity paying money to a non-resident must deduct TDS. Section 393(2) prescribes exact rates for every category. This article explains the full TDS table, the DTAA override, the proportionate TDS application, lower deduction certificates, and liability consequences for getting TDS wrong.
Non-Resident Taxation Series – fiscalzenith.com
You are reading Article 5: TDS on Non-Residents: Section 393(2).
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | NRI Provisions | DTAA – Section 159 | Representative Assesse and Agent | PE | ITR Filing
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | NRI Provisions | DTAA – Section 159 | Representative Assesse and Agent | PE | ITR Filing
Table of Contents
- Why TDS Matters Especially for Non-Residents
- The TDS Table: Section 393(2)Every category, payee, and rate from the Act
- Three Critical Notes to the TableDTAA override, Note 2 for FII, Note 3 for residual category
- Proportionate TDS: Section 395(2)
- Lower or Nil TDS Certificate: Section 395(1)
- Recovery from Non-Resident Assets: Section 422
- Consequences of Getting TDS Wrong: Section 393(3)
- Practical Compliance Checklist
- Frequently Asked Questions
Section 393(2)
The TDS table for non-resident payments. Equivalent to Section 195 of the Income Tax Act, 1961.
Section 395
Allows payer to apply for proportionate TDS (395(2)) or allows payee to apply for lower/nil deduction certificate (395(1)).
Note 3(b)
The residual TDS obligation applies to ALL persons making payments of sums chargeable under the Act to non-residents, even non-resident payers themselves.
Section 422
Tax arrears can be recovered from any assets of the non-resident located in India, or that may come to India in the future. Corresponds to Section 173 of the 1961 Act.
Part IWhy TDS Matters Especially for Non-Residents
When an Indian company pays a non-resident, that payment is the last point of contact between the Indian tax system and the money. Once it leaves India, chasing a foreign entity for tax is difficult. So the law places the obligation squarely on the Indian payer: deduct tax before you pay.
This is not just administrative. If the Indian payer fails to deduct, or deducts short, the payer becomes personally liable for the shortfall under Section 393(3). The payer is treated as an assessee in default, interest runs from the date TDS should have been deducted, and the underlying expenditure may be disallowed.
Part IIThe TDS Table: Section 393(2)
Section 393(2) of the Income Tax Act, 2025 (corresponding to Section 195 of the Income Tax Act, 1961) contains the full TDS table for non-resident payments:
| Nature of Payment | Payee | Rate |
|---|---|---|
| Income of non-resident sportsmen, entertainers, or sports associations (Section 211) | Non-resident non-citizen sportsman, entertainer, or sports association | 20% |
| Interest on infrastructure bonds borrowed in foreign currency (approved loan or bond before 1st July 2023) | Any non-resident or foreign company | 5% |
| Interest on rupee-denominated bonds (issued before 1st July 2023) | Any non-resident or foreign company | 5% |
| Interest on long-term bonds or rupee-denominated bonds listed only on IFSC exchange | Any non-resident or foreign company | 4% (issued 1st April 2020 to 30th June 2023); 9% (issued from 1st July 2023) |
| Interest from infrastructure debt fund | Any non-resident or foreign company | 5% |
| Distributed income from business trust (rental nature, Schedule V Sl. No. 3 B(a)) | Non-resident unit holder | 5% |
| Distributed income from business trust (other, Schedule V Sl. No. 3 B(b)) | Non-resident unit holder | 10% |
| Income from units of a Mutual Fund specified under Schedule VII (Table Sl. No. 20 or 21) or units from a specified company | Any non-resident (not being a company) or foreign company | As per Note 2 (20%, or lower DTAA rate if TRC and Form No. 41 furnished) |
| Long-term capital gains on units (Section 208) | Offshore fund | 12.5% |
| Interest or dividends on bonds or GDRs (Section 209) | Non-resident | 10% |
| Long-term capital gains on bonds or GDRs (Section 209) | Non-resident | 12.5% |
| Income from securities (Section 210 Table Sl. No. 1) for FII | Foreign Institutional Investor | 20%, or lower DTAA rate if TRC and Form No. 41 furnished (Note 2) |
| Income from securities (Section 210 Table Sl. No. 1) for specified fund | Specified fund | 10% |
| Any other interest or sum chargeable under the Act (not being salary) | Any non-resident (not being a company) or foreign company | Rates in force |
Part IIIThree Critical Notes to the Table
Note 1: DTAA Override
Where a DTAA between India and the payee’s country of residence prescribes a lower rate, the DTAA rate applies. But the lower rate is available only if the payee has furnished a valid Tax Residency Certificate (TRC) and Form No. 41 under Rule 75 of the Income Tax Rules, 2026 to the Indian payer before payment. Without both documents, the table rate applies regardless of any treaty.
Note 2: FII and Mutual Fund Unit Income
For FII income from securities and for income from certain mutual fund units, TDS is at the standard rate (20% or as specified) OR at the applicable DTAA rate, whichever is lower, if the TRC and Form No. 41 have been furnished. This allows FIIs and eligible non-residents to get treaty protection at the withholding stage itself without needing to file a return for a refund.
Note 3(b): Residual Category Scope
For the residual category (any other interest or sum chargeable under the Act), the TDS obligation applies to ALL persons making such payments, whether the payer is a resident or a non-resident. The non-resident payer’s own non-residence in India does not exempt it from the TDS obligation on payments to other non-residents when the sum is chargeable to Indian tax.
Example: A Singapore company (non-resident) pays a US company (non-resident) for services used in the Singapore company’s Indian operations. The payment is FTS arising in India under Section 9(7). Even though the payer is non-resident, Note 3(b) requires the Singapore company to deduct Indian TDS before remitting the payment to the US company.
Part IVProportionate TDS: Section 395(2)
Corresponding to Section 195(2) of the 1961 Act. Sometimes only a portion of the payment to a non-resident is actually income chargeable to tax. The rest may be return of capital, reimbursement of costs, or principal repayment.
In such cases, the Indian payer can apply to the Assessing Officer under Section 395(2) for a determination of what proportion of the payment is chargeable to tax in India. The AO issues an order specifying the taxable proportion, and TDS is deducted only on that determined amount.
Example: An Indian company buys software from a US company for Rs. 10 crore. Rs. 6 crore is for the software licence (royalty, taxable in India) and Rs. 4 crore is for installation hardware (not income, not taxable). Without a Section 395(2) order, TDS applies on the full Rs. 10 crore. With an AO determination, TDS applies only on Rs. 6 crore. This saves the US company from over-deduction and a subsequent refund filing.
Part VLower or Nil TDS Certificate: Section 395(1)
Corresponding to Section 197 of the 1961 Act. The non-resident payee can apply to the Assessing Officer for a certificate for deduction at a lower rate or nil deduction. This is useful when the non-resident has brought-forward losses, when the effective treaty rate is lower, or when the income is simply not taxable in India.
On being satisfied, the AO issues a certificate specifying the lower rate. The Indian payer then deducts TDS at that certificate rate. The certificate is valid for the period specified in it.
Part VIRecovery from Non-Resident Assets: Section 422
Corresponding to Section 173 of the 1961 Act. Where a non-resident is entitled to income arising in India under Section 9(2), the tax chargeable on that income may be:
- Recovered by TDS deduction under Chapter XIX-B, and
- In case of tax arrears, recovered from any assets of the non-resident that are within India, or that may come to India at any time in the future [Section 422(b)]
This provision ensures the Indian tax authorities can recover from any India-sited assets of the non-resident even if TDS was missed or if the non-resident has unpaid tax arrears. The demand follows the asset, not just the person.
Part VIIConsequences of Getting TDS Wrong: Section 393(3)
If a person required to deduct TDS fails to deduct, or fails to pay after deduction, under Section 393(3):
- The payer is personally liable to pay the tax
- The payer is treated as an assessee in default and interest under Section 424 at 1% per month runs from the date TDS should have been deducted
- The expenditure on which TDS was not deducted may be disallowed under Section 26(3) (equivalent to Section 40(a)(i) of the 1961 Act)
The disallowance consequence is severe: If you paid Rs. 1 crore in royalty to a foreign company without deducting TDS, and the AO finds out, that Rs. 1 crore expenditure may be disallowed from your business income. Your own tax liability increases substantially.
If you are an Indian company paying royalty or FTS to a foreign entity
- Check whether the foreign company has a DTAA with India providing a lower rate. Obtain TRC and Form No. 41 from the foreign company BEFORE making the payment. Do not retroactively try to claim the lower rate.
- If only part of the payment is income (e.g., part is reimbursement), file a Section 395(2) application to the AO for determination of the taxable proportion before payment.
If you are a foreign company receiving payments from India
- Track whether adequate TDS has been deducted by the Indian payer. If over-deducted (common with blanket 20% withholding), file an ITR in India to claim the refund.
- If your country has a DTAA with India, furnish TRC and Form No. 41 to the Indian payer before payment. This avoids the need for a refund by getting the right rate at source.
If you are a non-resident FII
- Submit TRC and Form No. 41 to your Indian custodian before receiving securities income. This enables the lower DTAA rate at the withholding stage.
- Track your annual STT-paid equity LTCGs. If total is below Rs. 1,25,000, no LTCG tax is due and you may be entitled to a refund of TDS deducted.
If you are a non-resident company paying another non-resident for India-connected services
- Note 3(b) to Section 393(2) still obligates you to deduct Indian TDS on sums chargeable to tax in India. Your own non-residence does not eliminate this obligation.
- Apply for a Section 395(2) determination if only part of the payment is chargeable to Indian tax.
Wrapping Up
TDS on non-resident payments is one of the highest-risk compliance areas for Indian businesses. The liability falls on the Indian payer if something goes wrong, not just the foreign recipient. The framework under Section 393(2) is comprehensive, the rates are clear, and the DTAA override through TRC and Form No. 41 is straightforward when documentation is in place.
Get the documentation right before you make the payment, not after. A Section 395(2) application for proportionate TDS is always better than over-deducting and waiting for the foreign company to claim a refund.
Frequently Asked Questions
You are in default under Section 393(3). You are personally liable to pay the TDS amount plus interest at 1% per month from the date it should have been deducted. Additionally, the Rs. 50 lakh expense may be disallowed under Section 26(3) in your own assessment, increasing your taxable income. To mitigate: pay the TDS with interest immediately, file a TDS return, and check if a DTAA applies that could reduce the rate. Future payments to the same consultant must have TDS deducted correctly.
Yes. The AO must be satisfied that the income level of the payee justifies nil or lower deduction. If the AO is not satisfied, the certificate may be refused or issued at a rate higher than requested. In that case, the payer must deduct at the rate specified in the certificate (or the standard table rate if no certificate is issued). The application must be filed with supporting documents showing the applicable tax position, DTAA benefits, and income computation.
Under Section 9(6)(c)(i), royalty includes transfer of all or any rights (including a licence to use) in computer software, regardless of the medium. This covers standard commercial off-the-shelf software licences. The payment is royalty deemed to arise in India, and TDS applies. This is a commonly misunderstood point. Many Indian companies assume shrinkwrap software is not royalty, but the Act’s definition is explicit and includes all software licences. DTAA benefits can reduce the rate if the foreign supplier furnishes TRC and Form No. 41.
When a non-resident sells immovable property in India, the Indian buyer must deduct TDS. The rate falls under the residual category in Section 393(2) item 14 (any sum chargeable under the Act). For long-term capital gains, the applicable rate is 12.5% under Section 197 (LTCG provisions). For short-term capital gains, it is the applicable slab rate or 30% at the maximum rate. The buyer must deduct TDS at the time of payment or credit, whichever is earlier, and file a TDS return. If the non-resident has a DTAA benefit on capital gains (some treaties exempt real estate gains), TRC and Form No. 41 must be furnished before the sale proceeds are paid.
Disclaimer: For informational and educational purposes only. Based on the Income Tax Act 2025 (30 of 2025), Income Tax Rules 2026, and provisions as amended by the Finance Act 2026, current as of June 2026. Does not constitute legal or tax advice.
