TDS on Payments to Non Residents: Section 195 to 393(2)

If your Indian entity is owned or managed from outside India, sooner or later you will need to pay someone who is not a tax resident of India. That could be your own parent company, a consultant based abroad, a foreign software vendor, or an NRI shareholder receiving a payout. Before that money leaves an Indian bank account, Indian tax law generally requires the payer to check whether tax needs to be withheld first.

This is where TDS on payments to non residents becomes relevant. For decades this obligation lived in Section 195 of the Income Tax Act 1961, and most bankers, CAs and search results still call it that. Since 1 April 2026 the operative provision is section 393(2) of the Income Tax Act 2025. Many foreign founders are surprised to learn that the obligation to check and deduct tax sits with the Indian payer, not the overseas recipient. Getting this wrong can hold up remittances, attract interest and penal consequences, and create friction with your bank's authorised dealer, who will usually ask for specific certificates before releasing funds abroad.

This guide walks through what the rule means in practice under the 2025 Act, which payments typically need a closer look, and the workflow an Indian company should follow before sending money overseas.

Section 195 is now section 393(2): the 2026 changeover

The Income Tax Act 2025 replaced the 1961 Act with effect from 1 April 2026. For non resident payments the substance carries forward largely unchanged, but the map has been redrawn: the scattered TDS provisions of the old law are consolidated into a single framework under section 393, and the withholding obligation on payments to non residents that practitioners knew as Section 195 now sits in section 393(2).

The paperwork was renumbered along with the law. Form 15CA, the remitter's declaration, is now Form 145. Form 15CB, the chartered accountant's certificate, is now Form 146. The quarterly TDS return for non resident payments, previously Form 27Q, is now Form 144, and the TDS certificate previously issued as Form 16A is now Form 131. Labels across bank checklists and older guidance are still catching up, so expect to see both names used interchangeably this year; on the e filing portal, the new numbers are what you will file. Skipping Form 145 where it is required now carries a penalty of Rs 1 lakh under section 462 of the 2025 Act.

Nothing in this changeover made foreign payments less taxable or the payer less responsible. If a payment was within the withholding net under Section 195, it remains within the net under section 393(2).

What TDS on payments to non residents means

Section 393(2) in simple terms

Section 393(2) generally requires any person making a payment to a non resident to deduct tax at source if that payment is chargeable to tax in India, before the sum is credited or paid, whichever happens earlier. Unlike domestic TDS provisions that apply to specific categories like salary or rent, this provision is broader. It can apply to almost any sum paid to a non resident once that sum is found to be taxable in India, unless a specific exemption or relief applies.

The practical effect for a founder is this: you cannot assume a foreign payment is automatically outside the Indian tax net simply because the recipient is based overseas. The taxability of the underlying payment in India has to be assessed first.

Who is treated as a non resident payee

A non resident payee is any person, individual or entity, whose residential status under Indian tax law is not that of a resident. This commonly includes your parent company incorporated outside India, an overseas holding company, a foreign consultant or freelancer, a foreign investor, and an NRI, meaning an Indian citizen or person of Indian origin who currently qualifies as non resident under Indian tax rules. The residential status of the payee, not their nationality or the currency of payment, is what determines how the provision applies.

Why foreign founders should review TDS before remittance

For a US, UK, EU, Canadian, or Middle East based founder running an Indian subsidiary or group company, this review matters for a few reasons. First, banks in India generally will not process outward remittances in most categories without the relevant tax forms and, where applicable, a certificate from a chartered accountant. Second, if tax that should have been deducted is not deducted, the Indian company can face disallowance of the expense for tax purposes along with interest and penal consequences. Third, correcting a missed deduction after the payment has already gone out is far harder than addressing it before remittance.

Building a TDS check into your payment process, alongside your usual invoice approval workflow, is the simplest way to avoid these issues.

Payments that should be checked before sending money abroad

Not every foreign payment carries the same level of TDS risk, but a wide range of common founder scenarios do need a look before the wire transfer is sent.

Foreign vendor invoices

Payments to overseas vendors for goods or services, including software subscriptions, cloud hosting, marketing platforms, or equipment, should be reviewed to see whether any part of the payment represents income taxable in India, for example where services are rendered in India or the payment is linked to a right to use Indian assets or data.

Consulting and professional fees

Fees paid to foreign consultants, advisors, or contractors for services connected with the Indian business are a frequent trigger point. Whether such fees are taxable in India often depends on where the services are actually performed and whether they qualify as fees for technical services or professional services under Indian law and the applicable tax treaty.

Royalties and licence payments

Payments for the use of trademarks, software licences, patents, or other intellectual property owned by a foreign parent or group company are commonly treated as royalty payments under Indian tax law, and these generally attract TDS consideration, subject to treaty relief where applicable.

Reimbursements and intercompany charges

Cost allocations, management fee recharges, and expense reimbursements between an Indian subsidiary and its foreign parent are an area where founders often assume no tax applies because the amount is a pure reimbursement. This assumption needs to be tested carefully, since the underlying nature of the charge, rather than its label, determines its tax treatment.

Payments to NRIs

Payments to NRIs, whether as consulting fees, director remuneration, dividend, or proceeds from sale of shares or property in India, generally fall squarely within the scope of non resident TDS and typically require careful review of both domestic rate and treaty rate before deduction.

How to decide whether TDS applies

Whether the payment is chargeable to tax in India

The starting question is always whether the specific payment is taxable in India under the 2025 Act. If the payment is not chargeable to tax in India at all, withholding under section 393(2) generally does not arise. This assessment depends on the nature of the payment, where the underlying activity takes place, and specific source rules under Indian tax law.

Residential status of the payee

Since the provision applies only to non resident payees, confirming the payee's residential status for the relevant tax year is a necessary first step. This is particularly relevant for NRIs whose status can change from year to year depending on the number of days spent in India.

PAN and tax residency documents

Whether the non resident payee holds an Indian Permanent Account Number, commonly called PAN, affects the applicable withholding rate. Where the payee does not have a PAN, a higher rate of withholding generally applies under current rules unless specific exceptions are met. A tax residency certificate from the payee's home tax authority, along with a self declaration in the prescribed format, is usually needed to support any treaty based relief.

Treaty position and supporting records

India has tax treaties, often called Double Taxation Avoidance Agreements, with the United States, the United Kingdom, most EU member states, Canada, and several Middle East jurisdictions. These treaties can reduce the applicable withholding rate or, in some cases, remove the Indian taxing right altogether, depending on the nature of the payment and the payee's circumstances. Claiming treaty benefit generally requires the payee's tax residency certificate, a completed self declaration, and sometimes additional documentation, all of which should be collected and reviewed before the treaty rate is applied.

Compliance steps before making the payment

Collecting invoices and tax documents

Before any foreign payment is processed, the Indian company should have the underlying invoice or agreement, details of the services or goods provided, the payee's country of tax residence, PAN if available, and the tax residency certificate if a treaty rate is being claimed.

Determining the applicable withholding position

Using these documents, the taxability of the payment and the correct withholding rate, whether under the 2025 Act or under an applicable treaty, needs to be worked out. This step should be documented, since it forms the basis for the certification and forms filed later.

Obtaining professional certification where needed

For taxable remittances above the applicable threshold, currently Rs 5 lakh in aggregate during the tax year under current rules, a certificate from a chartered accountant in Form 146 is required before the bank will process the transfer. This certification also feeds directly into the declaration filed with the tax department.

Deducting tax before payment

Where TDS applies, the tax should generally be deducted before the payment is made or credited to the non resident's account, and the net amount, after tax, is what is actually remitted. The deducted tax then needs to be deposited with the government within the applicable timeline under current rules.

Forms and filings for non resident TDS

Form 145 and Form 146, the forms formerly known as 15CA and 15CB

Form 145 is the declaration filed by the remitter providing details of the payment and the tax deducted, and it is generally required for most remittances to non residents above the applicable thresholds. It replaced Form 15CA on 1 April 2026. Form 146, which replaced Form 15CB, is the certificate issued by a chartered accountant confirming the tax position and the rate applied, and it typically needs to be obtained before Form 145 is filed where the payment is taxable and above the relevant limit. Authorised dealer banks generally will not process the remittance without these forms where applicable, and failure to furnish Form 145 for an eligible transaction attracts a penalty of Rs 1 lakh under section 462 of the 2025 Act.

TDS return in Form 144, previously Form 27Q

While a domestic TDS deduction is reported through the regular TDS return, tax deducted on payments to non residents is reported separately through Form 144, the successor to Form 27Q. This quarterly return captures details of the deductee, the nature of payment, the rate applied, and the amount deducted, and it needs to be filed within the applicable due dates under current rules.

TDS certificate and payment records

After the return is filed, a TDS certificate, now issued as Form 131 in place of the familiar Form 16A, should be generated and shared with the non resident payee so they can claim credit for the tax withheld in their own country, subject to that country's rules and the applicable treaty. The Indian company should retain the challan evidencing deposit of tax, the invoice, the certification, and the filed forms as part of its compliance record.

Common mistakes foreign owned Indian companies should avoid

Treating all foreign invoices as exempt

A common assumption is that payments to a foreign vendor or parent company are automatically outside Indian tax simply because the recipient is not based in India. This is not a safe assumption, and each payment needs to be assessed on its own facts.

Checking TDS only after remittance

Reviewing tax applicability after the payment has already gone out significantly limits the options available. The review should happen before the payment is approved, not after the transfer has been initiated.

Ignoring documentation for treaty claims

Claiming a reduced treaty rate without holding the tax residency certificate and self declaration on file is a frequent gap that surfaces during assessment or audit. These documents should be collected before the treaty rate is applied, not after.

Missing return filing after depositing TDS

Some companies deposit the tax deducted but fail to follow up with the Form 144 filing within the applicable timeline. Depositing tax and filing the return are two separate compliance steps, and both need to be completed.

Quoting the old law in new paperwork

Contracts, board resolutions and bank cover letters drafted from old templates still cite Section 195 and Forms 15CA and 15CB. Banks are tolerant during the transition, but paperwork created now should cite section 393(2) and Forms 145 and 146, with the old references in brackets if your counterparty needs the familiar names.

When founders should get professional help

High value foreign payments

Large remittances, particularly one time payments such as buyouts, licence fee settlements, or lump sum consulting fees, deserve a dedicated review given the compliance and cash flow impact of getting the withholding position wrong.

Intercompany transactions

Payments between an Indian subsidiary and its foreign parent or group companies, including management fees, cost allocations, and royalty arrangements, often involve overlapping considerations around TDS, transfer pricing, and treaty interpretation, and are best reviewed by a professional familiar with cross border structures.

Unclear taxability in India

Where it is genuinely unclear whether a payment is chargeable to tax in India, for example novel service arrangements or hybrid contracts, professional judgment is needed rather than a default assumption in either direction.

Payments with treaty documentation

Any time a reduced treaty rate is being claimed, having a chartered accountant review the tax residency certificate, the self declaration, and the underlying contract helps ensure the position taken will hold up if it is later examined.