TDS on Payments to Foreign Companies: Rates, Forms & Compliance

The Scope of Section 195: When TDS Applies

Section 195 of the Income Tax Act 1961 is the primary provision governing Tax Deducted at Source (TDS) on payments to non-residents. It requires any person responsible for paying to a non-resident (not being a company) or to a foreign company, any sum chargeable under the Act, to deduct income tax at source.

This article is part of our Complete Tax Guide for Foreign Companies in India. Here we dive deep into the TDS mechanics, rates, forms, and compliance procedures that apply to every cross-border payment from India.

The scope of Section 195 is broader than most foreign companies expect:

• No threshold limit: Unlike domestic TDS provisions that have minimum payment thresholds (e.g., INR 30,000 for professional fees under Section 194J), Section 195 has no minimum. TDS must be deducted even on a payment of INR 1 if it is chargeable to tax in India.
• Covers all income types: Interest, royalties, fees for technical services (FTS), dividends, capital gains, rental income, commission, and any other sum chargeable to tax
• Applies to all payers: The obligation falls on any person making the payment — individuals, companies, partnerships, trusts, or government bodies
• Applies regardless of remittance: TDS applies whether the payment is remitted outside India or credited to the non-resident's account in India

TDS Rates for Payments to Foreign Companies: FY 2026-27

Domestic Rates (Without DTAA)

When no Double Taxation Avoidance Agreement applies, or when the non-resident has not furnished a valid Tax Residency Certificate and Form 10F, the following domestic rates apply for FY 2026-27:

Surcharge and Cess Breakdown

The effective rate depends on the total income of the non-resident:

• Total income up to INR 1 crore: Base rate + 4% Health and Education Cess (no surcharge)
• Total income INR 1–10 crore: Base rate + 2% surcharge + 4% cess on (tax + surcharge)
• Total income above INR 10 crore: Base rate + 5% surcharge + 4% cess on (tax + surcharge)

For example, a royalty payment of INR 50 lakh to a foreign company with total Indian income below INR 1 crore: TDS = 20% + 4% cess = 20.8%. On INR 50 lakh, that amounts to INR 10.4 lakh withheld.

DTAA Treaty Rates

Where a valid DTAA exists and the non-resident provides a valid TRC and Form 10F, the treaty rate applies if it is lower than the domestic rate. Surcharge and cess are NOT added on top of treaty rates — the treaty rate is the final rate.

The savings can be substantial. A German company receiving INR 1 crore in royalties from its Indian subsidiary would pay TDS of INR 10 lakh at the treaty rate (10%) versus INR 20.8 lakh at the domestic rate (20.8%) — a difference of INR 10.8 lakh per payment. Over multiple annual payments, this compounds into significant savings, which is why maintaining valid TRC and Form 10F documentation is critical.

Form 15CA and Form 15CB: The Remittance Compliance Framework

What Are Forms 15CA and 15CB?

Form 15CA is an online declaration to the Income Tax Department about outward remittances, and Form 15CB is a Chartered Accountant's certificate confirming whether tax applies and at what rate. Together, they form the compliance framework that banks use to process cross-border payments from India.

The Four Parts of Form 15CA

Form 15CA has four parts, and the applicable part depends on the nature and amount of the remittance:

Exemptions from Form 15CA

Certain remittances are exempt from Form 15CA/15CB requirements. These include specified RBI purpose codes for personal and routine payments such as:

• Remittances by individuals up to USD 250,000 per FY under the Liberalized Remittance Scheme (LRS) for specified purposes
• Import payments covered by customs bill of entry
• Payments that do not require RBI approval under FEMA

The complete list is specified in Rule 37BB of the Income Tax Rules, which includes 33 specified purpose codes where Form 15CA is not required.

Step-by-Step Form 15CB Filing

Form 15CB must be filed by the payer's Chartered Accountant before filing Form 15CA (Part C). The process involves:

1. Gather documents: Invoice from the foreign company, DTAA article applicable, TRC and Form 10F of the payee, agreement/contract details, payment computation worksheet
2. CA logs in to the e-filing portal: Using CA credentials on incometax.gov.in
3. Fill Form 15CB details:
   • Name and TAN of the payer
   • PAN of the payer and payee (if available)
   • Country of the payee and applicable DTAA
   • Nature of payment (royalty, FTS, interest, etc.)
   • Amount payable in Indian rupees and foreign currency
   • Tax rate applied — domestic or treaty rate, with justification
   • TDS amount deducted and challan details
4. Submit with DSC: The CA signs with their Digital Signature Certificate
5. Acknowledgment number generated: This number is needed for filing Form 15CA

Step-by-Step Form 15CA Filing

1. Log in to the e-filing portal: The payer (or authorized signatory) logs in with PAN/TAN credentials
2. Navigate to Form 15CA: e-File > Income Tax Forms > File Income Tax Forms > Form 15CA
3. Select the applicable Part: A, B, C, or D based on the criteria above
4. For Part C: Enter the Form 15CB acknowledgment number to auto-populate fields
5. Review and submit: Verify all details, sign with DSC or EVC, and submit
6. Download and share with bank: The bank requires a copy of the submitted Form 15CA before processing the outward remittance

TDS Deposit and Return Filing Deadlines

Payment and Filing Calendar

After deducting TDS, the payer must deposit it with the government and file quarterly returns:

Interest and Penalty Regime

The penalty structure for TDS non-compliance is designed to be punitive:

• Late deduction: If TDS is not deducted when it should be, interest at 1% per month is payable from the date the tax was deductible to the date of actual deduction
• Late deposit: If TDS is deducted but not deposited on time, interest at 1.5% per month is payable from the date of deduction to the date of deposit
• Non-deduction penalty: Under Section 271C, the payer can face a penalty equal to the amount of tax that was not deducted — effectively a 100% penalty
• Disallowance of expense: Under Section 40(a)(i), if TDS is not deducted on payments to non-residents, 100% of the payment is disallowed as a business expense for the payer. This means the payer loses the tax deduction on the entire payment, not just the TDS amount.

The Section 40(a)(i) disallowance is particularly devastating. If an Indian company pays INR 1 crore in royalties to a foreign parent without deducting TDS, the entire INR 1 crore is disallowed as an expense. At a 25% corporate tax rate, this results in an additional tax liability of INR 25 lakh — on top of the TDS amount plus interest and penalties.

Lower TDS Certificate Under Section 197

When to Apply for a Lower Rate

If the non-resident's estimated total income for the year is such that the tax liability would be lower than the standard TDS rate, the non-resident (or the payer on their behalf) can apply for a lower TDS certificate under Section 197.

This is particularly useful when:

• The non-resident has business losses or carried-forward losses that reduce taxable income to zero
• Transfer pricing adjustments are expected to reduce the taxable component
• The payment includes both taxable and non-taxable components (e.g., reimbursement of expenses)
• The DTAA rate is lower than the domestic rate, but the payer is uncertain about applying the treaty rate

Application Process

The application is made to the Assessing Officer (AO) in Form 13, either by the non-resident payee or the payer. The AO issues a certificate specifying the rate at which TDS should be deducted. Processing typically takes 15–30 days, and the certificate is valid for the financial year in which it is issued.

Practical Examples: TDS Calculation

Example 1: Royalty Payment to a US Company

An Indian subsidiary pays USD 100,000 (approximately INR 84 lakh) in royalties to its US parent company for software license fees.

• Without DTAA: TDS at 20% + 4% cess = 20.8% = INR 17.47 lakh
• With DTAA (US-India treaty): TDS at 15% (no surcharge/cess on treaty rate) = INR 12.6 lakh
• Savings from DTAA: INR 4.87 lakh per payment

Example 2: Interest on ECB from Singapore

An Indian company pays interest of INR 50 lakh on an External Commercial Borrowing (ECB) from a Singapore bank.

• Domestic rate (specific ECB provision): 5% + surcharge + cess = approximately 5.2%
• DTAA rate (Singapore-India treaty): 15%
• Applied rate: 5.2% (domestic rate is lower) = INR 2.6 lakh

This illustrates an important principle: the applicable rate is the lower of the domestic rate or the treaty rate. In some cases, particularly for interest on specific borrowings, the domestic concessional rate under Sections 194LB/194LC/194LD is actually lower than the DTAA rate.

Example 3: FTS Payment to a German Company

An Indian company pays INR 2 crore for engineering consulting services to a German firm.

• Without DTAA: 20.8% = INR 41.6 lakh
• With DTAA (Germany-India treaty): 10% = INR 20 lakh
• Savings: INR 21.6 lakh

For comprehensive guidance on structuring cross-border payments to minimize withholding tax on profit repatriation, and for managing FEMA and RBI compliance, our tax advisory team provides end-to-end support.

Key Takeaways

• No minimum threshold: Section 195 requires TDS on even the smallest payment to a non-resident if it is taxable in India — there is no INR threshold exemption
• Treaty rates save 5–10% on most payments: DTAA rates for major treaty partners range from 10–15% versus domestic rates of 20%+, with no surcharge or cess added on treaty rates
• Form 15CA/15CB is mandatory for remittances over INR 5 lakh: Banks will not process outward payments without a filed Form 15CA, and Part C requires a CA-issued Form 15CB
• Late TDS deposit costs 1.5% per month: Plus the Section 40(a)(i) disallowance of 100% of the payment as a business expense — making non-compliance extremely expensive
• Quarterly Form 27Q filing is mandatory: TDS returns for non-resident payments are filed separately from domestic TDS returns, with a late filing penalty of INR 200 per day
• Lower TDS certificate under Section 197: Available when actual tax liability is expected to be lower than the standard rate — apply to the AO in Form 13