Introduction: Why Section 195 Should Be on Every Founder’s Radar
Your startup just hired a brilliant US-based designer. Your SaaS stack includes AWS, HubSpot, and Notion. You’re paying a Singapore consultant for growth strategy.
Here’s the question your CA will ask:
“Did you deduct TDS under Section 195?”
If you haven’t, you might be facing:
- ❌ Expense disallowance under Section 40(a)(i)
- ❌ Interest penalties under Section 201(1A)
- ❌ Bank blocking your foreign remittance
- ❌ Last-minute scrambles for Form 15CB/15CA
Section 195 governs TDS on payments to non-residents—and it’s one of the most misunderstood areas of Indian tax law.
This guide breaks down everything: when it applies, how to calculate rates, DTAA benefits, compliance steps, and real-world scenarios founders face daily.
1. What is Section 195? (Cut Through the Jargon)
Simple definition:
If you pay a foreign entity or individual, and that income is taxable in India, you must deduct TDS before remitting.
Core Principle:
Taxability in India determines TDS—not where you send the money.
It doesn’t matter if:
- The payment is ₹10,000 or ₹10 lakhs
- You pay once or monthly
- The recipient has a GST number in India
- You transfer from an Indian or foreign bank account
What matters: Is the income chargeable to tax in India?
2. The Three-Point Test: Does Section 195 Apply?
Section 195 kicks in only when all three conditions are satisfied:
✅ Condition 1: Payer is in India
OR the payment originates from an Indian entity.
✅ Condition 2: Payee is a Non-Resident
This includes:
- Foreign companies (US LLC, UK Ltd, Singapore Pte)
- Non-resident individuals
- Overseas freelancers
- SaaS providers
- Foreign parent companies
✅ Condition 3: Income is Taxable in India
This is the deciding factor.
Examples of Taxable Income (TDS Required):
- Royalty payments
- Fees for Technical Services (FTS)
- Professional/consultancy fees
- Commission to foreign agents (if they have a PE in India)
- Software subscriptions (often classified as royalty)
- Management fees
- Interest to foreign lenders
Examples of Non-Taxable Income (No TDS):
- Import of physical goods
- Pure cost reimbursements (no markup)
- Foreign travel expenses
- Commission to agents operating entirely outside India
3. The “Taxable in India” Test: Your Decision Framework
Income is taxable in India if it falls under:
- Section 9 (Income deemed to accrue or arise in India)
- DTAA provisions (Double Taxation Avoidance Agreement)
Rule 1: Service Utilized in India → TDS Likely Applies
Example:
A UK consultant advises your Indian startup on fundraising strategy.
→ Service is consumed in India → TDS applies under Section 195.
Rule 2: DTAA’s “Make Available” Clause Changes Everything
Many treaties (US, UK, Canada, Australia) require that technical services must “make available” technical knowledge to the payer.
What does “make available” mean?
The recipient should be able to apply the knowledge independently in the future.
Example:
- A US developer builds a custom app for you → Not “make available” → Often exempt from TDS
- A US trainer conducts workshops enabling your team to code independently → “Make available” → TDS applies
💡 Pro Tip: The “make available” clause has saved countless startups from unnecessary TDS deductions.
4. Common Payment Scenarios: TDS or Not?
Scenario 1: Foreign SaaS Subscriptions
Examples: AWS, Google Workspace, HubSpot, Figma, Notion, Zoom, Salesforce
Classification: Often treated as Royalty under Indian tax law
TDS Rate: 10% (plus surcharge + cess)
DTAA Benefit: May reduce to 10% or eliminate entirely (check specific treaty)
Reality Check:
Many founders pay these via credit card without deducting TDS. Technically non-compliant, but enforcement varies. Always maintain documentation.
Scenario 2: Foreign Freelancers/Consultants
Examples:
- Graphic designer in Philippines
- Developer in Ukraine
- Marketing consultant in US
- Legal advisor in UK
TDS Rate: 10% (or DTAA rate—often 15-20%)
Key Question: Does the DTAA have a “make available” clause?
- If yes, and service doesn’t “make available” → No TDS
- If no such clause → TDS mandatory
Scenario 3: Commission to Foreign Sales Agents
Situation: You pay a 10% commission to a Dubai-based agent for securing clients.
Analysis:
- Agent has no office/PE in India → Income not taxable in India → No TDS
- Agent operates from India or has PE → TDS applies
✅ Supported by multiple ITAT rulings (e.g., GE India Technology Centre)
Scenario 4: Import of Machinery/Goods
Simple Rule: Purchase of physical goods = No TDS
Only services/royalty/FTS attract Section 195.
Scenario 5: Interest to Foreign Lenders
TDS Rate: 20-40% (depending on nature)
DTAA Benefit: Most treaties cap it at 10-15%
Documents Required:
- Loan agreement
- TRC
- Form 10F
Scenario 6: Royalty Payments
Examples:
- Patent licensing
- Trademark usage
- Copyrighted content
TDS Rate: 10% (Section 115A)
DTAA Rate: Usually 10-15%
5. TDS Rates Under Section 195 (Quick Reference)
| Payment Type | Section | Base Rate | With Surcharge + Cess |
| Royalty | 115A | 10% | ~10.4% |
| Fees for Technical Services | 115A | 10% | ~10.4% |
| Professional Services | 195 | 10% | ~10.4% |
| Interest | 195 | 20-40% | Varies |
| Other Income | 195 | 30% | ~31.2% |
Always check DTAA first—rates can be significantly lower.
6. The DTAA Advantage: How to Save Lakhs in TDS
India has tax treaties with 90+ countries. Using DTAA benefits can:
- ✅ Reduce TDS rates dramatically
- ✅ Exempt certain services entirely
- ✅ Avoid double taxation
Popular DTAA Rates (FTS):
| Country | FTS Rate (DTAA) | “Make Available” Clause? |
| USA | 15% | ✅ Yes—many services exempt |
| UK | 15% | ✅ Yes |
| Singapore | 10% | ❌ No—TDS usually applies |
| Australia | 10% | ✅ Yes |
| UAE | Varies | Depends on PE |
| Netherlands | 10% | ✅ Yes |
To claim DTAA benefits, you MUST have:
- Tax Residency Certificate (TRC)
- Form 10F
- No PE declaration
7. Essential Compliance Documents (Founder’s Checklist)
Before remitting funds abroad:
| Document | Obtained From | Purpose |
| Invoice | Non-resident | Describes services rendered |
| Tax Residency Certificate (TRC) | Foreign tax authority | Proves residency for DTAA |
| Form 10F | Non-resident | Details of payee |
| No PE Declaration | Non-resident | Confirms no permanent establishment in India |
| Form 15CA | You (payer) | Reporting foreign remittance |
| Form 15CB | Chartered Accountant | CA certification (if required) |
| Form 16A | You (payer) | TDS certificate to payee |
| Bank A2 Form | Bank | For FEMA compliance |
8. Step-by-Step Compliance Process
Step 1: Classify the Payment
Is it royalty, FTS, professional fees, commission, or interest?
Step 2: Determine Taxability
- Check Section 9
- Review applicable DTAA
- Assess “make available” clause
Step 3: Calculate TDS Rate
Use lower of:
- Domestic rate (10%/30%)
- DTAA rate (if applicable)
Step 4: Collect Documents
TRC, Form 10F, No PE declaration from non-resident.
Step 5: Deduct TDS
At the time of payment or credit, whichever is earlier.
Step 6: Deposit TDS
By 7th of the following month (use Challan 281).
Step 7: File Form 15CA/15CB
- Some payments exempt from 15CB
- Others need CA certification
Step 8: Issue Form 16A
TDS certificate to the non-resident (quarterly).
Step 9: Report in Annual Return
Include in your Income Tax Return and TDS statements.
9. What Happens If You Don’t Deduct TDS?
🔥 Consequence 1: Disallowance Under Section 40(a)(i)
Your entire expense gets added back to taxable income.
Example:
You paid $10,000 (₹8 lakhs) to a US consultant.
No TDS deducted → ₹8 lakhs disallowed → Extra tax ~₹2.5 lakhs.
🔥 Consequence 2: Interest Under Section 201(1A)
1% per month on TDS not deducted (1.5% if not paid after deduction).
🔥 Consequence 3: Penalty Under Section 271C
Can be equal to the TDS amount.
🔥 Consequence 4: Bank Blocks Remittance
Without proper 15CA/15CB, banks won’t process your payment.
🔥 Consequence 5: Prosecution (Extreme Cases)
Under Section 276B—though rare.
10. Real Founder Scenarios (Case Studies)
Case 1: Startup Paying AWS Bills
Monthly Bill: $5,000
Classification: Royalty
TDS Required: Yes (10%)
How to Handle:
- Option 1: Deduct TDS, file 15CA/CB monthly
- Option 2: Pay through AWS India entity (no Section 195)
Most startups: Choose Option 2 or pay directly and handle TDS at year-end with CA.
Case 2: Hiring a US-Based Developer
Payment: $8,000 for app development
DTAA: India-US Treaty
“Make Available”: No (developer retains IP)
Result: Likely no TDS if properly documented
Documents Needed:
- Service agreement clarifying IP ownership
- TRC from US
- Form 10F
- No PE declaration
Case 3: Commission to Dubai Agent
Payment: 10% commission on sales
Agent Location: Entirely in Dubai
PE in India: No
Result: No TDS
Key Learning: Location of service delivery matters.
11. Advanced Situations
Situation 1: Reimbursement to Foreign Parent
Scenario: Your Indian subsidiary reimburses the US parent for shared costs (legal, accounting).
TDS Applicable?
- Pure reimbursement (no markup): Generally no TDS
- With markup/management fee component: TDS applies on markup
Situation 2: Payment from Foreign Currency Account
Question: I have a USD account in India. Does TDS apply?
Answer: Yes, if the service is for your Indian entity and taxable in India.
Situation 3: Foreign Travel Paid Directly to Airlines/Hotels
TDS Applicable? No—these are payments for services consumed outside India.
12. Form 15CA/15CB: Quick Guide
What is Form 15CA?
An online form filed before remitting money abroad.
What is Form 15CB?
A CA certificate required for most payments.
When is 15CB NOT Required?
- Imports of goods
- Payments up to ₹5 lakhs per year (for certain categories)
- Specified exempt remittances
Penalty for Non-Filing:
₹1 lakh under Section 271-I.
13. Common Founder Mistakes (And How to Avoid Them)
❌ Mistake 1: “It’s a Small Payment—I’ll Skip TDS”
Even ₹10,000 can trigger 40(a)(i) disallowance.
❌ Mistake 2: Assuming All SaaS is Exempt
Many SaaS tools = royalty → TDS applies.
❌ Mistake 3: Ignoring DTAA Benefits
Could save 5-20% in TDS with proper documentation.
❌ Mistake 4: Paying Without 15CA/15CB
Bank will block—causing delays and frustration.
❌ Mistake 5: Not Keeping Documentation
In case of scrutiny, TRC + 10F + No PE is your shield.
14. Founder-Friendly Summary (Action Checklist)
Before every foreign payment, ask:
- ☑️ Is the payee a non-resident?
- ☑️ Is the income taxable in India under Section 9?
- ☑️ Does a DTAA apply? (Get TRC + Form 10F)
- ☑️ Is there a “make available” clause?
- ☑️ What’s the applicable TDS rate?
- ☑️ Do I need Form 15CB certification?
- ☑️ Have I collected all compliance documents?
- ☑️ Will I deposit TDS by the 7th?
Pro Tip: Maintain a Foreign Payments Register tracking all payments, TDS deducted, and documents received.
15. Conclusion: The AdvoFin Consulting Approach
At AdvoFin Consulting, we see founders struggle with Section 195 daily:
- 🚫 SaaS payments blocked mid-month
- 🚫 40(a)(i) disallowances during audits
- 🚫 Incorrect 15CB filings leading to notices
- 🚫 Overpaying TDS due to missed DTAA benefits
The fix?
→ Proper classification
→ DTAA structuring
→ Timely documentation
→ Proactive compliance
With the right approach, Section 195 becomes routine—not a roadblock.
FAQs: Section 195 TDS on Payments to Non-Residents
Q1: Is TDS mandatory on every foreign payment?
A: No. TDS applies only if the income is taxable in India under Section 9. Import of goods, pure reimbursements, and payments for services consumed entirely outside India typically don’t attract TDS.
Q2: What if I forget to deduct TDS before making payment?
A: You face:
- Disallowance under Section 40(a)(i)
- Interest at 1% per month under Section 201(1A)
- Possible penalty under Section 271C
Solution: Immediately consult a CA to regularize and pay TDS with interest.
Q3: Do I need Form 15CB for every foreign payment?
A: Not always. 15CB is NOT required for:
- Import of goods
- Certain payments below ₹5 lakhs annually
- Specified exempt categories
For most service payments (SaaS, consulting, royalty), you’ll need 15CB.
Q4: How do I know if DTAA applies to my payment?
A: Check if:
- India has a tax treaty with the payee’s country (we have 90+ DTAAs)
- You have a valid Tax Residency Certificate (TRC) from them
- They’ve provided Form 10F
- They don’t have a Permanent Establishment (PE) in India
If all four conditions are met, you can apply the DTAA rate (usually lower).
Q5: What is the “make available” clause everyone talks about?
A: Some DTAAs (US, UK, Canada, Australia) require technical services to “make available” technical knowledge for TDS to apply.
“Make available” means: The recipient can independently apply that knowledge in the future.
Example:
- Hiring a US developer to build an app → NOT “make available” → Often no TDS
- US trainer teaching your team to code → “Make available” → TDS applies
Q6: Can I pay AWS/Google/HubSpot without deducting TDS?
A: Technically, these are often classified as royalty → TDS should be deducted at 10%.
In practice:
- Many startups pay via credit card without TDS
- Some pay through Indian entities (AWS India) to avoid Section 195
- Others handle TDS at year-end with CA guidance
Best practice: Discuss with your CA based on payment volume and risk appetite.
Q7: I hired a freelancer in the Philippines. What’s the TDS rate?
A:
- Without DTAA benefit: 10% (as FTS/professional fees)
- With India-Philippines DTAA: Check if “make available” clause exists and rate (often 15%)
Collect TRC and Form 10F to claim treaty benefits.
Q8: What if the non-resident refuses to provide TRC or Form 10F?
A: Without these documents, you cannot claim DTAA benefits and must deduct TDS at the higher domestic rate (10-30%).
Solution: Make it contractually mandatory for the payee to provide these documents.
Q9: Do I need to deduct TDS on reimbursements to my foreign parent company?
A:
- Pure cost reimbursement (no markup): Generally no TDS
- With markup or management fee component: TDS applies on the markup/fee portion
Key: Document that it’s a genuine reimbursement with supporting invoices.
Q10: What happens if I pay from my USD bank account in India?
A: Section 195 still applies if the service is for your Indian entity and taxable in India. The currency or bank location doesn’t matter—taxability is what counts.
Q11: Is commission to a Dubai-based agent taxable in India?
A:
- If agent has no office/PE in India and operates entirely from Dubai: Generally NOT taxable → No TDS
- If agent has presence in India: TDS applies
This is supported by cases like GE India Technology Centre.
Q12: Can the bank block my payment if I don’t file Form 15CA?
A: Yes. Banks are mandated to ensure Form 15CA is filed before processing foreign remittances for most payments. Without it, your payment gets stuck.
Q13: What’s the deadline to deposit TDS deducted under Section 195?
A: 7th of the month following the month in which payment was made or credited.
Example: Payment made on March 15 → TDS due by April 7.
Late payment attracts interest at 1.5% per month.
Q14: Do I need to issue TDS certificate to foreign payees?
A: Yes. Issue Form 16A quarterly to the non-resident. This helps them claim foreign tax credit in their home country.
Q15: What if DTAA rate is 0%? Do I still need to file 15CA/CB?
A: Yes. Even if TDS is nil due to DTAA, you typically still need to file Form 15CA. Some categories allow filing 15CA without 15CB for nil TDS situations, but check the specific rules.
Q16: I’m a small startup paying ₹50,000/year to foreign tools. Do I really need to worry?
A: Technically, yes—even small amounts require compliance. However:
- Enforcement is often focused on larger payments
- Many startups handle this during annual tax filing
- As you scale, setting up proper systems early saves headaches
Recommendation: At minimum, maintain documentation and discuss with your CA during tax filing.
Q17: Can Section 195 apply to payments I make personally (not through my company)?
A: Yes, if you’re making payments for services where income would be taxable in India. However, most Section 195 issues arise in business contexts.
Q18: What is a “No PE” declaration and why does it matter?
A: A No PE (No Permanent Establishment) declaration confirms that the non-resident doesn’t have a fixed place of business in India.
Why it matters: If they have a PE in India, DTAA benefits may not apply, and higher TDS rates kick in.
Q19: Are there any penalties for wrong classification of payment type?
A: Yes. If you classify FTS as “other income” and deduct 30% instead of 10%, you may face refund delays for the payee and compliance issues. Conversely, under-deducting leads to the penalties mentioned earlier.
Best practice: When in doubt, get a professional opinion.
Q20: Where can I find India’s DTAA texts with different countries?
A: The Income Tax Department website maintains all DTAA agreements:
https://incometaxindia.gov.in → International Taxation → DTAA
Your CA can also help interpret specific treaty provisions.
Q21: I made multiple small payments to the same vendor. Can I deduct TDS annually?
A: No. TDS must be deducted at the time of payment or credit, whichever is earlier. You cannot accumulate and deduct once a year. However, you can file consolidated 15CA/CB for efficiency (check with CA).
Q22: What if the foreign party says they’ll handle taxes in their country?
A: Doesn’t matter. Your TDS obligation under Section 195 is independent of what they do in their country. You must deduct if Indian tax law requires it. The non-resident can later claim foreign tax credit in their home country.
Q23: Can I get a lower deduction certificate from the Income Tax Department?
A: Yes. Under Section 197, you can apply for a certificate authorizing lower/nil TDS deduction. Useful when:
- DTAA provides lower rate
- Income is exempt
- Payee has no taxable income
Apply online on the Income Tax portal. Processing takes 30-45 days.
Q24: Are there any recent changes or notifications I should know about?
A: As of January 2025:
- Electronic filing of Form 15CA/15CB mandatory
- Increased scrutiny on SaaS payments
- Stricter enforcement of Form 10F requirements
Recommendation: Subscribe to updates from your CA or tax advisory firm.
Q25: How can AdvoFin Consulting help with Section 195 compliance?
A: We provide:
- ✅ Payment classification and taxability analysis
- ✅ DTAA structuring and rate optimization
- ✅ TRC and Form 10F review
- ✅ Form 15CB certification
- ✅ Monthly TDS compliance and filing
- ✅ Documentation systems for foreign payments
- ✅ Representation in case of notices
Result: Compliant foreign payments without delays or penalties.
Still have questions? Contact AdvoFin Consulting for consultation.
📧 Email: info@advofinconsulting.com
📞 Phone: +91-92116-76467
🌐 Website: www.advofinconsulting.com
Disclaimer: This blog is for educational purposes only and does not constitute professional tax advice. Consult a qualified professional for specific situations.
