What is Withholding Tax?

How it works

The payer deducts at the more beneficial of the Act or DTAA rate, files Forms 15CA/15CB where required, and the non-resident can claim the credit or refund.

Withholding on non-resident payments: the Section 195 discipline

Unlike domestic TDS (fixed rates on listed payments), Section 195 requires withholding on any sum chargeable to tax in India paid to a non-resident — at the rates in force, softened by the applicable DTAA where the payee provides a TRC, electronic Form 10F and a no-PE declaration. The payer certifies the position through Form 15CB (CA certificate) and reports through Form 15CA before remittance.

Worked example

An Indian company pays US$50,000 to a German engineering firm for technical services. Analysis chain: is it FTS under the Act (yes, Section 9(1)(vii))? Under the India-Germany treaty (10% FTS rate)? Does the make-available-style language or a PE change the answer? With TRC and 10F on file, withhold 10%; without them, the domestic 20%-plus regime applies. The characterisation memo — royalty versus FTS versus business profits — is the document that decides the rate and survives the audit.

Failure economics

Under-withholding makes the Indian payer an assessee-in-default: the tax itself, 201(1A) interest, disallowance under 40(a)(i) (100% of the expense for non-resident payments, reinstated on payment), and penalty exposure. Where the treaty position is genuinely arguable, a Section 195(2) application to the AO for a lower-withholding determination converts risk into certainty. From 1 April 2026 the framework continues within Section 393(2) territory of the Income-tax Act 2025.

This content is for general guidance only and does not constitute professional advice. Tax law changes frequently — verify the current position and consult a qualified Chartered Accountant before acting. Last reviewed: June 2026.