Section 195 TDS on Payments to NRIs: Everything the Payer Needs to Know

Section 195 is the provision most people encounter only when they buy property from an NRI, and it surprises them. But Section 195 is far broader than property. It applies to every payment to a non-resident that carries an Indian tax liability: rent on Indian property, fees for professional services rendered in India, interest on Indian deposits, royalties, and more. Most people know the property angle because the numbers are large enough to attract attention. The smaller payments - a monthly rent to an NRI landlord, a consulting fee to a non-resident professional - slip through, and that is where compliance gaps turn into notices.

When Does Section 195 Apply?

Two conditions must be met simultaneously:

1. The recipient is a non-resident under Section 6 of the Income Tax Act for the financial year in which the payment is made. This is determined by the recipient's residential status, not their citizenship or passport.
2. The payment is chargeable to tax in India. If the income is exempt under the Act (e.g., NRE deposit interest under Section 10(4)(ii)) or not sourced from India, Section 195 does not apply.

The payer can be anyone - an individual, a company, a partnership, or an HUF. There is no threshold below which Section 195 disappears, unlike Section 194-IA which only kicks in above Rs 50 lakh for resident property sellers.

TDS Rate Table Under Section 195 (FY 2026-27)

Important: TDS under Section 195 for property is computed on the full sale consideration, not the profit. This is why the actual TDS deducted often far exceeds the NRI's real tax liability, and why a Form 13 lower deduction certificate is critical for property sales.

Section 195 vs Section 194-IA: The Confusion That Costs Money

This is the single most common compliance error we see in NRI property transactions. Here is the difference in plain terms:

A buyer who files Form 26QB for an NRI seller has filed the wrong form at the wrong rate. The 1% deduction under Section 194-IA is a fraction of what Section 195 requires, and the buyer becomes personally liable for the shortfall plus interest.

Step-by-Step: Complying with Section 195

1. Verify the recipient's residential status. Ask for a declaration or check their India presence for the financial year. If they qualify as a resident (even under RNOR status), Section 195 does not apply.
2. Obtain a TAN. Apply via Form 49B on the Protean (NSDL) portal. See our TAN application guide for the complete walkthrough. Allow 7 to 10 working days.
3. Determine the correct TDS rate. Use the table above, and check whether a DTAA provides a lower rate for the specific income type. For property sales, consider whether the NRI has a Form 13 certificate for a reduced rate.
4. Deduct TDS at the time of payment or credit, whichever is earlier. For property transactions with multiple instalments, deduct on each instalment.
5. Deposit via Challan ITNS-281 by the 7th of the following month (30th April for March deductions).
6. File Form 27Q (now Form 144) quarterly on the TRACES portal: July 31 (Q1), October 31 (Q2), January 31 (Q3), May 31 (Q4).
7. Issue Form 16A (now Form 131) to the NRI within 15 days of the Form 27Q due date. The NRI needs this to claim TDS credit in their Indian ITR.

The Rental Income Trap

Most people associate Section 195 with property sales because the amounts are large and visible. But the most overlooked application is rent paid to an NRI landlord. If your landlord is a non-resident and the rent is sourced from an Indian property, you are required to deduct TDS at 30% (plus surcharge and cess) under Section 195, obtain a TAN, and file Form 27Q quarterly.

In practice, many tenants do not even know their landlord is an NRI, or they assume the standard 10% TDS under Section 194-I applies. It does not. Section 194-I covers rent to residents only. When the landlord is a non-resident, Section 195 overrides, the rate jumps to 30%, and the compliance requirements change entirely.

For the NRI landlord, this 30% TDS on gross rent (before any deductions for repairs, property tax, or the standard 30% deduction) typically far exceeds their actual tax liability. The remedy is the same as for property sales: apply for a Form 13 lower deduction certificate, or file an ITR to claim a TDS refund.

DTAA and Section 195: When Treaty Rates Apply

India has Double Taxation Avoidance Agreements with over 90 countries. For certain income types, the DTAA rate is lower than the domestic Section 195 rate:

• Interest: The domestic rate is 30%, but the India-US DTAA caps it at 15%, and the India-UAE DTAA at 12.5%.
• Royalties and FTS: Domestic rate is 10%, and some DTAAs provide the same or even lower rates.
• Capital gains on property: Most DTAAs give India unrestricted taxing rights, so DTAA does not reduce TDS on property sales.

To apply a DTAA rate, the NRI must provide a valid Tax Residency Certificate (TRC) from their country of residence, and the payer should verify the applicable treaty article. Without a TRC, the domestic rate applies.

Section 195 Under the New Income Tax Act 2025

The new Income Tax Act 2025 (effective April 1, 2026) renumbers Section 195 as Section 393(2), but the substance remains the same. The corresponding form changes are:

• Form 27Q becomes Form 144
• Form 16A becomes Form 131
• Form 13 becomes Form 128
• Form 15CA becomes Form 145
• Form 15CB becomes Form 146

The obligations, rates, and penalties are unchanged. If you were compliant under the old numbering, you are compliant under the new one.

Penalties for Non-Compliance

The consequences of failing to deduct or deposit TDS under Section 195 are severe and fall entirely on the payer:

• Personal liability (Section 201/398): The payer must pay the TDS amount from their own funds, regardless of whether the NRI has since paid their taxes independently.
• Interest: 1% per month for non-deduction, 1.5% per month for deduction but non-deposit.
• Penalty (Section 271C): Equal to the TDS amount not deducted.
• Prosecution (Section 276B): Willful failure to deposit deducted TDS can attract imprisonment from 3 months to 7 years.
• Disallowed expense: Under Section 40(a)(i), any payment on which TDS was required but not deducted is disallowed as a business expense for the payer in that year.