Withholding tax is collected when income is paid outside India. Withholding tax is also known as Retention tax. This also applies if the payment is made to an NRI (non-resident Indian). If the income is paid in India, the person responsible for payments to NRI must deduct the withholding tax at the time of payment or when the amount is credited to the NRI’s account, according to Section 195 of the Income Tax Act.

The rate of tax applicable to such payments is determined by the status of a Double Taxation Avoidance Agreement. India has signed DTAAs with many countries to avoid taxing individuals twice for the same income (in India and the partner country). Currently, India has DTAA treaties with more than 80 countries around the world and the benefit of such treaties is that individuals residing in any of these countries have to pay withholding tax at lower rates than their counterparts.

The government has specified that all foreign entities (individuals or firms) must obtain a PAN in India for providing services to Indian entities. They must provide the PAN number to the entity in India, which is making the payment, or else the tax will be charged at a higher rate of 20% or more. As a result, if additional withholding taxes are collected then no credit for those can be claimed abroad. The deducted tax must be paid no later than the 7th day of the month in which the withholding tax was deducted, except for March, for which the date of payment of the withholding tax is 30 April.

Difference between withhold tax and TDS :

Withhold tax :

Withholding tax is the amount that is deducted in advance, and the same is deposited to the government before the amount is paid to the payer. it is generally applicable on payment to non – residents, that are foreign transactions.

TDS :

A person (deductor) who is required to make a payment of a specific nature to another person (deductee) must deduct tax at source and send it to the Central Government's account. It is applicable on specified transactions under the income tax act, 1961 to both resident and non-resident.