Withholding tax is collected when income is paid outside India. This also applies if the payment is made to 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 the 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.

In the absence of a DTAA and the country in which the income is being credited, the rates are as follows:

Head Tax rate
Interest earned 20%
Technical services 10%
Royalties 10%
Dividend paid by Indian firms 0%
Other services by individuals 30%
Other services by firms 40%

It is important to remember that TDS is accrued to Indian citizens while payments to non-residents which can be termed foreign transactions are subject to withholding tax. For example: Apply TDS when making payments to Indian sellers, and if you make payments to foreign sellers, you apply a withholding tax.

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.