AS | Ankit Sarawagi|Founder, CFOmatrix·September 2026·8 min read | Startup Tax |
You hire an overseas developer, license a piece of foreign software, or pay a consultant abroad, and India quietly expects you to keep back a slice of that payment as tax. That slice is Section 195, and getting it wrong costs far more than the tax itself.
Section 195 is the rule that governs TDS on almost every payment an Indian company makes to a non-resident. It has no minimum threshold, it interacts with tax treaties, and if you skip it the expense can be disallowed entirely. This guide covers the scope, who deducts and when, the rate under the Act versus a treaty, grossing-up, and the documents that let you legitimately withhold nil.
- What it covers
- TDS on any sum chargeable to tax paid to a non-resident: royalty, technical fees, interest and more.
- Threshold
- None. Even a small taxable payment is inside the section.
- Rate
- Rate under the Act or the DTAA, whichever is lower, if treaty documents are held.
- Treaty documents
- TRC + Form 10F + No-PE declaration can bring the rate to nil for many services.
- Cost of default
- Expense disallowed, assessee in default, interest and penalty.
1 The scope: any sum chargeable to tax
Section 392 (old 195) says that any person responsible for paying a non-resident any sum that is chargeable to tax in India must deduct tax at source at the time of credit or payment, whichever is earlier. The key phrase is chargeable to tax. If the payment is not taxable in India at all, Section 195 does not apply, but that call has to be defensible, not convenient.
Common payments that are chargeable include royalty, fees for technical or professional services, interest on foreign borrowings, and certain software and cloud licences. Pure reimbursements and payments wholly outside Indian tax generally sit outside the section, but the burden is on you to show why.
2 Who deducts, and when
The person making the payment (your company) is the deductor. The tax must be withheld at the earlier of credit to the vendor’s account or actual payment. You then deposit it, file the TDS return (Form 27Q for non-resident payments) and issue Form 16A to the vendor.
Because there is no threshold, the discipline is to run the Section 195 test on every foreign invoice before it is booked, not at quarter-end. The decision on taxability and rate is what your CA later certifies in Form 15CB.
3 Rate: the Act versus the treaty
Two rate books can apply. The income-tax law prescribes rates for categories such as royalty and fees for technical services. A tax treaty between India and the vendor’s country may prescribe a lower rate, or exempt the income altogether. You are entitled to apply whichever is lower, but only if you hold the evidence to claim the treaty.
Brewly licenses a recipe-management platform from a Singapore vendor and pays a technical fee of USD 20,000. Under the Act, fees for technical services would attract a withholding at the domestic rate. Brewly instead obtains the vendor’s Singapore TRC, files Form 10F and takes a No-PE declaration. Under the India-Singapore treaty the fee is taxed at a capped rate, lower than the Act rate, so Brewly withholds at the treaty rate, certifies it in 15CB, and files 15CA. The documents turned a higher domestic deduction into a lower treaty one.
4 Grossing-up: who really bears the tax
Many foreign vendors insist on receiving a fixed net amount. When the contract makes the Indian payer bear the tax, the base has to be grossed up under Section 195A so that, after TDS, the vendor still receives the agreed net figure. The tax then comes out of your pocket on top of the invoice.
| Scenario | Effect on cost |
|---|---|
| Vendor bears tax (TDS out of the invoice) | Vendor nets the invoice minus TDS; your cost is the invoice amount. |
| You bear tax (net-of-tax contract) | Amount is grossed up; your cost is invoice plus the tax, so the effective rate bites harder. |
5 The cost of getting it wrong
Section 195 is enforced harder than most TDS provisions, because the money has already left the country. If tax was deductible but not deducted or not paid:
- the expense is disallowed under Section 37 (old 40(a)(i)) when computing taxable income, so you effectively pay tax on the whole payment as if it were profit;
- you are treated as an assessee in default under Section 397 (old 201), and can be recovered from for the tax;
- interest runs from the date the tax was deductible, and penalty can apply.
6 The 15CA/15CB link and the sequence
Section 195 is the charge; Forms 15CA and 15CB are how you administer it at the bank. The CA certifies the Section 195 position in 15CB where required, you file 15CA on the portal, and the authorised dealer bank uses both to release the remittance. Run the sequence the same way each time.
7 Your compliance checklist
- Run the Section 195 chargeability test on every foreign invoice before booking it.
- Compare the Act rate and the treaty rate and apply whichever is lower.
- Collect the TRC, file Form 10F, and take a No-PE declaration to claim the DTAA rate.
- Check the contract for a net-of-tax clause and gross up under Section 195A if you bear the tax.
- Deduct at the earlier of credit or payment, and deposit the TDS on time.
- Get Form 15CB where required and file Form 15CA before remitting.
- File Form 27Q and issue Form 16A to the non-resident vendor.
Foreign payments piling up before you have the process right?
Talk to us about setting up a clean Section 195 and 15CA/15CB workflow, so remittances go out on time and hold up in due diligence.
Talk to CFOmatrix8 FAQs
What is Section 195 TDS?
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Form 15CA & 15CB for foreign payments →
TDS & equalisation levy on Google, Meta & AWS →
FEMA & FDI compliance for startups →
FEMA/FDI filing checker (free tool) →
AS | Founder, CFOmatrix | Finance Strategy & Compliance CFOmatrix helps Indian startups build finance, tax and compliance functions that stand up to investor due diligence, from process and controls to the filings and the numbers behind them. |
Disclaimer: This article is general information as of September 2026 and is not tax or legal advice. Section 195, the rates and the relevant tax treaties can change and depend on the facts of each payment. Confirm your specific position with a qualified professional before deducting or remitting.