Withholding Taxes in India

The applicable withholding tax rate is the rate prescribed in the Income Tax Act, 1961 or relevant Double Taxation Avoidance Agreement (DTAA), whichever is lower. Non-residents are liable to pay taxes in India on source income, including:

Contributing Advisor

Nidhi Mittal

Assistant Manager, Corporate Accounting Services

• Interest, royalties, and fees for technical services paid by a resident;
• Salary paid for services rendered in India; and
• Income arising from a business connection or property in India.

Withholding Tax (WHT), also called retention tax, is an obligation on the individual (either resident or non-resident) to withhold tax when making payments of a specified nature, such as rent, commission, salary, for professional services, to satisfy contract provisions, etc. – at rates specified in India’s tax regime.

Withholding tax thresholds and rates on payments to Indian resident companies

A person providing a benefit or a perquisite arising from a business or a profession can withhold tax at 10 percent of the value of such benefit – which could also be partly or wholly non-cash.

Notes:

• Payments have different threshold limits. The payer is only required to withhold tax if the total payment within a tax year to a single person (except where specified otherwise) is above the limits specified above.
• The threshold limit for WHT for non-specified type of interest is INR 5,000, except in the case of interest received from a bank or deposit with post office, for which it is INR 10,000. This threshold limit is increased to INR 50,000 in case of interest provided by a co-operative society, and INR 40,000 if recipient of interest is a senior citizen (age of more than 60 years).
• Where the cash has been withdrawn by any person who has not filed return of income for three immediately preceding financial years, the threshold of INR 10 million will be read as INR 2 million and tax will be deducted at two percent on amount exceeding INR 2 million but not exceeding INR 10 million and five percent on amount above INR 10 million.
• The definition of ‘royalty’ also includes consideration for use of, or right to use, computer software. Transfer of all or any rights in respect of any right, property, or information includes transfer of all or any right to use computer software (including granting of a license), irrespective of the medium through which such a right is transferred and irrespective of whether any right or property is located in India. 
• Tax at two percent is to be withheld in case the company is engaged in business of operation of call centers.

Application for Permanent Account Number (PAN)

All individuals/non-individuals (including foreign citizens/entities)who enters into a financial transaction of an amount aggregating to INR 250,000 (US$ 3040)  or more shall be required to apply to a tax officer for a PAN.

If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant provisions of the Income-tax Act, the rates in force, or the rate of 20 percent, whichever is higher.

India’s withholding tax regime and the Finance Act, 2021

Finance Act 2021 has prescribed a levy of higher tax deducted at source (TDS) and tax collected at source (TCS) on non-filers of income-tax return. Accordingly, higher TDS will be applicable to those having interest income, dividend income, annuity pensions, income from capital gains.

However, this higher TDS will only apply to a specified category of non-filers of return.

• Twice the rate specified in the relevant provision of the Indian Income-tax Act; or
• Twice the rate or rates in force; or
• The rate of five percent.

India’s WHT rates on payments to non-resident companies

Notes:

• Percentage to be increased by a surcharge and health and education cess to compute the effective rate of tax withholding.
• Income from units of specified mutual funds received on or after 1 April 2020 is now taxable in the hands of the unit-holders. As per Finance Act, 2023,  'Specified Mutual Fund' means a mutual fund where not more than 35 percent of its total proceeds are invested in the equity shares of domestic companies. This provision will be applicable to Specified Mutual Funds acquired on or after 1 April 2023.
• Dividends received from Indian companies prior to April 1, 2020 are tax-free in the hands of the shareholder. Any dividends received post April 1, 2020 are chargeable in the hands of the non-resident shareholder at the rate of 20 percent or treaty rate, whichever is beneficial.
• There is no threshold for payment to non-resident companies up to which no tax is required to be withheld.
• If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant provisions of the Act, the rates in force, or the rate of 20 percent, whichever is higher. The government has notified rules that do not mandate quoting of PAN, subject to certain conditions.
• The payer is obligated to report specific information in the prescribed form (whether or not such payment is chargeable to tax).
• Where taxes are withheld as per the rates provided above with respect to dividend, interest, royalty, or FTS and there is no other income chargeable to tax in the hands of the non-resident, then compliance obligations relating to filing of return of income by such non-resident in India are not required.
• As per the Finance Act, 2023 no deduction is to be allowed for Securities Transaction Tax (STT) on capital gains.

Double Taxation Avoidance Agreements rates

Some tax treaties provide for lower WHT rates from certain types of income. The rates may be specific to the country with which the DTA is signed.