A Comprehensive Guide to Withholding Tax in India: Obligations, Rates & Tax Liability

Last Updated : Aug. 8, 2023, 12:38 p.m.

Withholding tax, commonly referred to as retention tax, is the obligation of the taxpayer to withhold the tax while making the payments under specific heads. As per the Income Tax Act, under section 195, the withholding tax rate is fixed.  The publication of the Indian Law Office states that “The provisions of Withholding Tax are like machinery provisions, which apply to the payer of the income to enable easy collection and recovery of tax and are independent of the charging provisions which are applicable for the recipient of the company.”

According to Section 195, the payer must deduct payments at the source when making payments to non-residents of India. The obligation lies on the person responsible for the payment to deduct the taxes at source. In India Central Government is empowered to collect the taxes. The government rules determine tax liability based on the individual’s income and the tax paid by them. The Income Tax Law specifies different tax rates for various types of income when the minimum amount is increased, classifying income into different segments.

Calculating Tax Liability

Withholding tax meaning tax retention, is usually done by calculating the net income earned for the previous financial year in the current assessment year. The individual’s residential status generally determines the income tax payable. It is essential to know how the Indian government categorises residential status to understand the withholding tax meaning.

Residential status is mainly of two types:

1. Resident of India
2. Non-Resident of India

To qualify as a resident of India, the assessed person must have resided in India for 182 days or more in the previous year or 60 days or more in the previous year and has been in India in the last four years, and have stayed 365 days must be or more in the year preceding the previous year. Any person who does not comply with the above rules will fall into the category of non-Indian residents.

Something to remember: Non-resident Indians have diverse charge commitments than inhabitants of India. Non-Resident Indians (NRIs) who generate income in India from the following sources are required to fulfil their tax obligations.

1. Salaries paid for services in India
2. Income earned from Indian property or pay from doing trade in India.
3. Fees, costs, and intrigues paid by Indian inhabitants to NRIs for business in India of a benefit given by non-Indian inhabitants.

Withholding Tax Rates for Non-Resident Individuals

The applicable rates for withholding tax for non-residents of India are as follows:

1. Income from domestic companies: 20% interest
2. Royalties: 10%
3. Technical services: 10%
4. Other services for persons: 30%
5. Other services companies: 40%

The above rates apply to countries where India has no double taxation treaty.

Withholding Tax Rates for Resident Companies

It is important to note that the payer should withhold tax only if they make all payments to one person. If the person does not provide a PAN (Permanent Account Number), the withholding tax will be higher than 20% or the amount specified in the main clause of the Revenue Act 1961 or proposals.

Rates that are applicable for the payment of withholding tax to the Resident Companies are as follows:

1. A 10% tax rate is charged on specified types of interests.
2. A 20% tax rate is charged on non-specified types of interests.
3. Professional or technical services, commissions and brokerage, and Royalties charge a 10% tax rate.
4. Rents and contractual payments generally charge 2% of the tax rate.
5. Contractual payments to an individual charge 1% of the tax rate.

Withholding Tax Rates for Non-Resident Companies

To benefit from the tax reduction, the percentage of special consumption tax, education tax, and secondary and higher education tax will be increased to the effective rate. Dividends received by shareholders from Indian companies are tax-exempt.

Rates that are applicable for the payment of withholding tax to the Non- Resident Indian Companies are as follows:

1. A 20% tax rate is charged on Dividends.
2. Interest on foreign currencies charges 5% of the tax rate.
3. Interest on borrowed foreign currency under a loan or through long-term infrastructure bonds charges, and Interest on long-term infrastructure bonds issued by an Indian company charges 5% of the tax rate.
4. The royalty and technical fees charge 25% of the tax rate.
5. Long-term capital gains charge 20% of the tax rate.
6. The extra income won by horse races charges 30% of the tax rate.
7. Other incomes, which are not mentioned, charge 40% of the tax rate.

Certificate of Withholding Tax

The payer is responsible for issuing the withholding certificate to the creditor every quarter. To obtain the tax deduction certificate, the creditor can conveniently access it online by downloading the document directly from the TRACES website, streamlining the process and ensuring efficient documentation for both parties involved. This online platform simplifies the overall procedure and provides a convenient way for creditors to access their tax deduction certificates promptly and securely.

Withholding Tax and TDS

Withholding refers to the practice of retaining a portion of funds before payment to the recipient. In the context of taxes, withholding tax is the amount deducted at the time of tax payment to the government. It also applies to payments made to contractors or professionals, where a certain amount is withheld. While Tax Deducted at Source (TDS) applies to Indian residents, withholding tax is specifically relevant for foreign transactions involving non-residents.

Penalties for Skipping Withhold Tax Payment

These are the consequences an individual must face when he skips the tax payment:

1. Penalties for not withholding and not paying taxes to the government will result in a minimum penalty.
2. Examination of a non-resident Indian with the aid of an agent. Even non-resident auditors have direct access.

Conclusion

Indian and Non-Indian residents and companies must always be aware of the withholding tax terms and rates. It will allow everyone to fulfil their tax obligations.

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