What Is Withholding Tax in India for Foreign Payments? TDS, TCS & Forms 145/146 (2026)

Last reviewed: June 7, 2026

As of June 7, 2026, withholding tax in India for foreign payments is governed primarily by Section 195 of the Income-tax Act, which requires every person making a payment to a non-resident to deduct Tax Deducted at Source (TDS) if the sum is chargeable to tax in India. Budget 2026 and the Income-tax Rules 2026 have introduced material changes that every payer, banker and in-house tax team must now absorb: the Liberalised Remittance Scheme (LRS) TCS rate has been streamlined to a flat 2 % in defined cases from April 1, 2026, and a new pair of remittance-compliance forms, Form 145 and Form 146, have replaced the legacy Forms 15CA/15CB for outward remittance reporting.

These changes affect companies, individuals and authorised dealer banks alike, demanding immediate updates to internal procedures, bank instructions and documentation packs.

• Who must deduct. Any “person”, company, firm, individual, HUF or AOP, making a payment to a non-resident that is chargeable to tax in India must deduct TDS under Section 195.
• When to deduct. TDS must be deducted at the time of credit to the payee’s account or at the time of actual payment, whichever is earlier.
• Which forms now apply. From FY 2026-27, payers must file Form 145 (remitter declaration) and, where applicable, obtain Form 146 (chartered accountant / authorised officer certificate) before remitting funds through an authorised dealer bank.

What Is Withholding Tax (TDS) on Foreign Payments?, Section 195 Explained

Section 195 of the Income-tax Act, 1961, is the central provision that answers the question of what is withholding tax in India for foreign payments. It imposes a statutory obligation on every person responsible for paying any sum to a non-resident (or a foreign company) to deduct income-tax at the applicable rate, provided the income is chargeable to tax in India. The provision is broad: it covers not only salary-type payments but also royalties, fees for technical services (FTS), interest, dividends, capital gains on Indian assets, and any other income that has an Indian-source nexus.

Understanding this provision is critical because unlike TDS on domestic payments, where specific thresholds and rate sections apply, Section 195 operates as a catch-all. The payer bears the initial compliance risk: if TDS is not deducted and the non-resident fails to pay tax directly, the payer can be treated as an “assessee in default” under Section 201.

When Does Section 195 Apply?

The trigger for TDS on foreign remittance under Section 195 is straightforward in principle but frequently litigated in practice. The obligation arises whenever two conditions are met simultaneously:

• The payee is a non-resident or a foreign company, as defined under Section 2(30) and Section 2(23A) of the Act.
• The payment (or any part of it) is chargeable to tax in India, meaning the income has an Indian-source character under the Act’s charging provisions (Sections 4, 5 and 9).

If the payment is entirely exempt, for instance, a reimbursement of expenses that does not constitute “income”, the payer may take the view that Section 195 does not apply. However, this position carries audit risk and, where doubt exists, it is advisable to apply to the Assessing Officer (AO) under Section 195(2) or Section 197 for a nil or lower withholding certificate.

Who Is a “Person” Required to Deduct?

Section 195 uses the word “person” without qualification, which means the obligation extends to every category of taxpayer: companies, LLPs, partnership firms, individuals, Hindu Undivided Families (HUFs), trusts and associations of persons. Unlike several domestic TDS sections that exempt individuals below audit thresholds, Section 195 applies regardless of turnover or audit status. An individual paying a foreign consultant for advisory services must deduct TDS if the payment is chargeable to tax in India, the same rule that applies to a large listed company.

Timing of Deduction, Credit or Payment

TDS under Section 195 must be deducted at the earlier of the following two events:

• Credit, when the sum is credited to the non-resident’s account in the payer’s books (including a suspense or payable account).
• Payment, when actual payment is made, by any mode (wire transfer, cheque, or any other method).

This “earlier of” rule is designed to ensure that the Revenue’s interest is protected regardless of how the payer structures its accounting entries. In practice, for most cross-border service payments, the payment date and the credit date often coincide, but payers with accrual-based booking should monitor journal entries carefully. A debit to “Professional fees payable” and a corresponding credit to the vendor’s account triggers the obligation even if the bank transfer has not yet been initiated.

Withholding Tax Rates India 2026, Payment-Wise Table & Treaty Notes

The domestic withholding tax rates applicable under Section 195 vary by the nature of payment and the residential status of the payee. These are the base rates prescribed under the Income-tax Act; they apply where no Double Taxation Avoidance Agreement (DTAA) relief is available, or where the domestic rate is already lower than the treaty rate. For FY 2026-27, the key rates (before surcharge and cess) are set out in the table below.

Effective rate after surcharge and cess. The base rates above must be grossed up for applicable surcharge and health & education cess. For a foreign company payee, the highest surcharge bracket can push the effective rate on royalties and FTS to approximately 21.84 % (20 % base + surcharge at 2 % + 4 % cess on total). Payers should calculate the effective rate using the prevailing surcharge slab applicable to the payee’s total Indian income.

Section 206AA, PAN absence. Where the non-resident payee does not hold or furnish a valid Indian PAN, Section 206AA requires withholding at the higher of: (a) the rate prescribed under the Act, (b) the rate in force, or (c) 20 %. In practice, this means that a non-resident without PAN will face a minimum 20 % withholding even if the DTAA rate is lower, unless a valid Tax Residency Certificate (TRC) and Form 10F are submitted and the payer relies on the treaty rate. The interplay between Section 206AA and DTAA relief remains a contested area; careful documentation is essential.

Treaty notes. India has an extensive DTAA network covering more than 90 countries. Where a treaty provides a lower rate, the payer can apply that rate at source, provided the non-resident supplies a valid TRC issued by the tax authority of the treaty partner, a completed Form 10F, a no-PE declaration (where relevant), and any other documentation the payer’s CA or the bank requires. Payers should reference the specific treaty article applicable to the payment (e.g., Article 12 for royalties, Article 11 for interest) and retain a copy of the treaty text on file.

TCS vs TDS on Foreign Remittances, When Each Applies (2026 Rules)

One of the most common points of confusion for payers is the distinction between TDS on foreign remittance under Section 195 and TCS on foreign remittance under Section 206C(1G). Both operate on outbound payments, but they serve different statutory purposes and are collected by different persons. The 2026 changes, including the introduction of a flat LRS 2 % TCS rate in defined categories, make it essential to understand which regime applies to each payment.

LRS/TCS Overview

Section 206C(1G) requires an authorised dealer bank to collect Tax Collected at Source (TCS) from the remitter when processing an outward remittance under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). From April 1, 2026, the TCS framework for LRS remittances has been rationalised. The key changes under the 2026 rules include:

• Flat 2 % TCS applies to LRS remittances in defined cases, including general investment, gift remittances and miscellaneous transfers, replacing the previously tiered structure that imposed varying rates depending on the nature and quantum of the remittance.
• Education-related remittances funded by an education loan continue to attract a concessional TCS rate (0.5 % on amounts exceeding the threshold).
• Medical treatment and education expenses below the prescribed annual threshold remain exempt from TCS altogether.
• Overseas tour packages attract a higher TCS rate (5 % up to ₹10 lakh; 20 % beyond), operating outside the general LRS 2 % band.

Importantly, TCS is collected by the bank, not by the payer. The remitter does not “deduct” TCS, instead, the bank adds it to the remittance cost. The TCS paid is available as a credit against the remitter’s income-tax liability when filing their return. This is a crucial operational difference from TDS, where the payer withholds tax from the amount payable to the non-resident.

Payer vs Bank Obligations

The relationship between TDS and TCS on the same payment is sometimes misunderstood. The general principle is:

• TDS (Section 195), the payer deducts tax from the gross amount payable to the non-resident. This reduces the amount received by the foreign payee.
• TCS (Section 206C(1G)), the bank collects tax from the Indian remitter on the remittance amount. This increases the cost for the Indian payer.

Both can apply to the same transaction. For example, a company paying royalties to a US-based licensor must deduct TDS under Section 195 (at the treaty rate or domestic rate) and may also be required to bear LRS 2 % TCS collected by the bank when the net-of-TDS amount is remitted. In practice, many business-to-business payments fall outside the scope of LRS (which is primarily designed for individuals), so TCS under Section 206C(1G) typically bites on individual remittances rather than corporate payments routed through normal banking channels. However, payers should verify with their authorised dealer bank whether TCS applies to the specific remittance channel being used.

Examples & Calculations

Example 1, Corporate royalty payment. An Indian software company pays ₹50 lakh in royalties to a UK-based licensor. Under the India-UK DTAA, the applicable rate is 15 %. TDS of ₹7.5 lakh (plus surcharge and cess) is deducted. The net amount of approximately ₹42.5 lakh is remitted to the UK entity. No LRS TCS applies (corporate remittance outside LRS scope).

Example 2, Individual education remittance. A parent remits ₹12 lakh to a university in Canada for a child’s tuition. The payment is not “income” chargeable to tax in India, so no TDS under Section 195 is required. However, TCS under Section 206C(1G) applies: on the amount exceeding the prescribed threshold, the bank collects TCS at the concessional rate (0.5 % if funded by education loan; otherwise the applicable LRS rate). The TCS paid is claimable as a credit in the parent’s income-tax return.

Example 3, Individual paying a foreign consultant. A freelance designer in Mumbai pays ₹8 lakh to a US-based graphic design studio for services. If the payment is chargeable to tax in India (as FTS), TDS must be deducted under Section 195. Additionally, the bank may collect LRS 2 % TCS on the remittance amount. The combined tax cost should be mapped in advance to avoid cash-flow surprises.

Forms & Documentation, Forms 145/146 (Replacement of 15CA/15CB) and Outward Remittance Documents India

The 2026 overhaul of remittance reporting forms is one of the most operationally significant changes for payers and authorised dealer banks. Under the Income-tax Rules 2026, Form 145 and Form 146 have replaced the earlier Forms 15CA and 15CB, respectively, for all outward remittances requiring tax reporting. The transition took effect from FY 2026-27, and banks are now required to accept only the new forms.

What Is Form 145 (India)?

Form 145 is the remitter’s declaration. It is filed electronically by the person making the outward remittance and serves as a self-certification that the remitter has complied with all applicable TDS obligations under Section 195 (or that the payment is not chargeable to tax). Form 145 broadly corresponds to the erstwhile Form 15CA but incorporates additional data fields, including DTAA-related declarations, the non-resident’s tax identification number, and cross-references to any CA certificate obtained.

Form 145 must be uploaded on the Income Tax Department’s e-filing portal before the remittance is processed by the authorised dealer bank. The portal generates an acknowledgement number, which the payer must share with the bank as part of the remittance documentation pack.

What Is Form 146 (India)?

Form 146 is the certificate issued by a chartered accountant (CA) or, in defined cases, by an authorised officer. It broadly replaces the erstwhile Form 15CB. Form 146 contains the CA’s independent verification of:

• The nature and taxability of the payment under the Income-tax Act and the applicable DTAA.
• The correct rate of TDS applied (including treaty relief, if claimed).
• The details of TDS deposited (challan references).
• The supporting documents examined (invoices, contracts, TRC, Form 10F).

Form 146 is mandatory where the remittance exceeds the prescribed threshold or where the payer claims treaty benefits. For remittances below the threshold and not claiming DTAA relief, the payer may file Form 145 without a CA certificate, although retaining a voluntary CA certificate is strongly recommended as an audit defence measure.

Legacy 15CA/15CB, Transition Notes

Payers who were accustomed to the 15CA/15CB workflow should note the following transition points regarding 15CA 15CB 2026 changes:

• No parallel filing. From FY 2026-27, the Income Tax portal no longer accepts Forms 15CA or 15CB. Any pending remittances must use the new Form 145/146 framework.
• Historical data. Previously filed 15CA/15CB records remain accessible on the portal for audit and reference purposes.
• Threshold alignment. The earlier ₹5 lakh threshold that determined which part of Form 15CA had to be filed has been recalibrated under the new rules. Payers should consult the updated Income-tax Rules for the current threshold applicable to Form 146 certification.
• Software updates. ERP systems and accounting software that auto-generated 15CA/15CB XML files need to be updated to produce the new Form 145/146 format. Industry observers expect most major providers to have released patches, but payers using custom systems should verify compliance immediately.

Bank Upload Checklist

Authorised dealer banks require a standardised documentation pack before processing an outward remittance. The following checklist reflects the standard requirements under the new framework for outward remittance documents India:

• Form 145 acknowledgement, the system-generated acknowledgement from the Income Tax e-filing portal.
• Form 146 (CA certificate), where applicable (above threshold or DTAA claim).
• Invoice or debit note, original or certified copy, with clear description of services/goods, currency, and amount.
• Contract or agreement extract, relevant clauses showing nature of payment, parties, and governing law.
• Tax Residency Certificate (TRC), issued by the payee’s home-country tax authority, valid for the relevant fiscal year.
• Form 10F, completed by the non-resident payee (where DTAA benefit is claimed).
• PAN of the non-resident, if available; if not, a declaration explaining why PAN is not held and the impact on withholding rate.
• TDS challan copy, proof that TDS has been deposited with the government before remittance.
• Board resolution or authorisation letter, for corporate remitters, authorising the signatory to approve the remittance.
• Purpose code declaration, as required by RBI banking rules for foreign exchange transactions.

Common Rejection Reasons & Fixes

Banks routinely reject remittance requests for documentation deficiencies. The most frequent rejection reasons, and their remedies, include:

• Missing or expired TRC. Fix: request an updated TRC from the non-resident before each fiscal year; build this into contract renewal workflows.
• Mismatched invoice amounts. Fix: ensure the Form 145 amount, the invoice, and the bank remittance instruction all match to the exact figure (including currency conversion basis).
• Incomplete Form 146. Fix: ensure the CA has signed all sections, referenced the correct DTAA article, and attached challan details.
• Wrong beneficiary details. Fix: verify SWIFT/IBAN codes and beneficiary name against the bank’s records before submission.
• Missing PAN or UBO information. Fix: if PAN is unavailable, include a written declaration and apply the higher Section 206AA rate unless treaty protection is established.

Operational Compliance Checklist for Payers & Banks, Step-by-Step

Ensuring seamless compliance with India’s withholding tax framework for foreign payments requires coordination across multiple functions. The checklists below are designed for immediate adoption by in-house teams.

Checklist for the Tax Team

• Determine the nature and taxability of every foreign payment at the contract-drafting stage, not at the time of remittance.
• Identify the applicable TDS rate: check the domestic rate under the Act, then verify whether a DTAA provides a lower rate.
• Collect and file the non-resident’s TRC, Form 10F, and PAN (or written declaration) before the first payment of each fiscal year.
• Calculate the effective TDS rate including surcharge and cess; document the calculation in a working paper retained on file.
• Where doubt exists on taxability, apply to the Assessing Officer under Section 195(2) for a determination, or under Section 197 for a lower/nil withholding certificate.
• Deposit TDS with the government within the prescribed time (generally, by the 7th of the following month; for March payments, by April 30).
• File quarterly TDS returns (Form 27Q for payments to non-residents) within the statutory deadlines.
• Retain all documentation, contracts, invoices, TRC, Form 10F, challan receipts, Form 145/146 acknowledgements, for a minimum of eight assessment years from the end of the relevant year.

Checklist for Accounts Payable

• Before booking a foreign vendor invoice, confirm with the tax team whether TDS applies and at what rate.
• Record the gross payment, TDS deducted, and net remittance amount in separate general-ledger lines for clear audit trails.
• Coordinate with the bank to ensure the Form 145 acknowledgement number is included in the remittance instruction.
• Send the non-resident payee a TDS certificate (Form 16A) promptly after the quarter-end filing, this supports the payee’s foreign tax credit claim in their home jurisdiction.
• Maintain a vendor master database flagging each non-resident’s PAN status, TRC expiry date, and applicable DTAA article.

Checklist for Banks & Payments Operations

• Verify that every outward remittance instruction is accompanied by a valid Form 145 acknowledgement and, where required, a Form 146 certificate.
• Cross-check the remittance amount against the Form 145 declared amount and the underlying invoice.
• Collect LRS 2 % TCS (or the applicable rate) from individual remitters under Section 206C(1G) and issue a TCS certificate.
• Report TCS collected in the quarterly TCS return (Form 27EQ) and upload data to the Income Tax portal as required.
• Flag remittances where the payer has not provided a TRC or Form 10F but has applied a DTAA rate, escalate to compliance for review.
• Retain copies of all remittance documentation in line with FEMA requirements and RBI master directions.

Penalties snapshot. Non-deduction or late deduction of TDS under Section 195 attracts interest under Section 201(1A) at 1 % per month (from the date of deductibility to the date of actual deduction) and 1.5 % per month (from the date of deduction to the date of deposit). Penalty under Section 271C, equal to the amount of TDS not deducted, may also be levied, though the payer can establish “reasonable cause” as a defence. Failure to file TDS returns on time attracts a late-filing fee under Section 234E (₹200 per day of delay, capped at the TDS amount). These consequences underscore why proactive compliance, rather than remedial correction, is always the more cost-effective approach.

Planning, DTAA Relief and Risk Controls, How to Lawfully Reduce Withholding Tax in India for Foreign Payments

While withholding tax obligations are statutory, the law provides several legitimate mechanisms to reduce the effective rate. Payers should treat these as standard operating procedures rather than exceptional planning tools.

DTAA Claim Process

To claim a reduced treaty rate at the point of withholding, the payer must assemble a complete evidence pack:

• Tax Residency Certificate (TRC), obtained by the non-resident from their home-country tax authority. This is a mandatory prerequisite; without it, DTAA benefits cannot be claimed at source.
• Form 10F, a self-declaration by the non-resident, providing information not already contained in the TRC (such as residential status, period of residency, and purpose of the payment).
• No-PE declaration, where the payment relates to business profits, a written confirmation from the non-resident that it does not have a Permanent Establishment (PE) in India.
• Beneficial ownership declaration, confirming that the payee is the beneficial owner of the income and not merely an intermediary or conduit entity.

The payer should retain all these documents for the statutory retention period and reference the specific DTAA article in the Form 146 certificate (or in the self-certification within Form 145).

Applying for Lower Withholding

Where the payer believes that the income is not chargeable to tax in India, or that the applicable rate should be lower than the statutory rate, two formal application routes are available:

• Section 195(2) application. The payer applies to the Assessing Officer for a determination of the appropriate portion of the payment that is chargeable to tax. This is useful where part of the payment is a reimbursement of expenses (non-taxable) and part is an FTS component (taxable).
• Section 197 certificate. The non-resident payee (or the payer on their behalf) applies for a certificate authorising lower or nil withholding for the fiscal year. The AO may issue the certificate after examining the payee’s tax position, DTAA eligibility, and expected total Indian income.

Audit Risk & Documentation

Aggressive withholding positions, such as treating a payment as entirely non-taxable without an AO determination or failing to obtain a TRC while applying a DTAA rate, invite scrutiny during assessment proceedings. The likely practical consequences include disallowance of the expenditure under Section 40(a)(i) (for failure to deduct TDS) and a demand for interest and penalty under Section 201. Payers should therefore maintain a contemporaneous “withholding analysis memo” for each significant foreign payment, documenting the legal basis for the rate applied, the DTAA article relied upon, and the supporting evidence obtained.

Withholding Tax Obligations by Payer Type, Comparison Table

This table is designed as a quick-reference grid for compliance teams. For detailed payment-wise rate analysis, refer to the withholding tax rates India 2026 table above, and for form-filling guidance, consult the Forms 145/146 sections of this article.

Conclusion, Immediate Steps for Payers in FY 2026-27

Understanding what is withholding tax in India for foreign payments is no longer a one-time exercise, it is an ongoing compliance discipline that demands updated processes, current documentation and proactive planning. The 2026 changes, from the introduction of Form 145 and Form 146 to the rationalisation of LRS TCS at 2 %, have reset the compliance baseline for every entity making cross-border payments from India.

Payers should take the following immediate steps:

• Update ERP and accounting systems to generate Form 145/146 in the prescribed format.
• Refresh non-resident vendor documentation, request current TRCs, confirm PAN status, and update Form 10F declarations for FY 2026-27.
• Brief accounts payable teams and authorised signatories on the new bank submission workflow.
• Review existing contracts with non-residents to ensure withholding tax gross-up clauses reflect the updated rates and forms.
• Where uncertainty exists on the taxability of a payment, apply proactively to the Assessing Officer under Section 195(2) or Section 197 rather than risk an “assessee in default” determination.

Cross-border tax compliance in India continues to grow in complexity, and the cost of errors, from disallowance of deductions to penalty proceedings, far exceeds the cost of rigorous upfront planning. Businesses making regular outward remittances should consider engaging a qualified cross-border tax specialist to conduct a compliance health check and establish defensible internal controls for FY 2026-27 and beyond.

Sources

1. Income Tax Department, Withholding Tax / TDS Pages
2. PwC, India Withholding Taxes (Tax Summaries)
3. BDO Global, India Withholding Tax Rate on Royalties and FTS
4. Razorpay, TDS on Foreign Payments Guide
5. Tax2win, Section 195 Under Income Tax Act
6. S&A Law Offices, Withholding Tax on Payments to Non-Residents
7. Bajaj Finserv, TCS on Foreign Remittance