TDS on Foreign Payments: Rates, Section 396, Form 145 & Compliance Guide

Table of Contents

Key Takeaways

TDS on foreign payments applies only when the payment is taxable in India.
Sections 393(2) and 396 of the Income Tax Act, 2025 govern withholding obligations on payments to non-residents.
DTAA benefits can significantly reduce withholding rates if the required documentation is available.
Import of goods generally does not attract TDS, while services, royalties, and technical fees often do.
Form 145 and Form 146 (replacing Forms 15CA and 15CB) play a critical role in foreign remittance compliance.
Businesses must evaluate taxability, documentation, and withholding obligations before processing international payments.

Let’s assume your finance director has just approved a ₹8 lakh payment to a US-based SaaS vendor. The CFO asks: “Did we deduct TDS?” Nobody in the room is sure.

These situations represent two different transactions and two different compliance risks, but one common problem: cross-border tax operations are no longer just an accounting task.

While Section 195 of the Indian Income Tax Act, 1961 historically governed TDS on foreign payments, payments made from FY 2026-27 onwards are governed by Section 393(2) and Section 396 of the Income Tax Act, 2025. To ensure compliance, you can no longer simply look at the legacy TDS tables.

Read ahead to know the applicable TDS rate for your payment type, documents required for compliance and how Cashfree Payments can help businesses streamline cross-border payment workflows with structured transaction visibility, RBI-compliant payment infrastructure, reconciliation support, and centralized records for international collections and settlements.

What is Non-Resident TDS? Legal Foundation (Section 195 / Section 393 & 396)

Non-resident TDS refers to tax withheld by an Indian payer when making certain payments to a foreign individual, company, or other non-resident entity.

Historically covered under Section 195 of the Income Tax Act, 1961, these obligations are now incorporated into Sections 393(2) and 396 of the Income Tax Act, 2025.

The law requires tax to be deducted before remitting specified payments outside India whenever the income is taxable under Indian tax laws.

Section 396 (formerly Section 195) Applies To	Section 396 (formerly Section 195) Does Not Apply To
Payments made to a non-resident individual.Payments made to a foreign company.Payments made by Indian companies, firms, LLPs, individuals, or HUFs.Foreign remittances involving taxable income in India.Payments for services, royalties, technical fees, interest, or other taxable sums.	Salary payments covered under Section 192.Payments to Indian residents.Payments not chargeable to tax in India.Pure import of goods transactions with no taxable income element in India.

The most important threshold under Section 195 is the “chargeable to tax” test. TDS is required only if the income has a taxability rate in India under domestic tax law or the applicable DTAA (Double Taxation Avoidance Agreement).

Along with Section 195 compliance, businesses and individuals must also understand the role of RBI TDS on foreign payouts and you also need to identify;

Tax determination
DTAA documentation
Form 15CA filing
CA certification under Form 15CB
Accurate RBI purpose codes

On this front, Platforms like Cashfree Payments increasingly function as compliance infrastructure as we provide the infrastructure for;

Cross-border collections
Vendor payouts
Automated reconciliation
FEMA compliance
Finance-system integrations

All of these are embedded into a single operational workflow, which you can integrate as per your business requirements and legal compliance needs.

Update as per the Income Tax Act 2025 Framework:
Form 15CA is replaced by Form 145Form 15CB is replaced by Form 146
Hence, many businesses are still operating on older compliance assumptions, creating a growing risk gap in international remittance processes.

Who Is Responsible for Deducting TDS?

The withholding obligation falls on the payer in the transaction. For transactions on or after April 1, 2026, your Form 27Q quarterly filings must quote Section 393(2) / Section 396 instead of the legacy Section 195 to avoid system validation rejections. The obligation applies even if:

You are an individual or HUF not subject to tax audit.
The payment is routed through a fintech platform or payment gateway.
The foreign vendor does not ask for TDS deduction.
The invoice is denominated in USD, EUR, or GBP.

While we are discussing the basics of the 195 TDS section, let’s clear two major misconceptions;

Your foreign vendor will not handle TDS, as the Indian tax laws cannot obligate a US consultant, UK agency, or any other entity in any country to deduct TDS as per the Indian tax system.
Even if you are using a platform like Cashfree Payments to transfer funds, the platform provider will deduct TDS. No, you have to deduct TDS.

TDS Rates on Foreign Payments

Section 195 TDS rates are determined by two variables: the nature of income and the applicable DTAA (Double Taxation Avoidance Agreement).

The same USD 10,000 payment can attract 0%, 10%, 20%, or 30% TDS depending on how the transaction is classified.

Payment Type	Nature of Income	Section 392(2) and 396 TDS Rate
Interest on foreign borrowing	Interest	10% 20% is applicable on money borrowed by the GOI.
Royalty (copyright, patent, software license)	Royalty	20%
Fees for Technical Services (FTS)	FTS	20%
*SaaS subscription	Royalty / Nil	20% or Nil
LTCG (Listed Equities)	Long-term capital gains on listed equity shares.	12.5%
LTCG (Unlisted Securities)	Long-term capital gains on unlisted shares or bonds sold by non-residents	10%
LTCG (Immovable Property)	Long-term capital gains on real estate/property held for more than 24 months	12.5%
STCG (Short-Term Capital Gains)	Short-term gains on listed equity shares (U/S 111A equivalent)	20%
Any other income	Other Income	30% for HUF40% for foreign companies
Import of goods	Not taxable under Section 195	Nil as TDS does not apply

On top of these, surcharge rates also apply, but they can differ based on whether the recipient is a foreign company, NRI, or of any other category.

Important Note: DTAA rates override domestic Section 195 rates if:

India has a tax treaty with the recipient’s country
The foreign recipient provides a valid Tax Residency Certificate (TRC)
Required documentation is furnished before remittance

For Finance Directors managing multiple foreign vendors, operational consistency matters as much as legal interpretation. Cashfree Payments helps global merchants centralize payment acceptance, reconciliation, settlement visibility, and RBI-compliant transaction processing.

Note: Whether SaaS payments require TDS deduction or attracts 0% TDS depends on the nature of rights granted in the agreement and the specific DTAA provisions.

If an Indian business is purchasing a standard user license to access a cloud-based platform without any source code transfer, proprietary rights, or commercial rights, the payment made is treated as business profits.
However, when the payment is classified as Royalty, which means if the contract allows Indian business to modify, distribute, copy, and use the said software commercially, it will attract a 20% TDS.

TDS on Import of Goods vs Import of Services | Why Does This Distinction Matter?

TDS under Section 396 is not applicable to the import of goods payments. Here’s why. Here’s a scenario for you to assess: you import.

Machinery from Germany.
Raw materials from China.
Finished inventory from the US.

The payment you make for the goods themselves is generally not taxable in India because the foreign seller’s income does not accrue or arise in India merely due to the sale transaction; Section 195 TDS does not apply.

However, with bundled contracts, things can get a bit complicated, and this is when foreign vendors provide goods and services under a single agreement.

For instance, you;

Import telecom equipment from a European supplier.
The installation and commissioning support is included, but delivered from different providers.
But you got one consolidated invoice issued.

In such a situation, the imported goods still remain outside the TDS purview, but the installation and technical services part will attract TDS. This means when you conduct a business transaction with a foreign entity,

Split goods and services contracts, when possible.
Get separate invoices for equipment and support.
Check and align FEMA codes with the transaction.

Cashfree Payments’ PA-CB-Import infrastructure enables overseas merchants to collect INR payments from Indian customers through locally compliant payment rails including UPI, cards, and netbanking.

Role of Form 15CA and 15CB in TDS on Foreign Remittance

TDS dedication is not the only aspect you must consider for foreign remittance. Under Income Tax Rules, two forms are required;

Form 15CA: The remitter’s online declaration filed on the income tax e-filing portal before the payment is sent abroad.
Form 15CB: This form includes the CA’s confirmation on the following;
- Whether the payment is taxable in India.
- The applicable Section 195 TDS rate.
- DTAA applicability.
- The correctness of the remittance classification.

Note: Form 15CA is replaced with Form 145, and Form 15CB is replaced with Form 146.

Both Form 15CA have four parts.

Part	Applicability	Requirement
Part A	Taxable remittance ≤ ₹5 lakh.	Basic self-declaration
Part B	Taxable remittance > ₹5 lakh with AO certificate under Sections 195(2), 195(3), or 197.	AO approval details required
Part C	Taxable remittance > ₹5 lakh without AO certificate.	Mandatory Form 15CB from CA
Part D	Remittance not taxable in India.	Minimal disclosure

Form 15CB is only required when the payment is taxable in India, and the aggregate remittances made to the foreign vendor exceeds ₹5 lakhs in a financial year.

TDS Compliance Workflow to Follow for Every Outgoing Foreign Payment

TDS compliance workflow for foreign payments

Cross-border TDS compliance becomes manageable when your finance team follows a standardized workflow instead of evaluating every remittance from scratch.

Step 1 Identify the Payment Type	Determine the type of payment you want to make, and check from the list. Import of goodsConsulting servicesSaaS subscriptionRoyaltyFees for Technical Services (FTS)Interest or other income
Step 2 Determine the Taxability	Here, you need to apply the income accrues or arises in India test. If the foreign vendor’s income is chargeable to tax in India, Section 396 / Section 393(2) applies.
Step 3 Check for DTAA Applicability	India has a DTAA agreement with several countries; check them all here (Source). If found, collect; Tax Residency Certificate (TRC)Form 10FNo Permanent Establishment (No-PE) declaration
Step 4 Calculate TDS Rate	If DTAA exists, apply the DTAA prescribed rates. If not, then apply the domestic TDS rate on foreign payments, plus surcharge, and Health & Education Cess.
Step 5 Deduct and Deposit TDS	Deduct TDS at: Payment date, orCredit date Deposit tax through the updated ITNS payment rails referencing the Income Tax Act 2025 codes.
Step 6 File Form 15CA / Form 145	File Form 145 on the e-filing portal before processing the transfer. For taxable payments exceeding ₹5 lakhs, ensure your CA has uploaded Form 146 beforehand.
Step 7 Initiate the Foreign Remittance	Submit remittance documents to the Authorized Dealer bank, and after this issue Form 16A to the non-resident within 15 days of filing the TDS return.

Operationally, this is where finance teams often lose time collecting invoices, purpose codes, beneficiary records, and remittance trails before CA certification.

But Cashfree Payments help standardize this workflow through structured cross-border payout records, beneficiary-level tracking, and payment documentation that supports audit readiness, reconciliation, and RBI-compliant transaction tracking.

How Cashfree Payments Reduces Cross-Border Compliance Friction for Indian Businesses?

Cross-border compliance failures are rarely caused by misunderstanding tax law alone. In practice, businesses struggle because transaction records, settlement references, reconciliation workflows, are fragmented across banks, ERPs, spreadsheets, and multiple payment systems.

Problem: Cross-Border Transactions Create Documentation and Reconciliation Gaps

Businesses handling international transactions often need structured payment records for:

FEMA compliance
Audit readiness
GST documentation
Settlement reconciliation
RBI reporting requirements

Manual banking workflows can make it difficult to maintain consistent transaction visibility across currencies, payment methods, and settlement systems.

How Cashfree Payments Helps

Cashfree Payments provides RBI-compliant cross-border payment infrastructure designed to simplify international transaction management for global merchants and Indian businesses.

The PA-CB-Import infrastructure enables overseas merchants to accept INR payments from Indian customers through localized payment methods including UPI, cards, and netbanking. At the same time, our platform centralizes;

Transaction records
Settlement references
Payment metadata
Reconciliation visibility
Currency-level reporting

This creates a more structured operational trail for businesses managing cross-border payment compliance, settlement tracking, and audit documentation.

For finance teams, the operational advantage is not automated tax interpretation. It is having cleaner payment infrastructure, better transaction visibility, and centralized records that reduce compliance friction across international payment workflows.

Mistakes Indian Businesses Must Avoid to Ensure TDS Compliance

Tax-based issues in cross-border payments are less likely, but skipping a step or assuming foreign payouts as routine payments by the finance team is more likely to commit a mistake.

Here are a few common mistakes:

Mistake	Regulatory Risk	Penalty / Consequence
Not deducting TDS when required	Section 407 (Assessee in Default) under ITA 2025	TDS amount recoverable and interest levied at 1.5% per month.
Expense disallowed under Section 40(a)(i)	Corporate tax exposure	The entire expense is disallowed as a deduction but only till 30%
Filing Form 15CA after remittance	Section 462 under ITA 2025 framework	Penalty up to ₹1 lakh per default.
Applying the DTAA rate without a valid TRC and Form 10F	AO may reject the treaty benefit	Differential tax plus interest added at 1% per month.
Missing 7th-of-month TDS deposit deadline	Section 201 interest	Interest at 1.5% per month.
Using an incorrect RBI purpose code	FEMA violation	Penalty up to 3x the amount involved.

Out of all these mistakes, the most costly one is the expense disallowed under Section 40(a)(i). For instance, if you don’t deduct TDS on a foreign vendor payment, the entire payment made may be disallowed as a business deduction.

To Sum It Up

TDS on foreign payments is no longer just a tax compliance requirement. Businesses must evaluate taxability, DTAA eligibility, remittance documentation, RBI reporting obligations, and payment workflows before processing international transactions.

A structured compliance process covering withholding, documentation, remittance, and reconciliation can significantly reduce operational risk and avoid costly mistakes.

For businesses managing international payments at scale, maintaining organized transaction records and centralized payment visibility is just as important as understanding the applicable TDS rate.

Ready to simplify international payment operations? Cashfree Payments helps businesses manage cross-border transactions through structured payment workflows, centralized records, and RBI-compliant payment infrastructure.

FAQs

Is TDS applicable on foreign vendor payments?

Yes, if the payment is taxable in India under domestic tax law or the applicable DTAA.

Is TDS applicable on SaaS subscriptions?

It depends on the contractual rights granted. Some SaaS payments may qualify as royalty, while others may not attract TDS.

Does TDS apply on importing goods?

Generally, no. Pure import of goods transactions typically do not attract TDS.

Can DTAA reduce TDS rates?

Yes. DTAA provisions may reduce or eliminate TDS if valid documentation such as TRC and Form 10F is available.

What documents are required for foreign remittance compliance?

Common documents include Form 145, Form 146, TRC, Form 10F, invoices, agreements, and RBI purpose code details.

What happens if TDS is not deducted?

The payer may face interest, penalties, expense disallowance, and other compliance consequences under the Income Tax Act.

Who is responsible for deducting TDS on foreign payments?

The Indian payer making the remittance is responsible for deducting and depositing TDS where applicable.

Is Form 146 required for every foreign remittance?

No. The requirement depends on taxability, remittance value, and the specific compliance scenario.

What is the TDS rate for paying a US consultant?

Under domestic law (Section 393(2) / 396 of the Income Tax Act, 2025), the base withholding rate for Fees for Technical Services (FTS) is 20% (plus surcharge and cess). However, under Article 12 of the India-USA DTAA , this rate is capped at 15%, but only if the service satisfies the rigorous “Make Available” test. The TDS is 15% for when some technical knowledge, formulas, processes, or skills are shared. But the TDS is Nil when its a standard consultancy, like the consultant gives general marketing advice, financial strategy, or business advice.

Is TDS applicable on importing goods from China?

No, the Section 195 TDS is not applicable when you import goods from China or any other country. TDS generally applies to when you make payments for services, royalties, technical fees, etc.

What happens if I forget to file Form 15CA before remittance?

Banks usually block the foreign remittance until Form 15CA compliance is completed. If the remittance is processed without the required filing, a penalty of up to ₹1 lakh may apply under Section 271-I.