When a startup in India or even a big company decides to get a foreign consultant or a Non Resident Indian (NRI) for some expert advice, the payment procedure is not as straightforward as a regular bank transfer. According to the Indian Income Tax Act, it is mandatory for you to deduct tax at source (TDS) before the funds are sent abroad.
Understanding these rules is very important as failure in following them could result in the tax department issuing heavy penalties and legal notices. At My Startup Solution, we assist businesses in managing these complicated international tax matters and we tell you in detail about TDS on consultancy fees paid to foreigners/NRIs with Rates, exemptions & DTAA procedures.
The Indian government wants to ensure that any income earned from an Indian source is taxed in India. Since it is difficult to collect tax from a person living abroad once they receive their payment, the law shifts the responsibility to the payer.
If you are hiring a consultant from the USA, UK, or any other country, you act as a tax collector for the government. You must deduct a specific percentage, deposit it with the Income Tax Department, and then pay the remaining balance to the consultant. Failure to do so means you might have to pay the tax out of your own pocket.
There are two primary sections under the Income Tax Act that govern these payments:
The rate of TDS depends on whether the consultant is an individual or a foreign company. Generally, the rates are as follows:
DTAA is a way to provide relief. It makes sure that a consultant is not taxed for the same income both in India and their home country.
To remain compliant and avoid a 20% flat tax, you will have to obtain the following details from the foreign consultant:
Following the correct workflow is essential to avoid the "Assessee in Default" status.
Before you can send money abroad through your bank, you must complete a digital "clearance" process.
Note: Usually, Form 15CB is mandatory if the payment is over 5 Lakhs in a financial year and is taxable in India.
Also Read: Managing Litigation in India While Living Abroad
Not every payment to a foreigner results in TDS. There are cases where you can be exempt from TDS, for example:
Ignoring the rules related to TDS can result in:
Tax laws get changed all the time. My Startup Solution is going to ensure that your business is fully compliant with the latest updates of the Finance Act. We help you in:
If you want smooth and mistake free international tax handling, do not hesitate to get in touch with MyStartup Solution at +91 7081220800. We make it easy for Indian entrepreneurs to do business globally.
Handling TDS on consultancy fees paid to foreigners is a matter of balance between Indian domestic laws and international treaties. Although the default rate under Section 195 can be high, it can be considerably lowered by means of a Tax Residency Certificate and the Double Taxation Avoidance Agreement (DTAA) benefits. It goes without saying that you should always have Form 15CA and 15CB ready before you make the remittance to comply with the law.
Under Section 195 of the Income Tax Act, the standard TDS rate is generally 20% plus applicable surcharge and 4% cess. However, if a DTAA applies, the rate may reduce to 10% or 15%, subject to documentation.
TDS must be deducted if the payment is chargeable to tax in India, meaning the income is deemed to accrue or arise in India. Section 195 governs such payments to non-residents, including individuals and foreign companies.
A Double Taxation Avoidance Agreement allows the payer to apply the lower tax rate between the Income Tax Act and the treaty rate. To claim benefits, the consultant must provide a Tax Residency Certificate and Form 10F.
Before remittance, Form 15CA (online declaration) and Form 15CB (CA certificate) are generally required. Additionally, PAN (if available), Tax Residency Certificate, Form 10F, and agreement copy are needed for DTAA compliance.
If a foreign consultant does not provide PAN, Section 206AA may trigger higher TDS deduction. However, DTAA provisions can override this requirement if valid TRC and prescribed documents are submitted to the payer.
Form 15CA is a declaration filed on the income tax portal before foreign remittance. Form 15CB is a Chartered Accountant’s certificate confirming taxability and TDS computation under Section 195 and applicable DTAA provisions.
TDS is not required if the income is not taxable in India. This must be certified by a Chartered Accountant in Form 15CB. Without proper justification, failure to deduct TDS may attract penalties.
Failure to deduct TDS may result in disallowance of the expense under Section 40(a)(i), interest liability under Section 201, and possible penalties. The tax department may also demand recovery from the payer.
In net-of-tax contracts, the payment must be grossed up. The payer increases the amount so that after deducting TDS, the consultant receives the agreed net sum. Grossing up ensures full compliance with Indian tax laws.
Yes, GST applies under the Reverse Charge Mechanism (RCM) when services are imported into India. The Indian company pays GST directly to the government and may claim input tax credit, subject to eligibility conditions.
FTS includes payments for managerial, technical, or consultancy services provided by non-residents. Such payments are taxable in India if they satisfy conditions under domestic law or applicable DTAA provisions, including “make available” clauses.
A Permanent Establishment refers to a fixed place of business of a foreign entity in India. If a PE exists, income may be taxed as business profits rather than FTS, changing the applicable TDS structure.
TDS deducted in any month must be deposited by the 7th of the following month. For March deductions, the due date is April 30. Quarterly TDS return in Form 27Q must also be filed timely.
Yes, if excess TDS is deducted, the foreign consultant can file an Indian income tax return and claim a refund. A valid PAN is usually required to process the refund and claim DTAA benefits properly.
For smooth and mistake free international tax handling, do not hesitate to get in touch with My Startup Solution at +91 7081220800. We make it easy for Indian entrepreneurs to do business globally.
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