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Understanding TDS on Foreign Remittances: Rates, Limits, and Its Effect

Learn about TDS on foreign remittance, including applicable foreign remittance TDS rules, rates, exceptions, and how it impacts your payments abroad

Written by : Knowledge Centre Team

2026-02-23

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7 minutes read

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As global integration has increased, cross-border payments have become routine for Indian individuals and companies in business and professional transactions. Indian businesses, freelancers, and professionals frequently make payments to overseas vendors, consultants, and investors for services, technology, intellectual property, and financial transactions. While these global transactions drive growth, they also bring tax responsibilities that cannot be overlooked.

Key Takeaways


  • TDS applies to payments to non-residents under Section 195 when remitting abroad for services, royalties, interest, or fees
  • If India has a Double Taxation Avoidance Agreement (DTAA) with the recipient’s country, payers may be eligible to apply a lower TDS rate instead of the standard domestic rate
  • Strict compliance (Form 27Q, PAN, and ITR disclosure) is essential to avoid penalties, disallowance of expenses, or payment delays
  • Remitters must obtain Form 15CA and a Chartered Accountant’s certificate in Form 15CB before initiating a transfer
  • TDS must be deducted at the time of credit or payment, whichever is earlier, making the timing of compliance critical

In India, the TDS system for foreign remittances is based on Section 195 of the Income Tax Act, 1961. This provision requires resident payers to deduct tax before sending certain payments to non-residents or foreign companies. The intent is simple: if income has a taxable connection with India, the government wants to collect its share before the money leaves the country. Ignoring these obligations can result in interest, penalties, or lengthy disputes with tax authorities.

This blog will break down how foreign remittance TDS rules actually work, who must deduct tax, and what rates apply to help you stay compliant while managing your global financial footprint effectively.

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What is TDS on Foreign Remittance?

TDS on foreign remittance is the tax deducted and paid to the Indian Government before transferring funds to a foreign account. In simple terms, when a payment to a non-resident is taxable in India, the payer must withhold a portion of the amount as tax, reducing the final sum received by the foreign recipient. The payer may be an individual, business, partnership firm, NRI, or even a foreign company making payments from India.

For instance, if an Indian advertising firm pays ₹12 lakh to a digital marketing agency in the United States for running an international campaign, and the payment is taxable under Section 195 and applicable DTAA provisions, the firm must deduct 10% TDS plus 4% cess before remittance. This means ₹1,24,800 is deposited with the tax authorities, and ₹10,75,200 is sent to the agency.

Section 195 of the Income Tax Act, 1961, governs this process, ensuring that income deemed to accrue in India is taxed before it leaves the country. This applies to payments such as technical fees, royalties, interest, dividends, consultancy charges, and rent for foreign assets.

How Section 195 Governs TDS on Foreign Remittances

Section 195 of the Income Tax Act, 1961, deals with Tax Deducted at Source (TDS) on payments made to Non-Resident Indians (NRIs) or foreign companies. It ensures that income taxable in India does not escape taxation merely because the recipient is a non-resident.

Who Must Deduct TDS?

Any person (resident or non-resident) making a payment to a non-resident or foreign company must deduct TDS. This includes individuals, businesses, partnerships, LLPs, companies, and government entities.

When Should TDS be Deducted?

TDS is deducted at the time the amount is credited to the non-resident’s account, or at the time of actual payment, whichever is earlier.

What Payments are Covered?

TDS on foreign remittance applies broadly to payments that are chargeable to tax in India, including:

  • Interest

  • Royalties

  • Fees for Technical Services (FTS)

  • Professional or consultancy income

  • Other business-related income earned by the non-resident

However, the key test is that the payment must represent taxable income in India for the recipient.

When Does Section 195 Not Apply?

If the remittance is a pure gift or a capital transfer not subject to Indian tax, foreign remittance TDS rules may not apply; however, strong documentation is still required to satisfy banks and tax authorities.

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Did You Know?

Unlike most domestic taxes, Section 195 has no minimum threshold; TDS must be deducted even on a ₹1 payment if it is taxable in India


Source: Income Tax

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TDS Rates and Thresholds on Foreign Remittances

Under the revised provisions of the Finance Act 2025 , tax deduction on foreign remittances becomes applicable only when the payment crosses the prescribed annual limit under Section 195. The applicable TDS rate depends on the nature and purpose of the remittance. The table below shows the revised TDS rates:

Type of Remittance

TDS Rate

Annual Threshold

Key Change in 2025

Education (self-funded)

5%

Above ₹10 lakh

Exemption limit increased from ₹7 lakh to ₹10 lakh; tax applies only beyond this limit

Medical treatment

5%

Above ₹10 lakh

Threshold revised upward to ₹10 lakh

Investments, loans, or other purposes

20%

Above ₹10 lakh

Higher exemption limit introduced

Overseas travel/tour packages

5% up to ₹10 lakh

₹10 lakh

5% applies till ₹10 lakh; 20% thereafter

Senior citizens (60+ years)

5% (where relevant)

Higher limit

Additional relief is mainly applicable to domestic income, not foreign remittances

Compliance Requirements on TDS on Foreign Remittances

Understanding the rules is just as vital as knowing the tax rates, as even a minor administrative oversight can lead to the permanent disallowance of business expenses. When making taxable payments abroad, the following rules must be followed:

  • Applicability of TDS: TDS applies to payments such as interest, royalties, professional fees, technical services, dividends, and other taxable income paid to non-residents.
  • Role of DTAA (Tax Treaties): Non-residents may benefit from lower tax rates under Double Taxation Avoidance Agreements (DTAA) as per Sections 90 and 91 of the Income Tax Act, 1961.
  • Reporting by banks (Form 27Q): Banks and financial institutions must report foreign remittance details in their quarterly TDS return using Form 27Q.
  • Mandatory PAN requirement: Under Section 206AA of the Income Tax Act, a valid PAN is mandatory for payments subject to TDS. If PAN is not furnished, tax will be deducted at an elevated rate of 20% or the prescribed rate, whichever is higher.
  • Disclosure in ITR: Individuals making foreign remittances must report these transactions in their Income Tax Return.
  • Form 15CA and 15CB Requirement: 
    • Form 15CA is required for taxable remittances
    • Form 15CB (CA certification) is needed if the taxable remittance exceeds ₹5 lakh

TDS Exemptions and Special Relaxations on Foreign Remittances

While TDS on foreign remittances is broadly applicable, the law recognises certain situations where tax deduction is reduced, relaxed, or completely exempted to avoid undue financial burden on taxpayers and genuine remitters.

  • Education Loans: If the remittance is funded through an approved education loan, tax deduction is either very low or fully exempt, depending on the nature of the payment.
  • Medical Treatment Payments: No tax deduction applies when money is sent directly to a foreign hospital or medical service provider instead of the individual.
  • Senior Citizens: While senior citizens get higher exemption limits for some domestic income, foreign remittance tax rules generally remain unchanged unless specified.

Conclusion

Understanding TDS on foreign remittance is vital for any Indian individual or business engaged in cross-border payments. Section 195 serves as a compliance requirement and a mechanism to safeguard India’s tax base on income paid to non-residents. With clear rates, structured rules, and treaty benefits under DTAA, both payers and recipients can navigate ‌international payments more confidently.

TDS deduction complexity becomes simple with proper planning, documentation, and professional support. Effective compliance not only avoids penalties and interest but also enhances financial transparency, ultimately making global remittances smoother and more predictable.

Glossary

  1. TDS: Tax Deducted at Source, a withholding mechanism where the payer collects tax at the time of payment to ensure revenue
  2. Non-Resident: An individual or entity not residing in India for tax purposes, making their Indian income subject to Section 195
  3. DTAA: Tax treaties between two nations to prevent double taxation, often offering lower TDS rates for cross-border remittances
  4. TRC: A document issued by foreign governments proving residency, required to claim lower tax rates under various DTAA treaties
  5. Section 195:  The specific Income Tax rule mandating TDS on all payments made to non-residents that are chargeable to tax in India
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FAQs

TDS on foreign remittance refers to the tax withheld by a resident payer on payments made to non-resident individuals or entities. Under Section 195 of the Income Tax Act, tax must be deducted at source before outward remittance to ensure Indian taxable income is covered in advance. This applies to remittances for fees, royalties, interest, and similar payments.

No TDS is required if the payment isn’t chargeable to Indian tax, if a lower/nil withholding certificate is obtained, or if income is fully exempt by law or treaty. Appropriate documentation is essential to justify the exemption during audits.

Yes. Under applicable DTAAs, beneficial lower withholding tax rates can be claimed if the non-resident provides a valid Tax Residency Certificate (TRC) and related documents. The payer must apply treaty rates when deducting TDS.

If TDS on foreign remittance isn’t deducted timely, the payer can be held liable for the tax with interest, penalty provisions, and late fee charges, as per the Income Tax Act. This can also delay remittances if banks flag compliance issues.

A non-resident recipient can claim a refund through their Indian ITR by showing excess TDS deducted beyond the actual tax liability. Proper documentation and TDS certificates are essential to support the refund claim.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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