Everything You Need To Know About Withholding Tax

Withholding tax is essentially the sum deducted directly from the earnings of an individual by the payer or the employer. The payer or employer, in turn, has to pay the deducted amount as withholding tax on the earnings of the individual, to the income tax department.

Withholding Tax vs TDS: What is the difference? 

Most would say that the withholding tax meaning is not all different from that of TDS. However, that is not true. Although withholding meaning and TDS meaning are almost synonyms, there are two stark differences between the two.

  1. Withholding tax applies to NRIs and foreign vendors whereas TDS is for Indian nationals.
  2. TDS is applicable at the time the payee is paid. In other words, tax is deducted when the payment is made. In the case of withholding tax, a certain amount is withheld (or deducted) even before the tax is deducted at the time of payment. This additional/withheld/deducted amount before the actual TDS is then paid to the government.

The tax system in India in brief

To get a grasp on the concept of withholding tax, let us first understand the tax system of the Union of India. As per our constitution, only the Central Government has the authority to collect and levy taxes. Every individual, whose total annual income is more than the minimum limit for tax exemption has to pay income tax according to the slabs mentioned in the income tax act.

This tax will be calculated on the total earnings, including all sources of income of the previous year, in the respective assessment year. However, the amount to be paid by an individual also depends on their residential status in India.

Status of residency: Non Resident or Resident

The income tax liability and tax assessment of the individual are determined as per his/her residential status.

  • An individual is termed as a “resident” if they have stayed in India for at least the prescribed period during the previous financial year ( 1st April to 31st March):
    • 182 days or more in the previous year.
    • 60 days or more, and, has stayed in India for aggregate 365 days or more in the 4 years preceding the previous financial year.
  • Any individual who does not meet this requirement is called a “Non-Resident”.

Tax liability of Non-Resident

The tax liability of a non-resident individual is different from a resident individual. Ideally, their income from foreign sources (sources outside of India) is not taxable even if the amount is remitted to India.

However, a non-resident individual is liable to pay tax on the Indian source of earnings (income from sources within the union of India), such as:

  • Income generated from businesses in India or earnings from a property in India
  • Salary paid for service provided in India
  • Interest, royalty and fees for technical services paid by an Indian resident

Now that you have a comprehension of the resident and non-resident status of an individual and the tax liability of a non-resident individual, you can better understand what is withholding tax.

What is the Withholding tax?

Withholding tax, in essence, is an obligation on the payer (an Indian individual or company who has sought the services of the non-resident individual) to withhold a certain amount as tax, while initiating the payment for the services received, such as contract, professional services, salary, commission, rent, etc. The amount to be withheld is prescribed as per the withholding tax rates specified by the income tax act.

In simple terms, withholding tax is mainly applicable to non-resident Indians. The example below will further simplify the process.

Example: A is a non-resident software professional. B, a resident of India, sought the services of A. For rendering the services, A charged Rs 40,000/-. B made a payment of Rs 36,000/- and withheld Rs 4,000/- as tax. Now, it is the liability of B to pay the withheld amount as tax for the services received from A to the income tax department of the Government of India. A can later claim the income tax credit while filing for income tax returns.

The direct tax provisions under withholding tax

  • According to section 195 of the Income Tax Act, it is the obligation or liability of the payer, who is responsible for making the payment, to deduct the tax at source from the payment, before making the payment or before initiating the online transaction to the non-resident individual.
  • If the payment is not taxable, then the payer should present an application to the assessing officer to determine the appropriate sum chargeable under the income tax act. The tax should then be deducted only on the chargeable sum.
  • The tax should be deducted as per the withholding tax rates prescribed by the Income Tax Act.
  • The payer then has to pay the prescribed amount, deducted as tax, to the Income Tax department.

Withholding tax rates

The prevailing withholding tax rates applicable on payment made to non-residents are:

  • Interest — 20%
  • Dividends paid by domestic companies — Nil
  • Royalties — 10%
  • Technical services — 10%
  • Other services
    • Individual — 30% of the income
    • Companies — 40%of the of net income

These are general rates and do not apply to countries with whom India has a Double Taxation Avoidance Agreement (DTAA).

As you can see, the withholding tax is mainly applicable to non-resident individuals. And the non-resident individuals can take the benefit of this income tax credit while filing their income tax returns.

Withholding Tax Due Dates For Payment and Filing of Returns

Following are the due dates for both the filing of tax returns and payment.

Due date for withholding tax payment 

In this case, the last date for the payment is the 7th of the same month in which the withholding tax is deducted. But this doesn’t apply for the month of March; the due date, in this case, will be on the 30th of April.

Due dates for quarterly filing of withholding tax returns

An important point to note about withholding tax is that it is assessed quarterly. In other words, the tax returns are filed quarterly. The returns must also include information about the payee and the total (deducted) tax for the quarter. 

The payer of the withholding tax must also provide a tax deduction certificate every quarter to the payee. This certificate can be retrieved online via the TRACES portal. The table below lists the specific quarters, the due dates for filing of returns, and the forms required.

QuarterForms (Tax Statements)Due Date
Q1 (April – June)Form 24Q, Form 26Q ; Form 27Q , Form 27EQ15th July
Q2 (July – September)Form 24Q, Form 26Q ; Form 27Q , Form 27EQ15th October
Q3 (October – December)Form 24Q, Form 26Q ; Form 27Q , Form 27EQ15th January
Q4 (January – March)Form 24Q, Form 26Q ; Form 27Q , Form 27EQ15th May

Withholding tax Certificate:(not mandatory that this has to be a separate heading, you can place it in a suitable way)

Withholding Tax – FAQs

  • What is Form 24Q?

It’s the quarterly statement of the Tax Deducted at Source (TDS) from salaries.

  • What is Form 26Q?

It’s the quarterly statement of the Tax Deducted at Source (TDS) from all other sources excluding salaries.

  • What is Form 27Q?

It’s the quarterly statement which contains the details of tax deduction from dividends, interest, or other sources that are paid to non-resident Indians.

  • What is Form 27EQ?

It’s the quarterly statement of the Tax Collected at Source (TCS).

  • Who qualifies as a resident Indian and an NRI?

To check the status, one has to take the total stay into consideration .ie., for the previous year which starts on 1 April and ends 31 March. To be a resident Indian, the assessee must have either stayed in India for (I) atleast 182 days in the previous year or (ii) more than 60 days in the previous year, and must have stayed in India for a total of atleast 365 days in the previous 4 years leading up to the previous year.

If the aforementioned conditions aren’t met, the taxpayer receives an NRI status.

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