Withholding Tax (TDS on Payments to Non-Residents)

What is Withholding Tax?

The WTH full form is withholding Tax. It is a type of tax imposed on specific types of payments made by Indian persons to non-resident Indians and companies. These payments come under section 195 of the Income Tax Act, 1961.

This tax is also known as the retention tax. It should be deducted and deposited with the government by the payer. The payer is the person who is making the payment to the non-resident company or indian. The following are the persons who can be certified as the payers:

• Individuals: It includes all the individual indian whomakes a specific payment to the NRI.
• Companies: The domestic companies that are operating in India have to deduct the withholding tax while they make the payments to the non-residents.
• Partnerships and LLPs: This includes the partnership firms and LLPs that make the specified payments to the non-residents.
• Trusts and other persons: This includes the trusts, AOPs, BOIs, etc., that have made the payment to non-residents.

Calculation of Withholding Tax Liability

The calculation process of withholding tax is very simple. All you need to do is follow the steps below:

Step 1: The payer has to find out whether the recipient of the payment should be a non-resident, whether they are an individual or a company.

Step 2: The payer has to check the rate of the withholding tax that is applicable to that specific payment.

Step 3: The said amount of tax should be deducted at the correct rate, and it needs to be paid to the government.

Step 4: The remaining payment will be provided to the non-individual party.

Step 5: Lastly, you have to pay the deducted tax directly to the government within the specified date.

How Does it Work?

The working process of withholding taxes is similar to the TDS process for payments made to Indians. This type of tax applies to the different types of payments, such as lottery winnings, royalties, dividends, interest, etc.

The payer who makes the payments is responsible for making the deductions and calculating the right amount of the withholding tax as per the income tax slab rates.