TDS On Foreign Payments: What Every Indian Business Should Know Before Sending Money Outside The Cou

TDS on Foreign Payments: What Every Indian Business Should Know Before Sending Money Outside the Country

These days companies in India often send money outside the country. A company might pay an expert for help buy software from a company abroad pay money for using a patent or give interest to a foreign lender. For businesses the process seems easy: get the bill change the amount to rupees and send the money.

There is one important thing to think about before sending the money to the bank: Is tax needed to be taken out in India?

This is where TDS on payments becomes important. A payment to a country is not always taxed in India and just sending the money outside does not mean that the rules about TDS in India can be ignored.

The first thing is to find out if the money being paid is considered taxable in India.

What is TDS on a payment?

When a person in India pays money to a non-resident or a company outside the country tax may need to be taken out at the source if the amount's taxable in India. In the past this was mainly covered by Section 195 of the Income-tax Act, 1961.

From 1 April 2026 the Income-tax Act 2025 applies. The rules about TDS have been. The new rules for payments to non-residents are in Section 393. The Income Tax Department has said that the new Act keeps the TDS rates and limits but presents the rules in a more organized way.

This change is important for businesses that keep records of their money and taxes. Payments made up to 31 March 2026 are still covered by the Income-tax Act, 1961. Payments made from 1 April 2026 are covered by the Income-tax Act, 2025.

The main idea however stays the same: decide if the payment is taxed in India then find the right rate and finally complete the TDS and payment rules.

Which foreign payments can require TDS?

There is no TDS rate for every payment to a foreign company. The tax treatment depends on what kind of payment it's who gets the money the rules of Indian tax law and if it applies the Double Taxation Avoidance Agreement, also known as DTAA.

Some common cases include:

Money paid as interest to a non-resident may be taxed in India depending on the rules.

Money paid as royalty to a company may require TDS if the income is taxed in India.

Fees for services may also require TDS depending on what kind of services are offered the local laws and the DTAA.

Services offered by a company need to be checked carefully. Just because the company is outside India does not mean there is no TDS obligation.

Payments for software, cloud services, subscription deals, licenses and similar digital transactions also need a look, based on the actual rights received the contract and tax rules.

On the hand some payments may not be taxed in India. For example buying goods from a supplier may not require TDS just because the supplier is outside India.. The full details and what really happened must be checked before deciding.

That is why copying a TDS rate from a chart without understanding the situation can cause problems.

The importance of Section 9 and DTAA

One of the important parts of looking at taxes on foreign payments is checking if the income is considered to come from India or is otherwise seen as coming from India.

In the past Section 9 of the Income-tax Act had rules about income that was considered to come from India. For payments to non-residents these rules are very important because the recipient may not have any office or people in India.

For example imagine an Indian company hires a technical expert. The expert works from outside India. Sends a bill to the Indian company. The Indian company cannot just say there is no TDS because the expert never came to India.

The local laws need to be checked. Then the relevant DTAA if it applies needs to be considered.

A DTAA can help avoid being taxed in India if the conditions of the agreement are met. Depending on the type of income ideas like Permanent Establishment profits from business, royalty and fees for services can be important.

That is why a proper check on payments usually involves three questions:

Is the payment taxable under Indian local laws?

If yes does the DTAA offer an better way?

What rate should actually be used after looking at the laws the treaty and any extra taxes?

What rate of TDS should be taken out?

The answer depends on the type of income and the tax rules. Section 393 of the Income-tax Act 2025 has the rules for non-residents including a part that covers interest and other money that is taxed and not part of salary. The official rules also have section codes for reporting these deductions.

It is important to know that the local tax rate is not always the rate. If a DTAA applies and the conditions are met the rate from the agreement may be better.

For example suppose an Indian company needs to pay ?10 lakh to a company for a service that is taxed in India. If the local TDS rate is higher than the rate in the DTAA the treaty rate may be used, as long as the necessary rules and documents are followed.

The company should not just assume that the DTAA rate can be used without checking. The tax status of the company a Tax Residency Certificate and other necessary papers may be important.

Surcharge and the Health and Education Cess also need to be taken into account where they apply. The current guidance from the Income Tax Department says that the Health and Education Cess is usually 4% of the income tax plus any applicable surcharge.

An example in practice

Imagine ABC Private Limited in India gets a bill of ?10,00,000 from a company for technical help.

Before paying the ?10 lakh ABC should not just send the money right away.

It should first check,

What exactly did the foreign company provide?

Is the payment taxed in India?

Is it royalty, fees for services, business profits or something else?

What does the relevant DTAA say?

Does the foreign company have a Permanent Establishment or another taxable presence in India?

What rate of TDS applies?

Are there any surcharge and cess rules?

After the tax check is done ABC can find out how much money should be sent to the company and how much should be given to the Indian government as TDS.

The role of Form 15CA

Form 15CA is a part of following the rules for sending money outside the country.

Under the system Form 15CA was used to report payments to a non-resident or foreign company. It was generally needed before sending the money except for some cases listed in the rules.

The old Form 15CA had four parts.

Part A was for payments that were taxed and the total amount or total of payments was not more than ?5 lakh in the financial year.

Part B was for payments that were taxed and the total amount or total of payments was more than ?5 lakh and the company had an order or certificate from the Assessing Officer.

Part C was for payments that were taxed and the total amount or total of payments was more than ?5 lakh and a Chartered Accountants certificate in Form 15CB was received.

Part D was for payments that were not taxed under the Income-tax Act.

The rules also list some situations where Form 15CA is not needed such as transactions and some personal payments that do not need approval from the RBI. So Form 15CA should not be seen as a form that must be filled for every payment outside the country. The purpose of the payment matters.

What is Form 15CB?

Form 15CB is a certificate given by a Chartered Accountant in some cases. It is basically a tax determination certificate.

Under the rules if a taxable payment or total of payments to a non-resident was over ?5 lakh in the financial year and the company did not get an order or certificate from the Assessing Officer, Form 15CB was needed before filling in Part C of Form 15CA.

The Chartered Accountant checks things like the type of payment if it is taxed in India, the rules of the DTAA the tax rate, the TDS amount and other details.

For example if an Indian company has to pay ?18 lakh to an expert and the payment is taxed in India the company may need a proper tax check before sending the money. If the conditions for Form 15CB are met the certificate from the Chartered Accountant becomes a part of the process.

What changed from 1 April 2026?

This is one of the important recent changes.

The Income-tax Act 2025 started on 1 April 2026. The old Forms 15CA and 15CB now have versions under the new system: Form 145 is like Form 15CA and Form 146 is like Form 15CB.

The Income Tax Department has also said that the new system keeps the limits and similar main rules for foreign payments. Under the rules the related rules are linked to Section 397(3)(d) and the forms are covered by the Income-tax Rules, 2026.

There is also a change in how things are done. Under the system if the relevant Assessing Officer’s order or certificate is received and Part B of Form 145 is filed then Part C is not needed. This removes the duplication that was there, in the system.

So companies that send money outside the country after 1 April 2026 should use the forms and rules from the new Act instead of using the old Form 15CA/15CB terms without thinking.

What documents should be checked

Before handling a payment the finance team or the accounts team should ideally gather the invoice, agreement or purchase order information about the foreign person receiving the money what the services or goods are which country the person lives in Tax Residency Certificate if needed the correct tax identification details and any other papers needed to get treaty benefits.

The agreement is especially important.

For example an invoice might just say "consultancy charges." That description alone might not be enough to know if it is taxable. The agreement might show if the payment is for services, software rights, access to a platform, reimbursement of expenses or something else.

The payment purpose code used for banking and foreign exchange reporting should also match the transaction.

Common errors companies make

One mistake is thinking that every payment to a country is subject to TDS.

The opposite mistake is just as dangerous: thinking no TDS is needed because the person is not in India.

Another error is using a DTAA rate without getting or checking the papers.

Some companies only look at the invoice amount. Forget about the agreement. This can lead to classification.

Another problem is submitting the remittance form after the payment is already done. Form 15CA should be filled before the payment and the Income Tax Department clearly says this.

Companies should also watch the change to the Income-tax Act, 2025. For payments made on or after 1 April 2026 the new rules and forms are in place. The Income Tax Department has said the TDS responsibility depends on the law that's in effect for the year and the date of the payment or when it is credited.

A way to handle any foreign payment

Before approving a foreign transfer the accounts team can follow a simple process.

First figure out what the payment is for.

Second find out where the person receiving the money lives and their residential status.

Third check if the payment is taxable under law.

Fourth look at the DTAA if it applies.

Fifth find the TDS rate, including any surcharge and cess.

Sixth decide if the remittance form and CA certificate are needed.

Seventh, deduct and pay the TDS on time.

Finally finish the payment and keep all the supporting documents for any future checks or audits.

This process might seem longer than making a bank transfer but it can stop notices, interest, penalties and problems later.

Conclusion

Foreign payments are now a part of business in India but the tax side of these payments cannot be decided just by looking at where the money is going.

The real question is whether the income in that payment is taxable in India.

Section 195 of the Income-tax Act 1961 was the rule for TDS on payments to non-residents. Starting on 1 April 2026 the Income-tax Act 2025 has changed the TDS system with Section 393 covering TDS on kinds of payments including those to non-residents. The main idea is similar. People must use the new rules and forms.

For payments under the system Form 145 and Form 146 are like the older Form 15CA and Form 15CB with the rules still focusing on the type, tax status and amount of the payment.

The safest way is not to ask, "How much should I send?"

A better question is, "What is the payment for is it taxable in India what does the DTAA say and what needs to be done before the money leaves India?"

This small change, in thinking can make foreign payment compliance more accurate and much easier.