Withholding Tax - Complete Guide

The Central Government of India is the body authorized to collect income taxes from everyone whose income exceeds the maximum exemption limit.

The rates of taxation are prescribed in the Income Tax Act, and the total tax payable will be calculated on the income pf the previous year, to be paid in the year of assessment.

The total income of the individual, however, is determined on the basis of his or her residential status in India.

Determining the Status of Resident Indian or Non-Resident Indian

The status of Resident Indian or Non-Resident Indian is determined after analyzing the total duration of the assessee’s stay in India during the “previous year” (from the 1^st of April to the 31^st of March).

To qualify as a Resident Indian, the assessee must have stayed in India for:

1. 182 days or more in the previous year, or
2. 60 days or more, and has been in India for an aggregate of 365 days or more in the 4 years preceding the previous year.

Anyone who does not satisfy either of the above requirements is in the category of a Non-Resident Indian.

Tax liability of Non-Resident Indians in India:

Non-Resident Indians are liable to taxation if their income arises in India, as under:

1. Income earned from interest, royalties, and fees for technical services – which are paid for by an Indian Resident – is chargeable to tax.
2. Salaries paid for services in India are chargeable to tax.
3. Income that arises from businesses running in India is chargeable to tax.
4. Income that arises from property in India is chargeable to tax.

Withholding Tax Rates

Currently, the Withholding Tax rates for payments to Non-Resident Indians is as follows:

These are general rates and are applicable in respect of countries with which India does not have DTAA (Double Taxation Avoidance Agreement).

Withholding Tax Rates for Payments by Resident Companies

It’s important to note that:

1. The payer is obligated to withhold tax only if the total payment made to a single person (except unless specified otherwise) in a single tax year is above the limits specified in the table below.
2. For non-specified types of interest, the Withholding Tax threshold limit is Rs.5,000.
3. In cases where interest is received from banks, co-operative societies, or deposits with post offices, the Withholding Tax threshold limit is Rs.10,000.
4. If the PAN(Permanent Account Number) of the individual is not made available, the Withholding Tax rate will be the higher of:
   1. 20%, or
   2. The rate specified in the relevant provisions of the Income Tax Act, 1961, or
   3. The rates in force.
5. “Royalty” also includes consideration for the use of (or right to use) computer software.

Withholding Tax Rates for Payments to Non-Resident Companies

It’s important to note that:

1. Percentages are to be increased by surcharge, education cess, and secondary and higher education cess to arrive at the effective rate of Withholding Tax.
2. Income arising from units of specified mutual funds are exempt from taxation in the hands of unit-holders.
3. Dividends received from Indian companies are exempted from tax in the hands of the shareholder.
4. Tax at the rate of 15% applies to short-term capital gains that arise on the transfer of shares of a company, or units of an equity-oriented fund, if they are subject to STT.
5. There is no tax liability for long-term capital gains that arise on the transfer of shares of listed companies (through stock exchanges), or units of an equity-oriented fund, if they are subject to STT.
6. If the PAN (Permanent Account Number) of the individual is not made available, the Withholding Tax rate will be the higher of:
   1. 20%, or
   2. The rate specified in the relevant provisions of the Income Tax Act, 1961, or
   3. The rates in force.
7. There is specific information that the payer is required to furnish (whether these payments are subject to taxation or not).

Difference Between Withholding Tax and TDS

Withholding tax and TDS are essentially the same. Under the Indian tax regulations, tax must be deducted at source when making certain payments such as salary, rent, commission, professional fees, etc. The amount is then remitted to the Government of India on the deductee's behalf.

Withholding tax refers to the amount withheld when making a payment. The amount so withheld is then remitted to the Government of India. While TDS is synonymous with payments in India, withholding tax is a term that is more common when it comes to cross-country payments.

Withholding Tax Payment Due Date

The due date for withholding tax payment is the 7th day of the month in which withholding tax is deducted. However, for the month of March, the due date for withholding tax payment is 30 April.

Withholding Tax Return Filing Due Date

Withholding tax returns must be filed on a quarterly basis and must contain the information of each payee as well as the amount of tax deducted for that specific quarter. Here is a table with the due dates for filing withholding tax returns: