Withholding Tax also called as Retention Tax is the obligation of the taxpayer to withhold tax when making payments under specific heads (such as rent, commission, payment for professional services, salaries, contracts, etc.) at the rates that have been specified in the current tax regime.
According to a publication by the India Law Offices:
“The provisions of Withholding Tax are in the nature of machinery provisions applicable to the payer of the income to enable easy collection and recovery of tax and are independent of the charging provisions which are applicable for the recipient of the company.”
Provision for Direct Tax:
In cases where payments are to be made to Non-Resident Indians, the payer is obligated to deduct at source. Section 195 of the Income Tax Act, 1961, states that the obligation lies on the person responsible for the payment to deduct taxes at source at the time of payment (or at the time of the credit of the income to Non-Resident Indian’s account).
Withholding Tax Rates:
Currently, the Withholding Tax rates for payments to Non-Resident Indians is as follows:
| # | Heading | Rate |
| 1 | Interest | 20% |
| 2 | Dividends paid by Domestic Companies | Nil |
| 3 | Royalties | 10% |
| 4 | Technical Services | 10% |
| 5 | Any other services: Individuals | 30% of income |
| 6 | Any other services: Companies | 40% of the net income |
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:
- 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.
- For non-specified types of interest, the Withholding Tax threshold limit is Rs.5,000.
- 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.
- If the PAN(Permanent Account Number) of the individual is not made available, the Withholding Tax rate will be the higher of:
- 20%, or
- The rate specified in the relevant provisions of the Income Tax Act, 1961, or
- The rates in force.
- “Royalty” also includes consideration for the use of (or right to use) computer software.
| Nature of Payment | Payment Threshold for Withholding Tax | Withholding Tax Rate |
| Specified types of interest | None | 10% |
| Non-specified types of interest | Rs.5,000 | 20% |
| Professional or technical services | Rs.30,000 | 10% |
| Commissions and brokerage | Rs.5,000 | 10% |
| Rent of plant, machinery, or equipment | Rs.1,80,000 | 2% |
| Rent of land, building, or furniture | Rs.1,80,000 | 2% |
| Contractual payments (except for Individuals / HUF) | Rs.30,000 (single payment) Rs.75,000 (aggregate payment) |
2% |
| Contractual payments to Individuals / HUF | Rs.30,000 (single payment) Rs.75,000 (aggregate payment) |
1% |
| Royalty / Fees for technical services | Rs.30,000 | 10% |
Withholding Tax Rates for Payments to Non-Resident Companies:
It’s important to note that:
- Percentages are to be increased by surcharge, education cess, and secondary and higher education cess to arrive at the effective rate of Withholding Tax.
- Income arising from units of specified mutual funds are exempt from taxation in the hands of unit-holders.
- Dividends received from Indian companies are exempted from tax in the hands of the shareholder.
- 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.
- 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.
- If the PAN (Permanent Account Number) of the individual is not made available, the Withholding Tax rate will be the higher of:
- 20%, or
- The rate specified in the relevant provisions of the Income Tax Act, 1961, or
- The rates in force.
- There is specific information that the payer is required to furnish (whether these payments are subject to taxation or not).
| Nature of Payment | Withholding Tax Rate |
| Dividend | 20% |
| Interest on foreign currencies (subject to certain conditions) | 5% |
| Interest on money borrowed in foreign currency under a loan, or through long-term infrastructure bonds (or rupee denominated bonds) – time period for borrowing is July 2012 to July 2015 | 5% |
| Interest on investment in long-term infrastructure bonds issued by Indian company (rupee denominated bonds or government securities) | 5% |
| Royalty | 25% |
| Technical fees | 25% |
| Long-term capital gains (other than exempt income) | 20% |
| Income by way of winnings from horse races | 30% |
| Other Income | 40% |
