Whenever your Indian subsidiary pays a non-resident — including the foreign parent itself — Section 195 of the Income Tax Act requires withholding at the rate prescribed by the Act, or by the relevant Double Taxation Avoidance Agreement (DTAA), whichever is lower. The withholding happens at the moment of remittance, not at year-end.
Rate matrix — what to withhold on what
| Payment type | Domestic IT Act rate | Typical DTAA cap |
|---|---|---|
| Royalty (software licensing, IP) | 10% (Sec 9(1)(vi)) | 10-15% (most treaties) |
| Fees for Technical Services (FTS) / Fees for Included Services (FIS) | 10% | 10-15% |
| Interest | 20% | 10-15% |
| Dividend | 20% (post 2020 reform) | 10-15% |
| Business profits (without PE in India) | Not taxable in India | Not applicable |
| Capital gains on shares (unlisted, sold by non-resident) | 12.5% (LT) / 30% (ST) | Often exempt or capped |
| Rent (property in India paid to non-resident) | 30% | Usually no treaty relief |
DTAA interplay — claiming the lower rate
To apply the DTAA rate (lower than the domestic rate), the payer needs:
- Tax Residency Certificate (TRC) of the recipient from their home country's tax authority.
- Form 10F (online declaration by the recipient on the Indian portal).
- No-PE declaration if the payment type requires it (FTS, business profits).
- The treaty itself between India and the recipient's country.
Without these documents, the payer must withhold at the domestic rate. With them, the lower DTAA rate applies. Document this in your file — every remittance gets queried at audit.
DTAA optimisation handled per remittance
FastLegal's tax specialist categorises each cross-border payment from your Indian subsidiary, applies the correct DTAA rate, obtains the supporting TRC / 10F / no-PE declarations from the foreign recipient, and files the Form 15CA / 15CB before remittance. You get a clean documentation trail your AD bank accepts on first review.
Form 15CA and 15CB — the gatekeeping mechanism
Before any cross-border payment from India is processed by the Indian AD bank, two forms must typically be filed:
- Form 15CA — online declaration by the remitter on the Income Tax portal. Four parts (A, B, C, D) depending on amount and taxability. Part D is the no-tax-liability declaration; Part C is the most common for taxable remittances.
- Form 15CB — certificate from a Chartered Accountant confirming the nature of the payment, applicable TDS rate, DTAA relief, etc. Required for most Part C remittances above ₹5L per year.
The remitter files 15CA online, gets the acknowledgement, hands it to the AD bank with the 15CB. The bank refuses the remittance without both. The IT department reviews them post-facto.
Common scenarios for foreign-owned subsidiaries
- Software licensing — your Indian subsidiary pays the US parent for using the parent's software platform. Royalty. US treaty rate 15%, domestic 10%. Withhold 10% (lower).
- Management fees — Indian subsidiary pays parent for shared services, finance, HR. Fees for Technical Services. US treaty rate 15% (technical knowledge made available), domestic 10%. Withhold 10%.
- Interest on intercompany loan — Indian subsidiary borrows from US parent. US treaty rate 10-15%, domestic 20%. Withhold 10-15%.
- Dividend distribution — Indian subsidiary distributes profits to US parent. US treaty rate 10-15%, domestic 20%. Withhold 10-15%.
- Reimbursement of expenses — typically not taxable if pure cost reimbursement without markup. File Form 15CA Part D (no tax). Document the cost-reimbursement nature in the agreement.
Common mistakes
- Treating a payment as 'reimbursement' when it includes a markup, so Section 195 applies to the markup portion.
- Failing to obtain TRC / 10F, so domestic rate applies (significantly higher).
- Mis-categorising royalty as business profits (avoids Indian tax but the foreign parent might create a PE).
- Forgetting that Section 206AA applies — if the non-resident doesn't have an Indian PAN, the rate becomes 20% minimum regardless of DTAA.
- Filing 15CA / 15CB after the remittance; the bank should reject this, but sometimes it slips through and is caught at audit.
Frequently asked questions
Does Section 195 apply to payments by an Indian individual / contractor to a non-resident?+
Yes — the section applies to any Indian-resident payer (individual, firm, company) making any payment chargeable to tax to a non-resident. The form mechanics are the same.
What about software-as-a-service (SaaS) subscriptions paid by my Indian subsidiary to a US SaaS vendor?+
Mixed. The Supreme Court Engineering Analysis judgment held that pure 'shrink-wrapped' software subscriptions are not royalty — so no Section 195 withholding. SaaS with bespoke configuration / right-to-use complex IP can still be royalty. Get an opinion before assuming no withholding.
How long does Form 15CB cost to obtain?+
₹1,000-5,000 per certificate depending on the CA and the complexity of the remittance. We bundle this in our cross-border bookkeeping plan.
Do we file 15CA / 15CB for every remittance, even small ones?+
Aggregate threshold matters. Remittances under ₹5L per year per recipient — Part D of 15CA only, no 15CB. Above ₹5L — Part C, with 15CB. Some remittance types (e.g. import of goods under invoice) are exempt from filing entirely.
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