Indian tax law makes the payer responsible for withholding tax at the moment of payment, not the recipient. If you operate an Indian subsidiary, you withhold TDS on every salary, every contractor invoice, every rent payment, every interest payment — and you remit it monthly to the government on behalf of the recipient. Getting this wrong is one of the more expensive mistakes a foreign-owned subsidiary makes.
The three regimes you care about
| What you pay | Section | Typical rate | Frequency |
|---|---|---|---|
| Salary to employees | 192 (or 392 from 2026-27 under ITA 2025) | Slab rates | Monthly TDS, quarterly 24Q return |
| Contractor / consultant fees | 194J / 194C (or 393 from 2026-27) | 10% (194J) / 1-2% (194C) | Monthly TDS, quarterly 26Q return |
| Rent above threshold | 194-I | 10% land/building, 2% plant/machinery | Monthly TDS, quarterly 26Q |
| Payments to foreign parent / non-residents | 195 | Treaty rate or domestic rate, whichever is lower | At the time of payment |
Salary TDS — Section 192 (and Section 392 from FY 2026-27)
Salary TDS is computed by estimating the employee's annual tax liability at the start of the year (taking their declared deductions, regime choice, HRA, 80C investments) and deducting 1/12th of that liability from each monthly payslip. By the year end, the total deducted should equal the actual liability. If it under-deducts, the employee pays the balance at ITR filing; if it over-deducts, the employee gets a refund.
Under the Income-tax Act 2025, the equivalent section is 392. The mechanics are largely unchanged for salary; the citation moves and the certificate name changes from Form 16 to Form 130. We're in the transition year.
Year-end TDS reconciliation, run by your consultant
FastLegal's consultant runs the year-end TDS true-up automatically for every employee, surfaces under-deductions before the final March payslip, and ensures Form 16 / Form 130 reconciles to the rupee against the 24Q return. Your CFO doesn't field 'why didn't I get my refund' questions in July.
Contractor TDS — 194J and 194C
When your subsidiary pays Indian contractors / consultants for services, TDS applies as follows:
- Section 194J — professional / technical services (developers, lawyers, CAs, consultants): 10% on the gross invoice value, withheld at the time of credit or payment, whichever is earlier.
- Section 194C — works contracts (cleaning, security, AMC, construction): 1% for individual / HUF, 2% for other entities, on payments above ₹30,000 single invoice or ₹1L aggregate per year.
- Section 194Q — purchase of goods above ₹50L aggregate per year from any seller: 0.1% TDS.
Under ITA 2025, all non-salary TDS consolidates under section 393 — a unified table with subsection 393(1) for residents, 393(2) for non-residents, and 393(3) for any person. Rates remain materially similar; the regime structure is the change.
Section 195 — when you pay the foreign parent
This is the regime that catches foreign-owned subsidiaries off guard most often. When your Indian subsidiary makes payments to non-residents — typically royalties to the foreign parent for software / IP licensing, management fees, technical services fees — Section 195 requires withholding at the moment of remittance.
The applicable rate is the lower of the Indian domestic rate and the rate under the relevant Double Taxation Avoidance Agreement (DTAA). For royalties paid by an Indian subsidiary to a US parent, the DTAA caps the rate at 15%. For fees for technical services / fees for included services, 15% under the US treaty (lower than the 25% domestic non-resident rate).
- Withhold the TDS at the time of remittance.
- File Form 15CA (online declaration) and obtain Form 15CB (CA certificate) before remittance through your AD bank.
- Issue Form 16A (or successor under ITA 2025) to the foreign recipient.
- Foreign recipient can claim foreign tax credit in their home jurisdiction against this withholding.
What the monthly TDS cycle actually looks like
- Day 1 of the month: TDS withheld on every salary, every paid invoice, every payment to non-residents during the prior month.
- Day 7 of the next month: TDS remitted via Challan 281 to the government.
- Within 30 days: TDS certificates (Form 16A for non-salary) issued to recipients.
- Quarterly (Jul / Oct / Jan / May): 24Q (salary), 26Q (resident non-salary), 27Q (non-resident) returns filed.
- Annual (15 June): Form 16 (salary) and consolidated Form 16A issued.
Frequently asked questions
Can we avoid Section 195 TDS by routing payments through a Singapore holdco?+
Treaty-shopping arrangements are scrutinised under GAAR and the Principal Purpose Test (PPT). A holdco with substance — real employees, decision-makers, business activity — can be defensible. A pure conduit will be denied treaty benefits.
What if the foreign parent provides services under a master services agreement?+
Section 195 still applies. The character of the payment (services vs. royalties vs. business profits) drives the treaty rate. Get a tax opinion before signing the MSA so the withholding rate is documented.
How do we get tax credit in the US / UK for India TDS?+
Through your home-country foreign tax credit mechanism. The US allows credit under IRC §901-§905 against US federal tax; the UK allows credit under the India-UK DTAA Article 23. You need the Form 16A and the Indian challan as supporting documentation.
Are TDS rates lowering under ITA 2025?+
Slightly, in some categories. The major change is structural — consolidation of all non-salary TDS under Section 393 with three subsections. Salary TDS under Section 392 is materially unchanged in rate structure.
Stop reading circulars. Start running clean payroll.
Every FastLegal plan ships with a dedicated payroll consultant — a real human who runs your PF, ESI, PT, TDS and Form 16 issuance, configured to your salary structure, your state, and your hiring plan. You sign off. We do the rest.