Sec 58 and sec 195 under income tax act,1961
This query is : Resolved
12 August 2011
With reference to provision of sec 58 and sec 195 whether we have to deduced TDS while making payment and depositing amount in NRO account, since wording used in sec 58 is tds is to be deduced when amount goes out of india and nro account balance remains in india
15 August 2011
Please provide complete fact
18 August 2011
Hi! Krishna, The facts are as follows:
Assessee is nri who has paid interest to party, who is also nri by directly depositing amount in his NRO Account without deducting TDS.
Now whether he has committed any default U/s 58 and whether that interest will be allowed to him as exp
Assessee is nri who has paid interest to party, who is also nri by directly depositing amount in his NRO Account without deducting TDS.
Now whether he has committed any default U/s 58 and whether that interest will be allowed to him as exp
23 July 2025
1. Section 58 of the Income Tax Act, 1961 (TDS on Payments Outside India)
Section 58 deals with the deduction of Tax Deducted at Source (TDS) for payments made by an assesse (including an NRI) to a non-resident party. The provision explicitly requires that if any payment is being made to a non-resident (NRI), the person making the payment must ensure that TDS is deducted as per the provisions outlined in the Income Tax Act.
2. Section 195 of the Income Tax Act, 1961 (TDS on Payments to Non-Residents)
Section 195 of the Income Tax Act is the core provision that governs the deduction of TDS on payments to non-residents, including NRIs. According to this section:
TDS must be deducted on any payment made to a non-resident, including payments for interest, royalties, dividends, and other incomes.
The payer (in this case, the NRI making payments to another NRI) is responsible for deducting TDS at the time of payment, before the amount is credited or paid out.
3. Is TDS Required When Depositing Amount into NRO Account?
When an NRI deposits interest in the NRO account of another NRI, the situation is a bit nuanced because it depends on whether the interest is being credited or actually paid outside India. The NRO account balance remains in India, and the payment is made to an NRO account, TDS provisions under Section 195 still apply, and TDS must be deducted even if the amount remains within India.
Key point: Interest payments made to non-residents are subject to TDS under Section 195. However, the specific question in your case is whether TDS is required if the amount remains within India (in an NRO account) versus being paid outside India.
4. Is There Any Default under Section 58 for Non-Deduction of TDS?
Since the interest is being paid directly into the NRO account of another NRI without TDS deduction, this could be a violation of the provisions under Section 195. If you fail to deduct TDS on an eligible payment (interest to an NRI in this case), you may have committed a default under Section 58, which also refers to the consequences of failure to comply with TDS obligations when making a payment.
5. Will the Interest Payment Be Allowed as an Expense?
The interest payment in question is allowed as an expense for the purpose of computing income under the Income Tax Act, but only if the TDS is properly deducted at the time of payment. In the case of non-deduction of TDS, the interest payment may not be allowed as an expenditure for tax purposes unless the TDS is deposited with the government along with applicable interest and penalties.
The failure to deduct TDS on the payment may result in the disallowance of the expense until the TDS is properly deducted and deposited. In such cases, penalties and interest may also apply.
6. What Happens If TDS Is Not Deducted?
If TDS is not deducted on payments to NRIs:
The payer (assesse) can be liable for penalties, and the income may be treated as non-compliant.
Additionally, the NRI receiving the interest might also face taxation at the time of filing their tax returns if the TDS is not deposited, and they may be liable to pay tax along with interest.
Possible Solutions:
The payer must deduct TDS at the applicable rate (for interest, generally 20% or the rate as per the Double Taxation Avoidance Agreement (DTAA) between India and the country of the NRI).
The payer must deposit the deducted TDS with the government, and once the tax is deposited, the expense of the interest payment can be recognized for tax purposes.
7. Conclusion:
Yes, TDS should have been deducted before the payment was made to the NRO account of the NRI.
Failure to deduct TDS under Section 195 could lead to a default under Section 58, and the interest payment might not be allowed as a deductible expense unless the TDS is subsequently paid.
You should rectify the situation by ensuring that TDS is deducted and deposited promptly and possibly file a revised return if necessary.
Section 58 deals with the deduction of Tax Deducted at Source (TDS) for payments made by an assesse (including an NRI) to a non-resident party. The provision explicitly requires that if any payment is being made to a non-resident (NRI), the person making the payment must ensure that TDS is deducted as per the provisions outlined in the Income Tax Act.
2. Section 195 of the Income Tax Act, 1961 (TDS on Payments to Non-Residents)
Section 195 of the Income Tax Act is the core provision that governs the deduction of TDS on payments to non-residents, including NRIs. According to this section:
TDS must be deducted on any payment made to a non-resident, including payments for interest, royalties, dividends, and other incomes.
The payer (in this case, the NRI making payments to another NRI) is responsible for deducting TDS at the time of payment, before the amount is credited or paid out.
3. Is TDS Required When Depositing Amount into NRO Account?
When an NRI deposits interest in the NRO account of another NRI, the situation is a bit nuanced because it depends on whether the interest is being credited or actually paid outside India. The NRO account balance remains in India, and the payment is made to an NRO account, TDS provisions under Section 195 still apply, and TDS must be deducted even if the amount remains within India.
Key point: Interest payments made to non-residents are subject to TDS under Section 195. However, the specific question in your case is whether TDS is required if the amount remains within India (in an NRO account) versus being paid outside India.
4. Is There Any Default under Section 58 for Non-Deduction of TDS?
Since the interest is being paid directly into the NRO account of another NRI without TDS deduction, this could be a violation of the provisions under Section 195. If you fail to deduct TDS on an eligible payment (interest to an NRI in this case), you may have committed a default under Section 58, which also refers to the consequences of failure to comply with TDS obligations when making a payment.
5. Will the Interest Payment Be Allowed as an Expense?
The interest payment in question is allowed as an expense for the purpose of computing income under the Income Tax Act, but only if the TDS is properly deducted at the time of payment. In the case of non-deduction of TDS, the interest payment may not be allowed as an expenditure for tax purposes unless the TDS is deposited with the government along with applicable interest and penalties.
The failure to deduct TDS on the payment may result in the disallowance of the expense until the TDS is properly deducted and deposited. In such cases, penalties and interest may also apply.
6. What Happens If TDS Is Not Deducted?
If TDS is not deducted on payments to NRIs:
The payer (assesse) can be liable for penalties, and the income may be treated as non-compliant.
Additionally, the NRI receiving the interest might also face taxation at the time of filing their tax returns if the TDS is not deposited, and they may be liable to pay tax along with interest.
Possible Solutions:
The payer must deduct TDS at the applicable rate (for interest, generally 20% or the rate as per the Double Taxation Avoidance Agreement (DTAA) between India and the country of the NRI).
The payer must deposit the deducted TDS with the government, and once the tax is deposited, the expense of the interest payment can be recognized for tax purposes.
7. Conclusion:
Yes, TDS should have been deducted before the payment was made to the NRO account of the NRI.
Failure to deduct TDS under Section 195 could lead to a default under Section 58, and the interest payment might not be allowed as a deductible expense unless the TDS is subsequently paid.
You should rectify the situation by ensuring that TDS is deducted and deposited promptly and possibly file a revised return if necessary.
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