Library / Income-tax Act, 2025: The Professional's Master Guide

31. Taxation of Non-Residents and Tax Treaties

31.1 The basic rule

A non-resident is taxed in India only on income that is received in India, or accrues or arises (or is deemed to accrue or arise) in India. Section 9, read with Schedule I, sets out when income is deemed to accrue in India. A non-resident may then claim the benefit of a tax treaty (DTAA) under section 159 if it is more beneficial.

Income deemed to accrue in India (section 9)	In simple words
Business connection	Income from a business connection in India, including a dependent agent who habitually concludes contracts
Significant economic presence (SEP)	Payments from Indian users above Rs. 2 crore a year, or systematic interaction with 3 lakh or more users in India, even without a physical presence
Property and assets in India	Income from any property, asset or source of income in India
Transfer of capital asset in India	Including shares of a foreign company that derive substantial value from Indian assets (indirect transfer)
Salary for services in India	Taxable in India wherever paid
Interest, royalty, fees for technical services (FTS)	Paid by a resident (with some exceptions) or by a non-resident for a business in India
Dividend by an Indian company	Taxable in India

31.2 Tax rates for non-residents

Income	Section	Old	Domestic rate
Dividends	207	115A	20%
Interest (general)	207	115A	20%
Royalty and fees for technical services	207	115A	20% (on gross, no expenses)
LTCG on listed equity (STT paid)	198	112A	12.5% above Rs. 1,25,000
LTCG on unlisted shares and other assets	197	112	12.5%
STCG on listed equity	196	111A	20%
Business profits through a PE	Normal		35% for foreign company, on net profit

Surcharge and cess apply on the domestic rates. Treaty rates are generally all inclusive, with no surcharge or cess on top.

31.3 Presumptive and special computations for non-residents

Business	Section	Old	Deemed profit
Shipping	61	44B	7.5% of gross receipts
Services and equipment for oil exploration	61	44BB	10% of receipts
Operation of aircraft	61	44BBA	5% of receipts
Turnkey power projects	61	44BBB	10% of receipts
Cruise ship operations	61	44BBC	20% of receipts
Services to resident electronics manufacturers	61	44BBD	25% of receipts
Head office expenses of a foreign company's PE	60	44C	Limited to 5% of adjusted total income
Royalty or FTS connected with a PE	59	44DA	Net basis, with restrictions on expenses

31.4 Using a tax treaty (section 159)

India has comprehensive tax treaties with more than 90 countries. Where a treaty applies, the non-resident pays tax under the Act or the treaty, whichever is more beneficial. To claim treaty benefits the non-resident must have:

A Tax Residency Certificate (TRC) from its home country.
The information in Form 41 (old 10F) where the TRC does not contain all details, filed electronically.
Beneficial ownership of the income (for dividend, interest and royalty articles).
A PAN, or in its absence the alternative details prescribed, to avoid the higher 20% withholding rate.
No abuse: the Principal Purpose Test under the Multilateral Instrument (MLI) denies benefits where obtaining the benefit was one of the principal purposes of an arrangement.

Illustration 116: Royalty to a US company

Indus Software Pvt. Ltd. pays Rs. 1 crore royalty to a US company for software licences. Domestic rate under section 207 is 20% plus surcharge and cess. The India-US treaty rate for this royalty is 15%.

The US company furnishes a TRC, Form 41 and its PAN. Indus withholds Rs. 15 lakh (15%) under section 393(2), deposits it, and files Form 145 with the CA certificate in Form 146 before remittance. Without the TRC, it must withhold at the domestic rate with surcharge and cess.

Illustration 117: Fees for technical services and the "make available" clause

A UK consultant prepares a market study for an Indian company for Rs. 40 lakh. Under the Act, this may be FTS. Under the India-UK treaty, a payment is FTS only if it "makes available" technical knowledge, skill or know-how that the payer can use on its own later.

A market report does not transfer such capability, so it is not FTS under the treaty. It is business profit of the UK firm, taxable in India only if the firm has a permanent establishment here. The Indian company can remit without withholding, after documenting this position in the Form 146 certificate.

31.5 Permanent establishment (PE)

Type of PE	What creates it
Fixed place PE	Office, branch, factory, workshop, or place of management available to the foreign enterprise
Construction PE	Building site or installation project beyond the treaty period (often 6 to 12 months)
Service PE	Employees or personnel furnishing services in India beyond the treaty threshold (often 90 days in 12 months)
Dependent agent PE	A person in India habitually concluding contracts or playing the principal role leading to contracts for the foreign enterprise

Illustration 118: Service PE

A foreign engineering company sends three engineers to supervise installation at an Indian plant for 130 days in a year. Its treaty has a 90-day service PE clause. It will have a service PE in India, and profits attributable to those services are taxable in India at 35% plus surcharge and cess, on net basis, after deducting expenses (with head office expenses capped under section 60).

31.6 Withholding on payments to non-residents (section 393(2))

Tax must be withheld from any sum chargeable to tax in India paid to a non-resident, at the rates in force or the treaty rate, whichever is lower (with TRC).
If the Indian payer agrees to bear the tax (net of tax contract), the payment must be grossed up.
Forms 145 and 146 (old 15CA and 15CB) are required before remittance, except for specified exempt remittances.
A lower or nil withholding certificate can be obtained under section 395 (old 197) where the actual tax on the payment is lower.

Illustration 119: Grossing up

An Indian company agrees to pay a foreign consultant Rs. 10 lakh net of tax for services that are FTS, with a combined rate of 20.8% (20% plus 4% cess, no surcharge at this level). Grossed up amount = 10,00,000 / (1 less 0.208) = Rs. 12,62,626. Tax to be deposited = Rs. 2,62,626. The grossed up amount is the expense and the income.

31.7 Foreign tax credit for residents

A resident taxed on global income can claim credit for foreign tax paid on the same income, either under the treaty (section 159) or unilaterally (section 160). Credit is the lower of foreign tax paid and Indian tax on that income, computed income by income and country-by-country. The statement in the prescribed form (old Form 67) must be filed by the return due date.

Illustration 120: Foreign tax credit

Anil, a resident, earns consulting income of Rs. 20 lakh in the US, on which US tax of Rs. 3 lakh is paid. His average Indian tax rate on total income is 18%, so Indian tax on this income is Rs. 3,60,000. Credit = lower of Rs. 3,00,000 and Rs. 3,60,000 = Rs. 3,00,000. If US tax were Rs. 4 lakh, credit would be restricted to Rs. 3.6 lakh.

31.8 Other international points

POEM: a foreign company whose key management and commercial decisions are in substance taken in India is a resident, and its global income is taxed in India. Active business outside India, board meetings held abroad with real decisions, and documented delegation help.
Equalisation levy: the 2% levy on e-commerce operators was abolished from 1 August 2024 and the 6% levy on online advertising from 1 April 2025.
Foreign assets: residents must report foreign assets and income in Schedule FA of the return. Non-reporting can attract penalties under the Black Money Act.
Non-resident returns: a non-resident need not file a return if its only income is dividend, interest or royalty and FTS on which full tax has been withheld at the applicable rate.

31.9 Business connection in more detail

A non-resident's business income is taxable in India only if it has a business connection in India (under the Act) or a permanent establishment (under a treaty). Where a treaty applies, the PE test prevails if more beneficial.

Dependent agent: a person in India who habitually concludes contracts, or habitually plays the principal role leading to conclusion of contracts that are routinely concluded without material modification, on behalf of the non-resident, creates a business connection. An agent of independent status acting in the ordinary course of his business does not.
Significant economic presence: transactions in respect of goods, services or property carried out by a non-resident with any person in India (including download of data or software) where payments exceed Rs. 2 crore in the year, or systematic and continuous soliciting of business or interaction with 3 lakh or more users in India.
Activities confined to purchase of goods in India for export do not create taxable income.
Only the income reasonably attributable to the operations in India is taxed.

31.10 Royalty and fees for technical services

Type	Meaning under the Act	Common treaty position
Royalty	Consideration for use of patents, know-how, copyrights, trademarks, equipment, and certain software rights	Taxable in source country at 10% to 15%; payments for end-user software licences are generally not royalty under treaties
Fees for technical services	Consideration for managerial, technical or consultancy services, excluding construction or assembly projects and salary	Taxable at 10% to 15%; many treaties (US, UK, Singapore, Canada) tax only if the service "makes available" knowledge or skill
Interest	Interest paid by residents, or by non-residents for business in India	Taxable at 5% to 15%; bank interest often at lower rates

Judicial view: Software payments

Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (Supreme Court, 2021): amounts paid by Indian end users and distributors to non-resident software suppliers for the resale or use of software under a licence are not royalty under the tax treaties, because no copyright in the software is transferred; only the right to use a copyrighted article is given. Consequently, no TDS was required on such payments where treaty benefits applied.

Judicial view: Most favoured nation clauses

AO v. Nestle SA (Supreme Court, 2023): a most favoured nation clause in a treaty protocol, which promises a lower rate if India gives a lower rate to another OECD country, does not apply automatically. It requires a separate notification by the Central Government, and applies only if the other country was an OECD member when India signed the treaty with it.

31.11 Permanent establishment in depth

Judicial view: Fixed place PE

Formula One World Championship Ltd. v. CIT (Supreme Court, 2017): the Buddh International Circuit, used by the foreign company for the race for a limited period each year, was held to be a fixed place PE, because the company had the circuit at its disposal and carried on business through it. Duration and exclusive control were assessed in the context of the business.

Attribution of profits to a PE follows the principle that the PE is treated as a separate and independent enterprise dealing at arm's length. Where the Indian associated enterprise is remunerated at arm's length for the functions it performs, often no further profit is attributed to a dependent agent PE, as the Supreme Court indicated in DIT v. Morgan Stanley and Co. Inc. (2007). However, if the PE performs functions or bears risks not captured in that remuneration, further attribution may arise.

Judicial view: Subsidiary as PE

ADIT v. E-Funds IT Solution Inc. (Supreme Court, 2017): an Indian subsidiary providing back-office support to its foreign parent did not constitute a fixed place or service PE of the parent, since no part of the parent's core business was carried on through a fixed place at its disposal in India and no employees were deputed to render services in India on its behalf.

31.12 Walking through a tax treaty

Article (typical)	What it covers
1 and 4	Persons covered and residence, including tie breaker rules
5	Permanent establishment
7	Business profits taxable only if there is a PE, and only to the extent attributable to it
8	Shipping and air transport, usually taxed only in the country of residence
9	Associated enterprises and transfer pricing adjustments
10, 11, 12	Dividends, interest, royalty and FTS, with source country rate limits
13	Capital gains; shares of Indian companies often taxable in India
15	Employment income; the 183-day rule for short stays
23	Elimination of double taxation (credit method in India's treaties)
24 to 27	Non-discrimination, mutual agreement procedure, exchange of information, assistance in collection

Illustration 121: Short stay employee under a treaty

A UK employee of a UK company visits India for 60 days to train an Indian customer's staff. His salary is paid by the UK employer and not charged to any Indian PE. Under the employment article, since he is in India for less than 183 days, the salary is not taxable in India. The Act also has a similar exemption for foreign employees of foreign enterprises staying up to 90 days, where the salary is not deducted from Indian income.

31.13 Capital gains of foreign investors

Mauritius, Singapore and Cyprus treaties were amended from 1 April 2017 to give India the right to tax gains on shares of Indian companies. Investments made before 1 April 2017 are grandfathered.
Netherlands and some other treaties may still restrict India's right in limited cases (for example, under the India-Netherlands treaty India can tax gains on shares only where the holding is at least 10% and the buyer is a resident of India), subject to the Principal Purpose Test and beneficial ownership.
Foreign portfolio investors pay tax on capital gains at the rates in sections 196 to 198 and 210, with no TDS on their gains (they pay advance tax or through custodians).

31.14 Withholding: practical steps before a foreign payment

Step	Action
1	Is the payment income of the non-resident taxable in India under the Act? If not (for example, purchase of goods from abroad), no TDS
2	If taxable under the Act, is it protected by a treaty (no PE, "make available" not met, capital gains not taxable)? Obtain TRC, Form 41, and a no-PE declaration where relevant
3	Determine the rate: lower of the Act rate (with surcharge and cess) and the treaty rate (inclusive)
4	Check whether the payer bears the tax; if so, gross up
5	Deduct and deposit TDS by the 7th of the next month; file Form 145 online (Part A, B, C or D depending on amount and certificate), with Form 146 from a CA where required
6	Report in the quarterly statement Form 144 and issue the TDS certificate

Judicial view: TDS only on sums chargeable

GE India Technology Centre Pvt. Ltd. v. CIT (Supreme Court, 2010): the obligation to deduct tax on payments to non-residents arises only if the sum is chargeable to tax in India. If no part is chargeable, no TDS is required. The payer may apply to the Assessing Officer for a determination where there is doubt.

31.15 Foreign tax credit: rules to remember

Credit is allowed in the year in which the income is offered to tax in India.
Credit is computed separately for each source of income and each country.
Credit is the lower of the foreign tax and the Indian tax on that income (at the average rate).
Foreign tax under dispute is allowed only after the dispute is settled, if evidence is furnished within six months.
No credit for interest, fee or penalty paid abroad, or for foreign taxes refundable.
The statement in the prescribed form (old Form 67) must be filed within the time allowed by the Rules (under the old Rules, as amended in 2022, by the end of the assessment year); tribunals have often treated a delay as procedural.

31.16 Taxation of expatriates and inbound employees

A foreign national working in India is taxed on salary for services rendered in India wherever it is paid, subject to treaty relief. Tax equalisation arrangements (where the employer bears the Indian tax) require gross up of the tax borne as a further perquisite. Social security contributions under the Indian PF scheme apply to "international workers" unless a social security agreement with the home country exempts them.

31.17 Outbound remittances and investments by residents

Transaction	Tax points
Liberalised Remittance Scheme (up to USD 250,000 a year)	TCS by the bank on remittances above Rs. 10 lakh, at rates depending on purpose (lower or nil for education funded by loan and medical treatment; 2% for tour packages from 2026). TCS is credited against the remitter's tax
Investment in foreign shares or funds	Dividends and gains taxable in India; foreign tax credit for tax withheld; report in Schedule FA
Overseas direct investment by an Indian company	Dividend from the foreign subsidiary taxable at normal rates; guarantee fees and loans subject to TP; outbound funds must meet FEMA rules
Branch abroad	Profits of the foreign branch are part of the Indian company's income; foreign tax credit for tax paid abroad

31.18 Schedule FA and the Black Money Act

A resident (not RNOR) must report foreign assets held at any time during the relevant calendar year: bank accounts, shares, mutual funds, ESOPs and RSUs, insurance policies, immovable property, trusts in which he is a trustee or beneficiary, and signing authority in foreign accounts. Non-reporting can attract a penalty of Rs. 10 lakh under the Black Money Act, and undisclosed foreign income or assets are taxed at 30% with a further penalty of three times the tax. Recent amendments give relief for small values of certain non-immovable assets; confirm the current thresholds before relying on them.

Illustration 122: Schedule FA

Priya, a resident, held RSUs of her US employer worth Rs. 18 lakh and a US bank account with Rs. 40,000 during calendar year 2026. She must report both in Schedule FA of her return for Tax Year 2026-27, with the peak and closing values, and the dividends in Schedule FSI. Missing it, even if all income was taxed, can attract the Rs. 10 lakh penalty.

Chapter summary

• Non-residents are taxed on Indian income, including deemed accrual categories.

• Treaty benefits need TRC, Form 41 and beneficial ownership, subject to PPT.

• Business profits are taxable only with a PE under treaties.

• Withholding on payments to non-residents under section 393(2) with Forms 145 and 146.

• Foreign tax credit for residents is the lower of foreign tax and Indian tax on that income.