Research & Articles

What Is Withholding Tax? A Guide for Foreign Businesses Receiving Payments From India

Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt. Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London

Published: 6 August 2026 | Last reviewed: 6 August 2026 | Estimated reading time: 11 minutes

This article states the position under the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 with effect from 1 April 2026, together with the Income-tax Rules, 2026. The obligation formerly in section 195 of the 1961 Act is now in section 393(2), Table Sl. No. 17 of the 2025 Act. Payments and credits before 1 April 2026 remain governed by the 1961 Act.

Short answer. Withholding tax is tax the Indian payer deducts before remitting money to you. Two things surprise foreign recipients most. Treaty relief is not automatic: a lower treaty rate must be substantiated with documents before the payer may apply it, and most-favoured-nation claims now require a separate government notification. And the entire framework was renumbered on 1 April 2026, so guidance citing section 195 and Form 15CA is describing repealed provisions.

Index of Topics

The gap between the treaty rate and the rate you actually receive
What withholding tax is, and who bears the obligation
What changed on 1 April 2026
Claiming treaty relief: what the payer needs before deducting less
The most-favoured-nation problem after Nestlé
The PAN penalty
Contract drafting: gross-up and its limits
Frequently asked questions
How R & D Law Chambers works on these matters

1. The Gap Between the Treaty Rate and the Rate You Actually Receive

Short answer. A treaty rate is an entitlement, not a default. The Indian payer is personally liable if it under-deducts, so it will apply the domestic rate unless the recipient supplies the documents that justify applying the treaty rate. Most disputes about withholding tax are really disputes about documentation and timing.

The common experience runs like this. A contract is priced at USD 100,000. The treaty says ten per cent on royalties. The recipient expects USD 90,000 and receives less, or receives it late while the payer waits for paperwork, or receives the full deduction at the domestic rate because the paperwork never arrived.

The reason is structural. The obligation to deduct falls on the Indian payer, and the consequences of under-deduction fall on the payer too: it can be treated as an assessee in default, and the expenditure may be disallowed in its own assessment. Faced with a choice between deducting too much and deducting too little, a rational payer deducts too much.

So the practical question for a foreign recipient is never simply what the treaty rate is. It is what the payer needs in hand, and by when, in order to lawfully apply it.

2. What Withholding Tax Is, and Who Bears the Obligation

Short answer. Tax deducted at source by the payer before payment to a non-resident, and remitted to the Indian government. The obligation is the payer’s. There is no monetary threshold for payments to non-residents: the obligation arises from the first rupee where the sum is chargeable to tax in India.

The obligation applies to any person making a payment to a non-resident or foreign company, other than salary, where the sum is chargeable to tax in India. Size of payer is irrelevant. An individual, a firm, a company, a trust or a government body is equally within it.

The qualification that does the work is chargeability. Withholding is required on sums chargeable to tax in India, so the prior question is always whether the payment is Indian-source income at all. Payments commonly within scope include interest, royalties, fees for technical services, professional fees, licence and software fees, rent and capital gains. Pure business profits of a foreign enterprise with no permanent establishment in India generally are not chargeable, and that analysis should be done before the payment rather than argued afterwards.

3. What Changed on 1 April 2026

Short answer. The Income-tax Act, 1961 was repealed and replaced by the Income-tax Act, 2025. The withholding obligation on payments to non-residents moved from section 195 to section 393(2), Table Sl. No. 17. The remittance forms were renamed: Form 15CA became Form 145, Form 15CB became Form 146, and Form 27Q became Form 144.

The substance of the framework was preserved. The obligation still falls on the payer, still applies without threshold, and still yields to treaty rates where properly substantiated. What changed is the numbering, and that matters more than it sounds.

Almost every article, template, contract precedent and internal compliance manual in circulation refers to section 195, Form 15CA and Form 15CB. Those references describe provisions of a repealed Act. Contract clauses that impose obligations by reference to section 195, or that require a Form 15CB certificate by name, now point at instruments that no longer exist under that designation. Agreements being signed today should refer to the current provisions or should be drafted in functional terms that survive renumbering.

Until 31 March 2026	From 1 April 2026
Income-tax Act, 1961	Income-tax Act, 2025
Section 195: deduction on payments to non-residents	Section 393(2), Table Sl. No. 17
Form 15CA (remitter declaration)	Form 145
Form 15CB (accountant certificate)	Form 146
Form 27Q (quarterly return, non-resident payments)	Form 144

Transitional position: payments and credits made before 1 April 2026 remain governed by the 1961 Act, and returns for those periods are filed on the old forms with the old section codes even if filed after that date.

4. Claiming Treaty Relief: What the Payer Needs Before Deducting Less

Short answer. A tax residency certificate from the recipient’s home tax authority, a self-declaration in the prescribed form, and, where relevant, evidence going to beneficial ownership and the absence of a permanent establishment in India. Without these the payer cannot safely apply the treaty rate.

Treaty relief operates through section 90 of the Act, under which the more beneficial of the treaty and the domestic law applies. But the machinery for proving entitlement is documentary, and the burden sits with the recipient in practice even though the liability sits with the payer in law.

A tax residency certificate issued by the tax authority of the recipient’s country of residence, covering the relevant period. This is the foundation document and it is frequently obtained late.
A self-declaration in the prescribed form supplying the particulars not contained in the certificate. This is a standing requirement, not a formality, and it must match the certificate.
Where the treaty article requires it, evidence that the recipient is the beneficial owner of the income rather than a conduit. Indian authorities examine this actively for interest, dividends and royalties.
Where business profits are claimed to be outside Indian tax, evidence that the recipient has no permanent establishment in India. This is fact-heavy and is the point at which many claims fail.

The practical discipline is to assemble this before the first invoice, not before the first payment. A recipient chasing a residency certificate while an invoice is overdue will be paid net of the domestic rate and will then be pursuing a refund through an Indian tax return, which is slower and more expensive than doing it in the right order.

5. The Most-Favoured-Nation Problem After Nestlé

Short answer. A most-favoured-nation clause in an Indian treaty does not operate automatically. In Assessing Officer v Nestlé SA, decided on 19 October 2023, the Supreme Court held that a separate notification under section 90(1) is required, and that whether the third country was an OECD member is judged at the date India entered into the treaty, not later.

This is the most commercially significant Indian withholding tax development of recent years for European groups, and it is still described inaccurately in a great deal of published material.

The background: treaties with the Netherlands, France, Switzerland and others contain protocol clauses extending to those countries any lower rate or narrower scope India later grants to an OECD member. Taxpayers claimed a five per cent dividend rate by reference to India’s treaties with Slovenia, Lithuania and Colombia, which became OECD members after concluding their treaties with India. The Delhi High Court accepted the argument in Concentrix Services and related cases.

The Supreme Court reversed that position on two grounds. A treaty or protocol modifying existing law is enforceable in India only once notified under section 90(1), so the most-favoured-nation clause requires its own notification. And the requirement that the third state be an OECD member is tested as at the date India entered into the treaty with it, so subsequent accession does not trigger the clause.

The consequence is direct. A Dutch, French or Swiss recipient cannot instruct an Indian payer to withhold at the lower rate on the strength of the protocol alone. Absent a notification, the payer that withholds at the reduced rate exposes itself. Positions taken before October 2023 on the strength of the High Court decisions should be reviewed rather than assumed to be safe.

6. The PAN Penalty

Short answer. Where the recipient has not furnished a permanent account number, the Act requires deduction at a higher rate. Relief from that higher rate is available where the recipient supplies prescribed alternative particulars, including its tax identification number in its home country. Both the requirement and the relief are documentary.

A foreign recipient with no Indian presence often assumes it has no reason to obtain an Indian permanent account number. That assumption is defensible, but it has a price unless the alternative particulars are supplied, and the alternative route has its own conditions.

The choice is a commercial one and should be made deliberately at the contracting stage: obtain the number and accept the associated compliance footprint, or rely on the alternative particulars and ensure they are complete and supplied in time. What does not work is discovering the issue when the first remittance is processed.

7. Contract Drafting: Gross-Up and Its Limits

Short answer. A gross-up clause shifts the economic burden of withholding to the payer, so the recipient receives the agreed net sum. It does not remove the deduction, it does not confer treaty relief, and in India the grossed-up amount is itself treated as income, so the arithmetic is not a simple addition.

Gross-up clauses are common and useful, but three limits are routinely misunderstood.

First, the tax is still deducted and remitted. The clause allocates cost between the parties; it does not change the payer’s statutory obligation or the recipient’s Indian tax position. Second, the clause does not substitute for documentation. A recipient with a gross-up clause and no residency certificate simply obliges its counterparty to bear a larger deduction, which is a commercial cost the payer will resist and may price in. Third, where tax is borne by the payer, the amount is itself grossed up for Indian tax purposes, so the cost exceeds the naive calculation.

Better practice is to pair the gross-up with a documentation covenant: the recipient undertakes to supply the residency certificate, declarations and particulars by a stated date, and the gross-up is expressed to apply where the payer is nevertheless obliged to deduct at a higher rate. That aligns the incentive with the party who can actually solve the problem.

8. Frequently Asked Questions

What is withholding tax in India?

Tax deducted at source by the Indian payer before remitting a payment, and paid to the Indian government. For payments to non-residents the obligation now sits in section 393(2), Table Sl. No. 17 of the Income-tax Act, 2025, which replaced section 195 of the Income-tax Act, 1961 with effect from 1 April 2026. There is no minimum threshold where the sum is chargeable to tax in India.

Does a tax treaty automatically reduce the rate?

No. Treaty relief must be substantiated before the payer may apply the lower rate. The payer typically requires a tax residency certificate from the recipient’s home tax authority, a self-declaration in the prescribed form, and, where relevant, evidence of beneficial ownership and of the absence of a permanent establishment in India.

Can I claim a most-favoured-nation rate under India’s treaty with the Netherlands, France or Switzerland?

Not without a notification. In Assessing Officer v Nestlé SA, decided on 19 October 2023, the Supreme Court held that a separate notification under section 90(1) is required to give effect to a most-favoured-nation clause, and that OECD membership of the third state is tested at the date India entered into that treaty rather than later.

What happened to Form 15CA and Form 15CB?

They were renamed under the Income-tax Act, 2025 workflow with effect from 1 April 2026. Form 15CA became Form 145, Form 15CB became Form 146, and Form 27Q became Form 144. Contract clauses referring to the old form names should be updated.

What happens if I do not have an Indian PAN?

The Act requires deduction at a higher rate where a permanent account number has not been furnished. Relief is available where the recipient supplies prescribed alternative particulars, including its home country tax identification number, but those conditions must be satisfied before the payment is processed.

Who is liable if too little tax is withheld?

The Indian payer. It may be treated as an assessee in default and may face disallowance of the expenditure in its own assessment. This is why payers deduct conservatively unless the recipient’s documentation is complete.

9. How R & D Law Chambers Works on These Matters

We advise on Indian law for businesses in India and internationally, wherever a matter has an India connection. On withholding tax our work runs from the contract, where the allocation of the burden and the documentation obligations are settled, through characterisation of the payment, treaty positions, and disputes where deduction has been challenged.

The practice is led by a lawyer holding the Advanced Diploma in International Taxation of the Chartered Institute of Taxation, and covers treaty interpretation, permanent establishment and profit attribution, the Mutual Agreement Procedure and Advance Pricing Agreements alongside withholding questions.

Related services

Withholding Tax on Non-Resident Payments: advisory, certification support and dispute representation.
International Taxation and Cross-Border Tax Planning: treaty positions, permanent establishment and profit attribution.
Mutual Agreement Procedure in India: treaty-based resolution of cross-border tax disputes.
Advance Pricing Agreement Advisory: forward certainty on transfer pricing positions.

This article is for informational purposes only and does not constitute legal or tax advice. The views expressed are those of the author. Specific legal or tax matters should be referred to qualified advisers. Practice led by Ravish Bhatt, dual-qualified lawyer (India and England & Wales), Bar Council of Gujarat (Enrolment G/504/2008), SRA (non-practising) Registration No. 492 477, ADIT (CIOT, London).