I am buying a flat from an NRI, must I deduct tax?
Almost certainly. Any Indian payer remitting a sum chargeable to tax to a non-resident falls within section 195, and that includes an individual buying property from an NRI seller. Buyers are usually startled by this, because nothing about a domestic purchase prepares them for it. The duty to determine whether the payment is chargeable sits on you as payer, and if the determination is wrong the liability is yours, not the seller's. In practice this needs settling before the sale agreement is signed, because the seller's cash expectation and the deduction have to be reconciled somewhere.
Who is liable if the wrong rate is deducted on a payment abroad?
The payer. India puts the duty to determine the taxability of a foreign payment on the Indian payer, who is liable for the tax if the determination is wrong, and who can also face disallowance of the expenditure. That combination is what makes section 195 different from a routine deduction. You are being asked to reach a conclusion about someone else's tax position, and you carry the consequence of getting it wrong. It is why the determination should be written down at the time, with the treaty article, the rate and the documents relied on set out, rather than assumed.
Can I apply the treaty rate without a residency certificate?
Not safely. The rate comes from the Act or the treaty, whichever is more favourable, but the treaty rate depends on the recipient's residency certificate and declaration being in hand. Without them the payer has no basis for the lower rate, and since the payer carries the liability, the payer is the one exposed if it is applied anyway. Recipients often supply the certificate late, after the invoice is due and the remittance is being pressed. Asking for it when the contract is signed, rather than when the payment is ready to go, avoids deducting at the higher rate for timing reasons alone.
Why will my bank not remit the payment without a certificate?
Because the remittance route itself requires documentation, separately from the deduction. Alongside the payer's declaration, most remittances need an accountant's certificate before the bank will move the money, and a bank with an incomplete file will simply hold the transfer. This catches people who have the tax question right and have left the paperwork until the day of payment. The sequence that works is the reverse. Settle the characterisation and the rate, collect the recipient's residency certificate and declaration, obtain the certificate the remittance needs, and then instruct the bank.
Is the treaty rate always better than the rate in the Act?
Not always, which is why the comparison has to be made rather than assumed. The rate comes from the Act or the treaty, whichever is more favourable, so for some payments the domestic rate is already the lower of the two and the treaty adds nothing but paperwork. Where the treaty does help, it helps only if the recipient's residency certificate and declaration support the claim. The work is the same either way. Characterise the payment, compare the two rates for that character of income, and record which one you applied and why.
What if we decide a payment abroad is not taxable and are wrong?
That is the risk the section is built around. The duty to determine taxability sits with the payer, so a determination that a remittance is not chargeable is your conclusion, and if it does not hold, the tax becomes your liability, with disallowance of the expenditure alongside it. A nil or reduced determination is defensible when it rests on the treaty article, the character of the payment and the recipient's documentation, all recorded at the time. It is not defensible as a view formed at the point of payment because the recipient said tax did not apply.
Do I have to declare my dual citizenship?
A tax return does not generally ask you to declare which passports you hold; it asks about residence, and in the US case it applies to citizens by definition. What does ask is your bank. Account-opening self-certification under FATCA and the Common Reporting Standard asks which countries you are a tax resident or citizen of, and the answer is reported onward to the tax authority. So the practical answer is that the information arrives either way. See FATCA reporting.
Is my foreign pension taxable?
Usually in at least one country, and which one depends on the treaty article covering pensions — some give the taxing right to the country paying it, others to where you live, and several treat government service pensions differently again. Withholding at source is common and often reducible by treaty, with an elective return recovering an over-deduction. See the pensions article.
