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Understanding Withholding Tax in India: A Beginner's Guide

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Created on
May 4, 2023


What’s Inside

It goes unsaid that earning a living is no piece of cake. With a fixed, regular income comes several considerations—the most crucial being taxes.

Are you wondering what is withholding tax? It points to an obligation of the person to withhold a specific amount as tax. This tax is paid with the service, such as commission, salary, rent, professional service, etc.

Worry not if your academic curriculums left out these important bits about taxes. Delve into what is withholding tax in India with Fi Money.

What is Withholding Tax in India?

Learn from the top by deriving the withholding tax meaning.

India’s Income Tax Act, under section 195, specifies the policy of tax retention. Tax withholding is the amount which is directly deducted by an employer from the employee’s earnings for taxes.

Further, these deductions go to the central government as tax liability from earners. How much tax you pay depends on your income. Yet, payable income tax depends on your residential status. You can be either of the two:

  • Resident Indian
  • Non-resident Indian

You qualify as a resident Indian if you have stayed in the country for:

  • Either at least of 182 days in the past year
  • Or over 60 days for a total of 365 days in the 4 years before the past year

If you do not meet either of the criteria, then you fall under the non-residential Indian category. Moreover, withholding tax is mainly levied on non-resident Indians.

An Example

‘X’ is a therapist, and ‘Y’ is a man who goes to X. For a recent booking, X charged INR 50,000. While Y paid INR 45,000, he deducted INR 5000 as withholding tax. Therefore, Y must now pay this deducted amount to the central government. Y can eventually claim this amount while filing for his income tax returns.

The Purpose of Withholding Tax

  • The government gets the benefit of early tax generation. Here, the payee deducts tax while paying for the service, depositing the deduction to the government. Hence, the government does not have to wait for the end of the year and has revenue generation.
  • It is always under high scrutiny. The liability of payment is on the payee, who needs to assure the accuracy of the amount and deposition. The process is under the radar while the payee pays the service and deposits the deduction.
  • A major advantage is that it prevents tax evasion. NRIs cannot evade these taxes as they pay them through the deductions made by their payees. Moreover, as the payee must directly pay the government, they cannot escape their tax nets.

Rates and Due Dates of Withholding Tax

As per the payments made to Non-resident Indians, the applicable tax rates are:

These rates do not fit with counties that share a DTAA (Double Taxation Avoidance Agreement) with India.

When it comes to the due date for paying withheld tax, it is the same every month. You can make your payment within the 7th of the month. However, in March, the due date shifts to April 30th.

Summing Up

Understanding withholding tax is essential for anyone who earns an income in India. Withholding tax is the amount deducted by an employer from an employee's earnings for taxes and is paid directly to the central government. The purpose of withholding tax is to generate early tax revenue and prevent tax evasion. The applicable tax rates and due dates depend on the residential status of the individual and the payments made to non-resident Indians. By understanding the nuances of withholding tax, individuals can ensure accurate tax payments and avoid any legal repercussions.

Save Tax with Ease Using Fi Money's FIT Rules and Smart Deposits

Fi Money, designed for digital natives, makes saving tax enjoyable! It allows you to set up fun FIT Rules like 'Save ₹50 in ELSS Mutual funds every time I order food online'. Once the rule is activated, Fi will automatically transfer the amount to a designated Smart Deposit account of your choice. You can also set a 'Goal Amount' that you want to achieve, such as saving for a dream home, a car, or a child's education. Fi Money, backed by the licensed Federal Bank, offers a variety of features that prove saving tax does not have to be a sacrifice.

Frequently Asked Questions

1) What is the due date to deposit withholding tax?

The deducted tax must be paid within the 7th of each tax-paying month. However, in March, this due date shifts to April 30th.

2) What is the difference between TDS and withholding tax?

While TDS applies to resident Indians, withholding tax applies to Non-resident Indians.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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