TDS on foreign SaaS payments: meaning, how it works in India

TDS means tax deducted at source. The person who pays a bill keeps back a part as tax and deposits it with the government, so the receiver gets the rest. Indian law makes the payer, not the receiver, responsible for this.

For payments to a non-resident, such as a US cloud company or a European analytics tool, the rule sits in Section 195 of the Income Tax Act, 1961. It asks one question: is any part of this payment income that India can tax? If yes, tax must be deducted before the money leaves. If no, nothing is deducted, though paperwork may still be needed.

Section 195 has no minimum amount. Unlike TDS on domestic payments, which has yearly thresholds, a payment to a non-resident that is taxable in India is caught even if it is small, according to law-firm and tax-advisory summaries as of November 2026.

The test is whether the payment is chargeable to tax in India. A foreign company is taxed in India mainly on income that arises or is deemed to arise here. Two heads matter for software: royalty and fees for technical services. A plain purchase of goods from abroad, or a payment that is not income of the receiver at all, usually falls outside.

The startup should check each vendor and each type of charge rather than treat all foreign bills alike. A subscription to a design tool, a cloud hosting bill and a custom software build can all land differently.

The Income Tax Act defines royalty widely, covering payment for the use of, or the right to use, certain software, patents and processes. For years the tax department argued that many software payments to foreign firms were royalty, which carries tax.

In 2021, in the case known as Engineering Analysis, the Supreme Court held that payments for off-the-shelf software licences to a foreign supplier were not royalty under the relevant tax treaties. The court looked at what the buyer actually received: a right to use a copy, not a right over the copyright itself.

How far this reaches into cloud and SaaS is less settled. A standard subscription to a hosted tool is often argued to be the same kind of access, while customised work, managed services or the supply of technical know-how can be read as fees for technical services. Advisers differ by facts, so a startup with large foreign bills usually takes a written opinion once and reuses it.

India has double taxation avoidance agreements (DTAAs) with many countries. A treaty can lower the rate on royalty or technical fees, and can say a country may not tax a payment at all unless the receiver has a business presence there. The taxpayer may choose the Indian law or the treaty, whichever is more favourable.

To use a treaty, the foreign vendor normally gives the Indian payer a tax residency certificate from its home country and a short self-declaration, known as Form 10F, with details such as tax identification number and period. The payer keeps these on file.

The statutory rate on royalty and technical fees paid to a non-resident is shown as 20% plus surcharge and 4% cess in several summaries, while treaty rates are often lower. Rates and surcharge rules change, so check the current year's figures.

The equalisation levy was a separate charge on certain digital services bought from non-residents. A 6% levy on online advertising services began in 2016, and a 2% levy on some e-commerce supplies was added in 2020. It was collected by the payer, much like TDS, but it was a different tax with different rules.

The 2% levy was withdrawn from 1 August 2024. The 6% levy on online advertising was abolished from 1 April 2025 by the Finance Act 2025, as of November 2026 according to tax-advisory summaries. It never applied to an ordinary SaaS subscription, so most startups never paid it on software. Its end does not remove Section 195.

Before a bank sends a foreign payment, it asks for a declaration of the tax position. Form 15CA is that declaration, filed online by the payer. Form 15CB is a chartered accountant's certificate of the tax rate and treaty position, needed when the payment is taxable and crosses a threshold.

From 1 April 2026, when the Income-tax Act, 2025 replaced the 1961 Act, these forms are reported to be renumbered as Form 145 and Form 146, with Section 195 carried into a new Section 393. Summaries put the accountant-certificate threshold at ₹5 lakh of taxable remittances in the year. Check the official forms for the current rules.

Tax rules for foreign payments have a few figures worth keeping at hand. Treat them as a checklist of things to verify with a professional, not as a tax calculation.

• Minimum amount for Section 195: none, as of November 2026
• Statutory rate on royalty and technical fees to a non-resident: 20% plus surcharge and 4% cess in several summaries, lower under many treaties
• Equalisation levy on online advertising: 6%, abolished from 1 April 2025
• Equalisation levy on e-commerce supplies: 2%, withdrawn from 1 August 2024
• Accountant certificate (15CB, now reported as Form 146): taxable remittances above ₹5 lakh in the year
• Documents usually asked from the vendor: tax residency certificate and Form 10F

If tax should have been deducted and was not, the Indian payer can be treated as an assessee in default, owing the tax plus interest. The tax law also has a provision, Section 40(a)(i) of the 1961 Act, that can deny the payer a deduction for the whole expense, which raises the startup's taxable profit. The new Act carries an equivalent provision under its own numbering.

Some contracts say the Indian company bears the tax. This is called grossing up: the startup pays the vendor the full agreed sum and also pays the tax on top, so the real cost rises. Founders often miss it until the audit. Read the tax clause of every foreign vendor agreement before signing.

GST on imported services is a different tax with different rules. An Indian business that buys services from abroad may have to pay GST itself under the reverse charge mechanism, usually at the 18% rate on software services, and claim it back as input credit if it is eligible. TDS and GST can both apply to the same invoice, and neither cancels the other.

When a headline says a startup faces a tax demand over foreign cloud or software bills, ask which tax it is: income tax under Section 195, or GST on imports. Ask also whether the dispute is about the rate, the paperwork, or whether the payment was taxable at all. This guide is general information. Check your own case with a chartered accountant or tax lawyer.