Paying Abroad? 20% TDS Risk on Tech Payments

When Indian businesses pay foreign companies for software or tech services, tax treatment depends on whether it is royalty or a technical service. Getting it wrong means paying 20% TDS instead of a lower treaty rate — and that hits your company's cash flow hard.

Here's what happened: Indian tax law taxes royalty and foreign technical service fees differently — getting the category wrong can mean TDS at 20% instead of a lower treaty rate.. Software payments, cloud subscriptions, and tech support fees all sit in a grey zone between royalty and Fees for Technical Services under the Income-tax Act.. Tax treaties India has signed with countries like USA, UK, and Singapore contain a 'make-available test' that often exempts automated tech services from the higher royalty rate..

What you should do: Review every foreign payment contract to identify whether you are paying for a product licence (royalty) or a human-delivered service (FTS) before deducting TDS.. Check whether the foreign vendor's country has a tax treaty with India and apply the correct treaty rate using Form 10F and a Tax Residency Certificate from the vendor.. File TDS returns accurately under Section 195 — an incorrect deduction can attract interest and penalty under Section 201 even if the foreign party eventually claims a refund..

If a foreign software tool works without any human intervention from the vendor's side, it likely fails the 'make-available test' — meaning a lower treaty FTS rate may apply, saving you significant TDS outgo.

For readers weighing their credit and loan options, our personal loan guide and CIBIL score resources put this update in context.