Refund of Tax Deducted

Refund of TDS deducted under Section 195 can be claimed when tax is wrongly withheld on a payment to a non-resident, for example due to contract cancellation, double deduction, or non-application of a lower DTAA rate. CBDT Circular 7/2007 allows the Indian deductor to apply to the jurisdictional Assessing Officer with proof of the original challan and an undertaking that the non-resident has not claimed credit. Alternatively, the non-resident can file an Indian return and claim refund with interest under Section 244A.

Mayank Wadhera

Published: 23 Aug 2022

Updated: 16 May 2026

3 min read

Section 195 of the Income-tax Act requires Indian payers to deduct TDS on payments to non-residents that are chargeable to tax in India. In practice, deductors often end up withholding more than the correct amount — either because the underlying transaction does not crystallise, or the rates under a Double Taxation Avoidance Agreement (DTAA) are lower than the deducting rate. Recovering this excess TDS through a Section 195 refund continues to be relevant in FY 2026-27 as cross-border transactions grow under the Union Budget 2026 push for ease of doing business.

When Does an Excess Section 195 Deduction Arise

CBDT Circular No. 7/2007 (read with subsequent clarifications) recognises specific situations where TDS deducted under Section 195 can be refunded to the deductor where the amount has not actually been credited to the non-resident. Typical triggers include:

Contract cancellation after TDS deposit but before payment to the non-resident.
Excess deduction due to incorrect application of rate ignoring DTAA benefits.
TDS deducted twice on the same transaction.
Deduction on a payment ultimately held to be not chargeable to tax in India.
TDS borne by the deductor that exceeds the correct liability under Section 195A grossing up.

Refund Routes Available

There are essentially two refund routes depending on who claims it. The non-resident payee can file an Income-tax Return in India and claim the refund as part of normal assessment. The Indian deductor can claim the refund directly under the Section 195 procedure if the conditions in CBDT Circulars 7/2007 and 11/2016 are satisfied.

Deductor-side Refund

File an application before the jurisdictional Assessing Officer (TDS) with full particulars.
Attach proof of the original challan, Form 27Q and the cancellation or rate-difference documentation.
Furnish an undertaking that the credit of the excess TDS has not been claimed by the non-resident.
Reverse the TDS credit shown in Form 27Q before claiming the refund.
The Assessing Officer verifies and grants refund along with interest, where applicable.

Non-resident Return Route

The non-resident can obtain an Indian PAN, file an Income-tax Return for the relevant Assessment Year (AY 2026-27 or AY 2027-28), declare the income as exempt or at DTAA rate, and claim refund of the excess TDS reflected in Form 26AS / AIS. Interest under Section 244A is also payable on delayed refunds.

DTAA Considerations

Indian DTAAs with countries like the US, UK, Singapore, UAE and Mauritius often provide concessional rates on dividends, interest, royalty and fees for technical services. To claim the lower rate, a valid Tax Residency Certificate (TRC), Form 10F and a no-PE declaration are mandatory. Many refund disputes arise simply because deductors apply the Income-tax Act rates without taking the trouble to evaluate DTAA eligibility upfront.

Documentation You Must Maintain

Copy of the underlying contract or invoice and any cancellation note.
Form 15CA and 15CB filed at the time of remittance.
Challan-cum-statement and Form 27Q acknowledgement.
Tax Residency Certificate, Form 10F and PE declaration of the non-resident.
DTAA article-wise analysis with supporting computation.

Timelines and Common Roadblocks

Refund applications under Circular 7/2007 should be made within two years from the end of the financial year in which the tax is deducted. Common roadblocks include mismatch between Form 27Q and Form 26AS, the non-resident having already claimed credit in the home country, and incomplete DTAA documentation. Filing the rectification or refund claim through the TRACES portal with clear annexures significantly speeds up disposal.

Conclusion

Refund of TDS under Section 195 is a technical but recoverable benefit if you act systematically. Treat every cross-border remittance as a documentation event — preserve contracts, certificates and Form 15 filings. For FY 2026-27, integrate DTAA analysis into your TDS workflow so that the right rate is applied upfront, leaving very little to chase as refund.

Frequently Asked Questions

Can an Indian deductor directly claim refund of excess TDS under Section 195?

Yes. CBDT Circular 7/2007 allows the deductor to apply to the jurisdictional Assessing Officer in cases like contract cancellation, double deduction or excess deduction due to incorrect rate, provided the non-resident has not claimed credit and the TDS credit is reversed in Form 27Q.

What is the time limit to file a Section 195 refund application?

An application under CBDT Circular 7/2007 should generally be filed within two years from the end of the financial year in which the tax was deducted. Non-residents can also claim refund by filing an Indian Income-tax Return within the normal timeline under Section 139.

How does DTAA affect Section 195 TDS?

If the non-resident is a tax resident of a country with which India has a DTAA, the lower of the Act rate and the DTAA rate applies, subject to furnishing a Tax Residency Certificate, Form 10F and a no-PE declaration. Wrong application of Act rate ignoring DTAA is a common cause of refund claims.

Is interest payable on delayed refund of Section 195 TDS?

Yes. Where refund is granted to the non-resident through return assessment, interest under Section 244A is generally payable on the refund amount for the period of delay. Refund granted to the deductor under Circular 7/2007 may also carry interest as clarified by CBDT.