Withholding tax · Section 195
Why did my Indian customer deduct 20% tax from my invoice?
Because Indian law requires them to. When an Indian business pays a foreign company, it must deduct tax before sending the money — from the first rupee, with no minimum threshold. That is section 195 of the Income-tax Act. Your customer is not being difficult and has not made a mistake: if they pay you in full and the department later says tax was due, your customer is the one who pays it, with interest. So they deduct, and they deduct at the safest rate they can justify.
The deduction is often larger than it needs to be. The domestic rate is 20% plus surcharge and cess. A tax treaty will usually bring that down, and for standard software the correct answer is frequently that no tax is due at all. But your customer cannot apply a lower rate on your say-so — they need three specific documents from you, and until those arrive they will keep deducting at the full rate.
The money is not gone. It has been paid to the Indian government against your Indian tax liability. Depending on your position, some of it may be recoverable, some may be creditable against tax at home, and the ongoing deduction can usually be reduced or stopped. What you cannot do is ignore it — the amount compounds every invoice.
What rate should actually apply?
Start with the domestic rate, because that is the default your customer will use if you give them nothing.
For royalties and fees for technical services paid to a foreign company, the rate under section 115A is 20%. It has been 20% since 1 April 2023, when the Finance Act 2023 doubled it from 10%. Surcharge and cess sit on top of that, and this is where a lot of published guidance is careless:
| Your total Indian income | Surcharge | Effective rate |
|---|---|---|
| Up to ₹1 crore | Nil | 20.8% |
| ₹1 crore to ₹10 crore | 2% | 21.22% |
| Above ₹10 crore | 5% | 21.84% |
You will see 21.84% quoted almost everywhere as though it were the rate. It is the ceiling, and it only applies once your Indian income passes ₹10 crore — roughly $1.2 million a year. If you are a software company with a handful of Indian enterprise customers, your rate is 20.8%, and anyone telling you otherwise has not checked which band you are in.
Treaty rates are lower. Most of India's treaties cap royalties and technical service fees somewhere between 10% and 15%. Which rate applies to you depends on your country's treaty and on how your product is characterised, which is the next question.
Is our software even taxable in India?
Often, no — and this is the part that costs foreign software companies the most money, because they assume the deduction is correct and never test it.
In Engineering Analysis Centre of Excellence v. CIT, the Supreme Court of India held that payments for standard, off-the-shelf software are not royalties. Buying a copy of a program is not buying the copyright in it. If it is not a royalty, and you have no permanent establishment in India, the payment is your business profit and India generally cannot tax it.
The tax department pursued review petitions against that judgment for years. The Supreme Court dismissed them on 11 May 2026. The royalty question has attained finality.
It matters commercially, not just legally. If your Indian customer's finance team is still deducting on the basis that your subscription is a royalty, they are applying a position the country's highest court has now closed — twice.
The argument has moved rather than ended. Having lost on royalty, the department has been re-characterising software subscription revenue as fees for technical services instead, and has issued assessment orders on that basis to large foreign software companies. Tribunals and High Courts have largely been deciding against it.
Where it gets genuinely arguable is when your contract bundles things together. A standard subscription is one thing. A subscription plus implementation support, customisation, training or a dedicated engineer is several things, and the department will treat the whole invoice as the most taxable of them unless the contract separates them. Splitting the contract is often worth more than arguing about the rate.
What do I have to give my customer to reduce it?
Three documents. Your customer's finance team cannot apply a treaty rate without them, and most foreign vendors have never been told they exist.
1. A Tax Residency Certificate
Issued by your own tax authority, confirming you are resident there for treaty purposes. In the United States this is IRS Form 6166, applied for on Form 8802, and it takes weeks — often six or more. In the UK it is a certificate of residence from HMRC. This is the long pole: start it before anything else.
2. Form 41 — and this changed on 1 April 2026
This is the declaration filed on the Indian income-tax portal to claim treaty benefit. It used to be Form 10F. It is now Form 41, under the Income-tax Rules 2026, notified on 20 March 2026 and effective 1 April 2026.
A great many foreign vendors are still filing Form 10F because that is what they filed last year and nobody told them otherwise. Indian payers are correctly rejecting it — and when the paperwork is rejected, they withhold at the full domestic rate instead. It is entirely possible to lose 20.8% on an invoice because of a form number.
3. A No Permanent Establishment declaration
A statement that you have no fixed place of business, dependent agent or other permanent establishment in India. Your customer needs it on file to justify not deducting at the higher rate. It should be accurate — if you have people working in India, say so and take advice, because a permanent establishment changes the whole analysis.
Claiming a treaty rate is generally not a free action. Where a non-resident takes the benefit of a treaty rather than being taxed at the full domestic rate, an Indian tax return is usually required, and that has its own consequences including a PAN. Any adviser who hands you three documents and does not mention the filing tail has given you half the answer.
Can I get back what has already been deducted?
Sometimes, and it depends on three things: whether the tax was actually due, whether you can evidence it, and how long ago it happened.
If tax was deducted on a payment that was never taxable in India — standard software, no permanent establishment — that is an over-deduction, and the route to recovering it runs through filing an Indian return and claiming a refund. It is not fast. If the tax was properly due but at a lower treaty rate than was applied, the excess is similarly a refund question.
And there is a third possibility worth checking before you spend money on the first two: if you are paying tax at home on the same income, some or all of the Indian tax may be creditable against your domestic liability, in which case the cash was not lost so much as prepaid to the wrong government. Your own accountant, not us, is the right person to confirm that — and the answer changes whether recovery is worth pursuing at all.
Stop the bleeding first. Getting the documents in place so the next invoice is taxed correctly is faster, cheaper and more certain than recovering the last three years. Do that, then decide whether the historical position is worth chasing.
Send us a recent invoice and the deduction certificate your customer gave you, and we will tell you what rate should apply and what it would take to change it. We do not charge for working out what the problem is.
Last reviewed: 10 August 2026 · Written for foreign companies invoicing Indian customers. Reviewed by a chartered accountant with 40 years of Indian practice.
This page describes the position under Indian law as we understand it at the date above. It is general information, not advice on your situation, and your facts will change the answer.
Sources
- Income-tax Act — section 195 (deduction at source on payments to non-residents) and section 115A (rates on royalty and fees for technical services).
- Finance Act 2023 — increase of the section 115A rate from 10% to 20%, effective 1 April 2023.
- Engineering Analysis Centre of Excellence Pvt Ltd v. CIT, Supreme Court of India; review petitions dismissed 11 May 2026.
- Income-tax Rules 2026, Notification 22/2026 dated 20 March 2026 — Form 41 replacing Form 10F with effect from 1 April 2026.