₹8 Lakh Foreign Freelancer TDS & 15CA/15CB Forms 2025-26

What Happened?

The Central Board of Direct Taxes (CBDT) has clarified TDS obligations on payments to non-resident foreign freelancers in August 2026. The key change: payments of ₹8 lakh and above to foreign service providers now trigger mandatory TDS computation under Section 393(2) of the Income Tax Act 2025, along with mandatory treaty documentation and submission of new Forms 145, 146, and Form 41 for proper remittance reporting.

Background & Legal Context

Let's understand what changed and why this matters for your business.

Section 393(2) of IT Act 2025 — The Core Rule

Section 393(2) (which retained provisions from Section 194C of the 1961 Act) mandates TDS on payments to non-residents for services. The 2025 Act restructured this provision and made it stricter with the following framework:

• Payment Trigger: Any payment to a non-resident (individual or entity) for services, freelance work, consultancy, or technical support
• TDS Rate: 20% on gross amount (unless treaty benefit applies)
• Threshold: ₹8 lakh in a financial year (new clarification effective August 2026)
• Treaty Relief: If your foreign freelancer is from a country with which India has a treaty, rate may reduce (e.g., 5-10% for technical services under many treaties)

New Forms 145, 146, and Form 41

The CBDT has introduced three forms for AY 2025-26 onwards:

• Form 145: Declaration of non-resident status and treaty entitlement (to be filed before first payment)
• Form 146: Quarterly TDS reconciliation statement for non-resident payments (due within 15 days of quarter-end)
• Form 41: Annual remittance certificate showing gross payment, TDS deducted, and net amount remitted (due before financial year-end)

These forms replace the older practice of informal documentation and bring transparency to foreign remittances.

Treaty Documentation Requirement

If your foreign freelancer claims treaty benefit (e.g., reduced TDS), you MUST obtain:

• Copy of valid passport or identity proof
• Tax residency certificate from the freelancer's country (issued by their tax authority)
• Declaration Form TDS-OP-1 (Treaty Benefit Declaration)
• Certificate of Residence (if Indian freelancer claims exemption abroad)

Without these documents, you cannot grant treaty benefit and must deduct 20% TDS.

What Does This Mean for You?

For Indian Businesses Paying Foreign Freelancers:

Scenario 1: ₹10 lakh payment to US graphic designer (no treaty claim)

• TDS due: ₹10 lakh × 20% = ₹2 lakh
• Net payment: ₹8 lakh
• You must file Form 145 before payment and Form 41 by 31 March
• Failure to deduct: 20% penalty on TDS amount + 1.5% interest per month on tax shortfall

Scenario 2: ₹12 lakh to UK IT consultant (with treaty certificate for 5% rate)

• TDS due: ₹12 lakh × 5% = ₹60,000
• Net payment: ₹11.4 lakh
• You save ₹1.8 lakh in TDS by obtaining treaty certificate
• But if tax residency certificate is fake or expired, entire 20% TDS is reassessed with penalties

Scenario 3: ₹5 lakh payment (below ₹8 lakh threshold)

• TDS still applies under Section 393(2) if payment is for 'services'
• The ₹8 lakh threshold is NOT an exemption — it's a reporting trigger for Form 146
• Even ₹1 lakh payment requires 20% TDS if classification is 'service'

Common Mistakes to Avoid (August 2026 Update):

• Mistake 1: Assuming ₹8 lakh threshold means "no TDS below ₹8 lakh." WRONG. TDS applies from first rupee for non-resident service payments.
• Mistake 2: Not obtaining tax residency certificate from freelancer's country. If freelancer claims "I'm not a tax resident," request proof or deduct full 20%.
• Mistake 3: Not filing Form 145 before first payment. CBDT now views this as non-compliance equivalent to TDS evasion.
• Mistake 4: Showing invoice date as payment date. If you receive invoice on 15 Jan but pay on 31 Jan, TDS due date is 31 Jan (payment date).
• Mistake 5: Forgetting quarterly Form 146 reconciliation. IT dept now cross-checks Form 146 with bank remittances for AY 2025-26.

What Should You Do Now?

Immediate Action Items:

Step 1: Audit Your Current Foreign Payments (by 31 August 2026)

• Identify all non-resident freelancers/vendors you've paid in FY 2025-26
• Calculate total payment per freelancer (cumulative since 1 April 2025)
• Check if TDS was deducted correctly

Step 2: Collect Treaty Documentation (by 30 September 2026)

• For freelancers claiming treaty benefit: request tax residency certificate from their country's revenue authority
• Maintain Form TDS-OP-1 declaration and save validity period (usually 1 year)
• If certificate expired, immediately revert to 20% TDS

Step 3: File Form 145 & 146 (within timeline)

• File Form 145 (non-resident status declaration) before first payment or within 7 days of onboarding
• File Form 146 (quarterly reconciliation) within 15 days of quarter-end (30 June, 30 Sept, 31 Dec, 31 March)
• Use your accounting software or tax practitioner to auto-generate these forms

Step 4: Maintain Proof of TDS Payment

• Keep bank transfer proof, TDS challan receipt (Form 49 or 49A), and Form 16 equivalent (Form 16A for NRI)
• File Form 41 by 31 March 2026 showing cumulative payment, TDS, and remittance details

Step 5: Update Your Vendor Onboarding Process

• Modify vendor forms to include: country of residence, tax ID, and treaty eligibility claim
• Add checkbox: "Tax residency certificate attached: Yes/No"
• Make it mandatory for payments above ₹5 lakh

For Tax Practitioners:

• Brief your clients on Section 393(2) changes before October 2026
• Create a TDS checklist for non-resident payments
• Set up calendar reminders for Form 145, 146, and Form 41 deadlines
• Keep updated on treaty amendments (India adds new treaties every year)

Key Takeaways

• Section 393(2) applies to ALL non-resident service payments: No exemption based on amount. The ₹8 lakh threshold only triggers stricter Form 146 compliance, not exemption from TDS.
• Treaty benefit requires documented proof: A verbal claim or "I'm not a tax resident" is not enough. Demand tax residency certificate from the freelancer's country revenue authority, or deduct 20% TDS.
• New Forms 145, 146, 41 are mandatory for AY 2025-26: Missing these filings can invite penalty notices and detailed assessments. File within the prescribed timelines.
• TDS is deducted at payment date, not invoice date: If you delay payment, TDS due date also shifts. Reconcile Form 146 quarterly to avoid year-end surprises.
• Non-compliance has doubled penalty impact in 2026: Earlier (pre-2025), TDS evasion invited 20% penalty. Now it's 20% of TDS shortfall PLUS 1.5% monthly interest. Plan your cash flow accordingly.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602