Withholding Tax

Withholding tax is a type of income tax collected at the source of income. Under this system, a third party (such as an employer, bank, or payer) is responsible for deducting tax from certain payments and remitting it directly to the government.

Key Features Collected at Source: The payer of income deducts the tax before making payment to the recipient.

Common Applications Dividends paid to shareholders Interest on loans or deposits Royalties and license fees Salaries and wages (as wage tax) Purpose Ensures timely tax collection Reduces tax evasion Simplifies the taxpayer’s compliance burden Interaction with Tax Treaties International tax treaties may reduce withholding tax rates on cross-border payments Prevents double taxation by allowing credits in the recipient’s home country

Example: A company pays ₹1,00,000 in dividends to a foreign shareholder. If the withholding tax rate is 10%, the company deducts ₹10,000 and remits it to the government. The shareholder receives ₹90,000, and the withheld ₹10,000 counts toward their tax liability in their home country