TDS on Royalty to a Foreign Company

Royalty paid to a foreign company attracts 20% domestic TDS under Section 393(2), doubled from 10% by Finance Act 2023 — subject to a lower rate under a valid DTAA.

FY 2026-27 · Section 393(2)

Quick answer

Indicative rate

20%

Section & code

Section 393(2), Sl. No. 17, Code 1057

Forms typically needed:

Form 15CA Form 15CB Form 10F if claiming DTAA

Cross-Border TDS Decision Helper

Nature of payment

Payee has valid PAN?

TRC + Form 41 furnished?

Indicative Act rate

20%

Domestic Act rate under Section 393(2) for royalty/FTS to a non-resident non-company — doubled from 10% by Finance Act 2023 (effective 1 April 2023), unchanged since. Classify carefully: royalty and FTS have different treaty definitions.

Without a TRC and Form 41, the treaty rate can't be applied — the Act rate above governs until documentation is furnished.

This is a decision aid, not a filing determination — always confirm classification and the exact treaty article with a professional before remitting.

The 2023 rate change practitioners must know

Finance Act 2023 doubled the domestic withholding tax rate on royalty and Fees for Technical Services paid to non-residents, from 10% to 20%, effective 1 April 2023. This remains the current domestic rate carried forward into FY 2026-27 under Section 393(2). Older reference material, older client engagement letters, and outdated online calculators still frequently cite the pre-2023 10% figure — this is now incorrect for payments after that date.

The rate change significantly increased the value of a valid DTAA claim, since many treaties provide for a royalty rate below 20% — meaning the gap between the domestic rate and the treaty rate widened substantially, making proper TRC/Form 10F documentation more financially consequential than it was before 2023.

What counts as royalty for TDS purposes

Royalty broadly covers payment for the use of, or the right to use, a patent, trademark, design, secret formula or process, copyright, or similar intellectual property, as well as payment for information concerning industrial, commercial or scientific experience (know-how). The definition under the domestic Act and under a specific DTAA can differ meaningfully, which is why classification against the treaty's own definition — not just the domestic one — matters when a treaty is being relied on.

Trademark, brand and franchise royalties are common but easily misclassified

Brand licensing fees, franchise royalties, and trademark usage payments are all royalty for TDS purposes when they compensate the foreign owner for the Indian party's right to use the mark or brand — a frequent arrangement in franchise and licensing business models. These payments are sometimes mislabeled internally as 'marketing fees' or 'brand contribution,' which doesn't change their tax character; the substance of what's being paid for governs, not the invoice line-item description.

Group IP royalties draw transfer-pricing attention

Royalty paid to a related foreign entity for the use of group intellectual property — a global brand, proprietary technology, or centrally developed processes — is common in multinational structures, and is subject to the same transfer-pricing scrutiny as any related-party cross-border payment: the royalty rate itself must reflect an arm's-length charge, independent of whether TDS was correctly withheld on the amount actually paid.

Worked example

A ₹40 lakh annual brand royalty paid to a foreign franchisor

An Indian franchisee pays its foreign franchisor ₹40,00,000 annually for the right to use the franchisor's brand and operating system. This is royalty. Without DTAA documentation, 20% TDS (₹8,00,000) applies. If the franchisor furnishes a valid TRC and Form 10F from a treaty country with a royalty article specifying, say, a lower rate, that lower rate may apply instead — the specific treaty article must be checked, and the franchisee should also confirm the royalty percentage itself is consistent with arm's-length franchise royalty benchmarks for transfer-pricing purposes.

Common mistakes & litigation traps

Using the old 10% rate from pre-2023 reference material

The domestic royalty/FTS rate has been 20% since 1 April 2023 — any calculation or client advice still citing 10% as the default domestic rate is out of date.

Relabeling a royalty as a 'service fee' or 'marketing contribution'

The substance of the payment — compensation for use of IP — governs its tax character, regardless of how the invoice or agreement describes it.

Applying the domestic royalty definition when the treaty's definition is narrower

Some DTAAs define royalty more narrowly than the domestic Act — a payment that's royalty domestically might not qualify as royalty under a specific treaty's own definition, which can affect treaty eligibility.