Section 195A of the Income-tax Act, 1961: Income Payable Net of Tax
Section 195A explains how to calculate tax deduction at source (TDS) when a contract requires the payer, rather than the recipient, to bear the income tax. The taxable payment is grossed up so that the recipient receives the agreed net amount.
What does Section 195A mean?
A net-of-tax arrangement is an agreement under which the recipient is promised a specified amount after applicable TDS, and the payer agrees to bear that tax. Grossing up means increasing the amount used for calculating TDS so that the amount remaining after deduction equals the contractual net payment.
Statutory rule under Section 195A
Where an agreement or other arrangement provides that the person paying income will bear the tax chargeable on that income, the income is increased, for TDS purposes, to the amount that will leave the agreed net payment after deduction at the rates in force. The provision excludes the case referred to in Section 192(1A), concerning tax paid by an employer on certain non-monetary perquisites.
Read the official text of Section 195A on the Income Tax Department website.
TDS grossing-up formula
Where a single flat effective withholding rate applies to the entire payment, the calculation is:
Gross income = Agreed net income / (1 - applicable TDS rate)
TDS borne by payer = Gross income - Agreed net income
Use the rate as a decimal (for example, 10% = 0.10). The applicable rate may require surcharge and cess where relevant. Progressive rates, thresholds, treaty relief, and other special rules may require a different calculation.
Illustration: payment of Rs. 90,000 net of tax
| Particulars | Amount |
|---|---|
| Contractual net amount | Rs. 90,000 |
| Assumed TDS rate (illustrative only) | 10% |
| Grossed-up income: 90,000 / 0.90 | Rs. 1,00,000 |
| TDS borne and deposited by payer | Rs. 10,000 |
| Amount received by payee | Rs. 90,000 |
The 10% rate is an assumption for illustration, not a universal rate under Section 195A. This section supplies the grossing-up mechanism; the relevant withholding provision determines whether tax is deductible and at what rate.
When does grossing up apply?
- There must be an agreement or other arrangement making the payer responsible for the recipient's tax.
- The payment must fall within an applicable TDS provision; Section 195A does not independently create a withholding obligation.
- The relevant rate in force and the income chargeable to tax must be identified before calculating the grossed-up amount.
- The express exclusion for cases covered by Section 192(1A) must be considered.
Related provisions and definitions
Section 192(1A): addresses an employer's option to pay tax on specified non-monetary perquisites, instead of deducting it from salary. Section 195: governs withholding on certain chargeable payments to non-residents or foreign companies. Section 197: provides for certificates authorising lower or nil deduction in eligible cases. Section 198: addresses treatment of tax deducted as income received, subject to its terms. Section 200: deals with duties of persons deducting tax, including payment to the government.
Income-tax Act, 2025: transition and current applicability
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, with savings for matters governed by the earlier law. The Department's correspondence materials identify Section 393 of the 2025 Act in relation to the earlier Section 195A; this is not a statement that the full wording or operation is identical. Verify the applicable subsection and current rules before computing TDS for a transaction under the new Act.
See the official Income-tax Act, 2025 resources and correspondence utility and the official consolidated Income-tax Act, 1961 text.
Legislative history
Section 195A was inserted by the Finance Act, 1987 (Act 11 of 1987), section 50, effective 1 June 1987. The opening words were substituted by the Finance Act, 2002 (Act 20 of 2002), section 81, effective 1 June 2002, to exclude the case covered by Section 192(1A).
Practical compliance checklist
Before processing a net-of-tax payment, review the contractual tax clause, the recipient's tax status, chargeability of the payment, applicable TDS provision and rate, any relevant treaty or certificate, and the deposit and reporting obligations. Record the gross-up calculation and supporting documents.
Disclaimer: This article is general information, not transaction-specific legal or tax advice. Rates and obligations depend on the relevant tax year and facts.