What is withholding tax?
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Short answer
Withholding tax is tax that a payer deducts from a payment and pays to the government for the recipient.1 The US taxes most US-source income paid to a foreign person at 30% this way, unless the code or a treaty lowers it.1 An Indian resident can claim credit for foreign withholding under rule 76 of the Income-tax Rules, 2026.2
| Full form | Governed by | Who needs it | Where it is used | Related terms |
|---|---|---|---|---|
| Not an abbreviation; the US calls it NRA withholding1 | The payer country's tax law; in India, rule 76 of the Income-tax Rules, 2026 governs the credit12 | Exporters paid by clients or platforms that tax payments at source | Foreign client and platform payments; foreign tax credit claims in India2 | DTAA, tax residency certificate, W-8BEN, Form 44, TDS |
Sometimes an invoice is paid short, with a note that tax was "withheld". This happens to Indian freelancers, agencies and companies paid by clients or platforms in countries that tax payments to foreigners at source.
What does withholding tax mean in simple words?
Withholding tax is the part of your fee that a foreign client or platform deducts and pays to its own government before paying you the rest.1 The US calls this "NRA withholding": the IRS says most types of US-source income received by a foreign person are subject to US tax of 30%, with a reduced rate or exemption where the tax code or a tax treaty provides.1
- Who deducts: the payer, under its own country's law.1
- Who bears it: you, because the deduction comes out of your fee.1
This page is about tax withheld abroad on your export fees.
Why does withholding tax matter for Indian exporters and freelancers?
Withholding tax matters because it reduces what you receive, and you then need to claim it back as a credit in India to avoid paying tax twice.12
- Tax treaties: India's tax treaties, entered into under section 159 of the Income-tax Act, 2025, give relief from double taxation.5
- Income tax in India: A resident can claim credit for foreign tax under rule 76 of the Income-tax Rules, 2026.2
- Client paperwork: US payers ask for Form W-8BEN (individuals) or W-8BEN-E (entities); without a valid form, the IRS instructions say the payer may withhold at 30% or at the backup withholding rate.4
A marketing agency with clients in a country that taxes service fees at source, or an online tutor paid through a foreign platform that deducts tax, should keep every withholding certificate.
How does withholding tax work?
A foreign client withholds tax when its own country's law treats your fee as taxable there and requires the payer to collect it.1 Whether that applies depends on the country, the type of income and any tax treaty with India.
For US clients, the place where the work is done matters most. The IRS says personal service income is sourced where the services are performed.3 For example, a copywriter, developer or consultant working from India generally earns foreign-source income from a US client, outside the scope of US withholding on US-source income.13
How do you claim credit for withholding tax in India?
You claim credit for tax properly withheld abroad under rule 76 of the Income-tax Rules, 2026.2 The key rules are:2
| Point | Rule 76 says |
|---|---|
| Who can claim | A resident assessee, for foreign tax paid outside India |
| Amount | Lower of the Indian tax on that income and the foreign tax paid; tax above the treaty rate is ignored |
| Exchange rate | Telegraphic transfer buying rate on the last day of the month before the tax was paid or deducted |
| Form | Form No. 44, with a certificate or statement of the tax deducted |
| Deadline | Within twelve months from the end of the relevant tax year, with the return filed on time |
Under the Income-tax Rules, 1962, the same credit was claimed in Form No. 67 under rule 128; Form No. 44 under rule 76 of the 2026 Rules now does that job.26
What is the difference between foreign withholding tax and TDS?
Foreign withholding tax is deducted by a payer abroad under its own law, while tax deducted at source (TDS) is India's own version, which applies when Indian payers pay you.1
| Term | Who deducts | Best for |
|---|---|---|
| Foreign withholding tax | A foreign client or platform, under its country's law1 | Understanding short payments from clients abroad |
| TDS | An Indian payer, under Indian law | Understanding deductions by Indian clients |
Credit for foreign withholding tax is claimed under rule 76.2
What do people get wrong about withholding tax?
The common mistake is assuming the full amount withheld comes back as credit.2
- Credit cap: The credit is the lower of the Indian tax on that income and the foreign tax paid.2
- Treaty rate: Foreign tax deducted above the treaty rate is ignored for credit.2
- Missing forms: A missing W-8BEN or W-8BEN-E can trigger withholding at 30%.4
Treaty rates differ by country and income type, so confirm your case with a chartered accountant.
Which terms are related to withholding tax?
These terms come up with withholding tax:
- DTAA: the tax treaty that can lower the withholding rate.
- Tax residency certificate: proof of residence a payer may ask for.
- W-8BEN: the US form individuals give to document their status.
- Form 67: the older foreign tax credit form.
For the full process, read foreign withholding tax for Indian exporters and foreign tax credit with Form 67 and Form 44.
How did we verify this?
We checked this page against the sources below on 30 October 2026. Read our methodology or report an error.
- [1]IRS, NRA withholding (checked 28 October 2026)
- [2]Income-tax Rules, 2026, rule 76 (foreign tax credit) (Income Tax Department)
- [3]IRS, Nonresident aliens: sourcing of income (checked 28 October 2026)
- [4]IRS, Instructions for Form W-8BEN (Rev. October 2021) (checked 28 October 2026)
- [5]Income-tax Act, 2025, section 159 (Income Tax Department)
- [6]Income-tax Rules, 1962, rule 128 (Foreign Tax Credit, Form No. 67) (Income Tax Department)
Frequently asked questions
Should a US client withhold tax from an Indian exporter's fees for work done in India?+
Generally not. The IRS sources personal service income where the services are performed, so fees for work done in India are generally not US-source income.3 US withholding tax on foreign persons applies to US-source income.1 A US client may still ask for Form W-8BEN or W-8BEN-E to document your foreign status.4
Is the foreign tax credit equal to the full withholding tax deducted?+
Not always. Under rule 76(7) of the Income-tax Rules, 2026, the credit is the lower of the Indian tax on that income and the foreign tax paid, and any foreign tax deducted above the treaty rate is ignored.2 An Indian exporter may therefore get less credit than the withholding tax a client deducted.
By when must Form 44 be filed to claim credit for withholding tax?+
Under rule 76(12) of the Income-tax Rules, 2026, Form No. 44 is filed within twelve months from the end of the tax year in which the income is offered to tax in India, provided the return is filed within the time allowed.2 File it with proof of the withholding tax deducted.
Which exchange rate converts foreign withholding tax into rupees?+
Rule 76 of the Income-tax Rules, 2026 converts foreign tax into rupees at the telegraphic transfer buying rate on the last day of the month before the month in which the tax was paid or deducted.2 An Indian exporter needs that rate for each month in which a client withheld tax.
Which form was used to claim credit for withholding tax before Form 44?+
Under the Income-tax Rules, 1962, credit for foreign withholding tax was claimed in Form No. 67 under rule 128.6 Form No. 44 under rule 76 of the Income-tax Rules, 2026 now does that job, so an Indian exporter uses Form No. 44 for the new tax years.2
This page is general information for Indian service exporters, not tax or legal advice. Rules change and outcomes depend on your facts, so confirm with a chartered accountant before acting.
Keep reading
What should an Indian exporter do when a foreign client withholds tax?
Why a foreign client or platform may withhold tax from an Indian exporter's fee, how treaty caps limit it, and how the tax is credited in India from 2026.
TaxHow do Indian service exporters claim credit for tax a foreign client withheld?
How Indian freelancers claim credit for tax withheld by foreign clients: DTAA relief, Form 67 (FY 2025-26), Form 44 (tax year 2026-27), deadlines, rejections.
TaxWhat changed when Form 44 replaced Form 67 for foreign tax credit?
Form 67 under rule 128 is now Form 44 under rule 76 of the Income-tax Rules, 2026. Which form applies to which year, new deadlines, CA verification and Form 45.
GlossaryWhat is a DTAA (Double Taxation Avoidance Agreement)?
A DTAA is a tax treaty between India and another country that relieves double taxation. What it means for Indian freelancers and agencies paid from abroad in 2026.
GlossaryWhat is a tax residency certificate?
A tax residency certificate proves you are tax resident in a country for treaty purposes. Indian residents apply in Form 42 under rule 75 of the 2026 Rules.