Gross tax at 20%, and the rate rise
Franchise and royalty income has its own regime, and the key feature is that it is taxed on the gross. When an Indian business pays a non-resident a franchise fee, a brand royalty or a fee for know-how or technical support, that payment is Indian-source income, characterised as royalty under Section 9(1)(vi) or as fees for technical services, and taxed under Section 115A on the whole amount, without deduction for your costs.
The rate matters, because it recently went up. The Finance Act 2023 doubled the Section 115A rate on royalty and technical fees paid to non-residents from 10 per cent to 20 per cent, plus surcharge and cess, with effect from the 2024-25 assessment year. So a franchise or royalty stream from India that used to bear 10 per cent now bears 20 per cent under the domestic rate. For many NRIs that makes the treaty rate, discussed next, far more important than it used to be.
The treaty rate, its new filing condition, and bundling
Most tax treaties cap the rate on royalties and technical fees below the domestic 20 per cent, often at 10 or 15 per cent, and you are entitled to the lower of the treaty rate and the domestic rate. But the Finance Act 2023 added a catch. It removed the earlier concession that let a non-resident skip filing an Indian return where tax had been withheld, so to claim the treaty rate you now have to file an Indian return and support it with a tax residency certificate, Form 41, formerly Form 10F, a declaration that you have no permanent establishment in India, and a PAN. Miss the filing and you can be left on the 20 per cent domestic rate. The Indian franchisee deducts TDS under Section 195, renumbered to Section 393(2) under the Income-tax Act, 2025 from FY 2026-27.
One more thing to get right is bundling. A franchise agreement often rolls several things into one fee, the brand and intellectual property, which is royalty, training and technical support, which is fees for technical services, and plain reimbursements of cost, which may not be taxable at all. Splitting the fee into its parts can change the rate on each slice and reduce the overall tax. And if you actually have a permanent establishment in India, the picture flips: the income is then taxed on a net basis as business profits under the business-profits rules, not on the gross under Section 115A. A practising CA characterises the fee, secures the treaty rate with the right paperwork and filing, and keeps the withholding correct.