Tax Exemption Certificate

Under the Indian Income Tax Act, 1961 (the “Act”) any income or capital gain receivable by the NRI from any Resident or NRI, is liable for withholding taxes/Tax Deducted at Source (TDS) by the payer at the prescribed rate of tax ranging from 10% to 30%. However, in the majority of the cases of NRIs, the actual tax liability is lower or Nil, than the rate of tax prescribed.

For any NRI, whose TDS is more than his/her tax liability, such excess tax can be claimed as refund from the Indian Tax Department (ITD) by filing the Return of Income in the particular Financial Year. Such excess TDS results into loss to NRI due to the time interval between the tax deducted and refund of such excess tax, which may take generally 1 to 2 years.

In order to address the above situation, a procedure has been prescribed under the Act, whereby NRI recipient of income can apply online to ITD (in a prescribed format) along with the relevant supporting documents to issue a Tax Exemption Certificate (TEC) authorising the payer of income (who deducts tax) to deduct tax at a lower rate or Nil rate, as the case may be.

In case of NRIs, whose actual tax liability is lower than the rate of tax prescribed under the Act, it is beneficial to obtain a TEC. An NRI should apply for TEC under few situations listed below:

SituationsPrescribed rate of TDS (%)*Actual Tax Liability (%)*
Short Term/Long Term Caption Gain on sale of property and intention for claiming exemption by re-investment in property/bonds20%/ 30%Nil / Lower than rate applicable
Short Term/Long Term Capital Gains on sale of securities/and other transactions15%/ 30%Nil / Lower than rate applicable
Rental income30%Nil / Lower than rate applicable
Interest income on NRO Deposits up to basic exemption limit – Rs <2,50,000> for AY <2019>30%Nil rate

*Plus applicable surcharge and Health and Education cess on income tax

In the above situation, the NRI may therefore be saved from the process of seeking refund of income-tax and delays in obtaining the refund of tax.

The NRIs (the recipient of income) should estimate their total income, tax liability and likely TDS and then apply for Nil or lower rate for TEC. Such certificate would be binding on the payer of the income who is required to deduct tax in accordance with the directions in the TEC.

Procedure/Timeline: The Jurisdictional Assessing Officer (from international taxation ward of the ITD) of an NRI generally issues a TEC between 2 and 4 weeks from the date of application.

Validity: A TEC is normally valid for the period for which such TEC is obtained (i.e. a Financial Year) and for the specific income as stated in the TEC.

Filing Return of Income: NRI who has obtained the TEC has to mandatorily file his Return of Income in India for that Financial Year.

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