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Tax Exemption Certificate

Meanings

Lower or Nil Rate of TDS:
The rate prescribed for TDS from NRI's income is the maximum rate of tax at which relevant Income is taxable in India. However, in majority of the cases of NRI, the actual tax liability is lower than this. However, the higher deduction of tax so made is generally not claimed as refund by filing Return of Income. In order to assist such a situation, the Income-tax Act has provided procedure under section 197 whereby a NRI can apply to the Assessing officer (in prescribed form) to issue specific certificate authorising the payer of income (who normally deducts tax at highest prescribed rate) to deduct tax at a lower rate or nil rate as the case may be. The NRI should estimate his income, tax liability and likely TDS and then apply for partial or complete Tax Exemption Certificate. The payer shall deduct tax in accordance with the certificate of the Assessing officer. Such a certificate would be binding on the payer.

 

Few of such situations are mentioned below:

 

1)

Interest Income lower than the exemption limit:(less than Rs.1,50,000)

 

An NRI is earning interest on which he is not liable to tax at all. However the tax is deducted at source at 33.99%.

 

2)

Short Term Capital Gains:

 

An NRI has short term capital gains [ other than on Shares and Mutual Fund Units traded on Exchange] of Rs.2,00,000/- from which the tax is deducted at 33.99%, but the tax liability as per the slab rates is only 2.5%.

 

3)

Set-off of Gains against losses:

 

When NRI has incurred loss on sale of shares and later when he sells other shares where he has capital gains, in such a case the tax is deducted from the Capital Gain at prescribed maximum rate. The NRI is eligible to claim set off provided both the transactions are in the same year i.e. during April- March financial year.

 

4)

Re-investment of capital gains:

 

The re-investment of capital gains/sales proceeds as prescribed may exempt the capital gain from tax partially or fully but nevertheless the tax is deducted on such capital gains.

 

5)

Buy Back of Shares:

 

If NRI offers shares in Buyback Offers of any company, the tax shall be deducted by the company at 33.99% or 22.66% on the capital gains or sometimes on the entire sale proceeds. The NRI can apply for TEC in all the above situations and avoid larger tax deduction.

 

FREQUENTLY ASKED QUESTIONS

 

1)

Who can apply for Tax Exemption Certificate?

 

Any Non Resident Indian from whose Income the Tax is likely to be deducted at source can apply to obtain exemption for tax deduction provided his/her taxable Income in India is less than Rs.1,50,000/- per year. Or if the tax likely to be deducted is more than the estimated tax liability, is eligible to apply for certificate permitting deduction of tax at lower rate.

 

2)

What is the time taken to issue such certificates?

 

Normally the Exemption Certificate is issued within 10-25 Days.

 

3)

For how much period the exemption certificate is valid?

 

The income tax department generally issues Exemption Certificate for a period of 1 to 3 years.

 

4)

Action to be taken after obtaining exemption certificate

 

Any NRI who has obtained Exemption Certificate need to submit it to the Payer of the income who will follow the certificate and not deduct tax or may deduct at a lower rate as given.

 

5)

Misrepresentation in the application - consequences

 

If there is genuine mistake in representation for obtaining the Exemption Certificate, no penalty is attracted. However you may have to pay interest if you are liable to pay income tax later on.

 
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