Tax exemption Certificate
The rate prescribed for TDS from NRI’s Indian income is the maximum rate of tax at which relevant Income is taxable in India. However, in majority of the cases of NRIs, the actual tax liability is lower than the TDS. However, the higher deduction of tax so made is generally not claimed as refund by filing ROI. Whenever a person’s actual tax liability as per the provisions of the Act is lower than the TDS, he may apply for Tax Exemption Certificate (TEC) from the Indian Income Tax Department.

Considering the example given above where sales consideration was Rs.9,50,000/- and the amount of Capital Gain was Rs.2,00,000/-. In this case, tax is payable on Rs.2,00,000/- i.e. on the amount of capital gain at the specified rate, depending upon the nature of capital gain. However, while deducting tax at source, the payer may apply the rate of tax on Sales consideration and deduct the amount calculated in the said manner from Sales consideration. Accordingly, tax deducted by the payer would be higher than the amount of tax that shall be actually paid on the amount of capital gain.

In order to assist in above mentioned situation, the Act has provided procedure u/s 197 whereby an NRI can apply to his Jurisdictional Assessing Officer (in prescribed form) at the Income Tax Department to issue specific certificate authorizing the payer of income (who 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 TEC. The payer is mandatorily required to deduct tax in accordance with the TEC of the Assessing Officer. Such a certificate is binding on the payer.

Do note that if a person obtains TEC for any financial year, he is compulsorily liable to file the ROI in India for that year. We can assist NRI’s to obtain a TEC from the Income Tax Department.