Tax Exempt Certificate: To understand Tax Exempt Certificate, we must first understand the meaning of Tax Deducted at Source (TDS). Under the Income Tax Act, 1961, a person making payment to another person is required to deduct tax (hence, TDS) and then deposit the same to the Government of India. This deduction takes place either at the time or debit or credit (whichever is earlier). Furthermore, this provision ensures the collection of tax and also scrutiny of the same for the deduction of the tax liability of a taxpayer.
Moreover, Section 197 of the Income Tax Act also allows a lower rate of TDS or NIL TDS on credit payment (as the case may be), provided if the applicant presents satisfactory evidence to the Assessing Officer. Hence, the Tax Exemption Certificate needs to be applied by the applicant rather than being suo moto. Therefore, the applicant themselves need to provide justification on which such certificate needs to be issued in order for the Assessing officer to make an informed decision.
Students can find more about Certificates, explore the types used for academic purposes, professional purposes and more.
Who is Eligible for a Tax Exemption Certificate?
Non-Resident Indians:
As per the Indian Income Tax Act, 1961, when a Non-Resident Indian (NRI) receives any capital gain or income, is liable for tax deduction at source by the payer at a prescribed tax rate, which can range anywhere from 10% to 30%. However, in many cases, the actual tax liability is lower than the prescribed rates or even NIL. We shall explore some of those scenarios in this article:
In some cases, an NRI may have more TDS than their actual tax liability. This excess tax will be refunded by the Indian Tax Department by filing Return of Income in a particular financial year. However, this is actually a financial loss to the NRI due to the long time period between the deduction and subsequent refund (usually takes 1 year or more).
To address such situations, a provision has been incorporated under the Act, where an NRI recipient of income can apply for a Tax Exemption Certificate online which authorises the payer of income to deduct tax at a much lower rate or even at an NIL rate. In cases where the NRI’s actual tax liability is much lower than the rate of tax prescribed, it is highly recommended that they apply for a Tax exemption certificate. Following are some scenarios where an NRI can apply for a tax-exempt certificate.
| Scenarios | Percentage of TDS Prescribed | Percentage of Actual Tax Liability |
| Interest on Income from Non-resident Ordinary Account Deposits (up to basic exemption limit – INR.2,50,000/-) | 30% | NIL |
| Short Term or short term capital gains on the sale of securities | 15% or 30% | NIL / Lower than prescribed |
| Short Term or Long Term capital gains on the sale of properties with the intention of claiming an exemption by re-investing in bonds or property. | 20% or 30% | NIL / Lower than prescribed |
| Income from rent | 30% | NIL / Lower than prescribed |
If the NRI applies for a tax-exempt certificate, the Assessing officer will usually issue the same within two to four weeks. Furthermore, the certificate is usually valid for a financial year and for the particular income specified in the tax-exempt certificate. And also, if the NRI has obtained the certificate, they are compulsorily required to file their Return of Income in India for that financial year.
Startups:
Startups that meet certain eligibility criteria under the Startup India Action Plan (G.S.R Notification 127-E) are eligible to apply for a tax exemption certificate. Do note that the startups will have to provide supporting documents during application. We shall explore the eligibility criteria for this program:
- The startup should be registered as a partnership firm, a limited liability partnership or as a private limited company.
- In the previous financial years, the startup should have less than INR 100 crores as turnover.
- An entity is considered a startup only if it is no older than 10 years from the date of its inception
- An entity which is formed from reconstruction or splitting up shall not be termed as a start-up
- The startup must work towards the end goal of improving existing products or services, or it must have the potential to create wealth, employment opportunities or make society a better place.
80 IAC Tax Exemption
- After a startup is officially recognised and deemed eligible under the programme, they may apply for exemption of tax under section 80 IAC of the Income Tax Act.
- The startup can then avail a tax holiday for 3 consecutive years from the first 10 years since its inception.
- Do note that the startup must have been incorporated after 1st April, 2016.
Revised Tax Exemptions for 2019 and 2020 (Union Budgets)
- A new tax regime has been proposed by the government under Section 115BAC. Present taxpayers can continue as per the existing regime or opt for the new tax regime
- Individuals who earn up to INR 5,00,000 per annum will be eligible for a rebate under Section 87A – upto an amount of INR 12,500 on tax payable.
- Deductions of medical expenses and health insurance premiums still remain at INR 50,000 under section 80D.
- For companies with turnover of under INR 250 crores, corporate tax has been reduced to 25%.
- For companies with turnover above INR 250 crores, corporate tax has been reduced to 30%.
Applying for a Tax Exempt Certificate
Individuals who are eligible for tax exemptions in India can file an application in Form No. 13 u/r 28 of Income Tax Rules, 1962. However, the applications will be subject to scrutiny by the assessing officer. Typically, the entire process will be completed within 30 days from the date of application.
The applicant must also provide certain other details within their application. These are as follows:
- Residential status
- PAN
- TAN (Tax collection and collection number)
- Details of statements/ returns under Section 139 Income Tax Returns, Section 200 TDS Returns and Section 206C TCS Return, which are due, but not filed
- Details of the returned or assessed income for the previous 3 assessment years
- Details of the previous 3 assessment year’s tax payment
- A copy of the audit report, balance sheet, statement of profit and loss for the previous three years
- Details of the existing liabilities under the Income Tax Act, 1961
- The AY to which the payment relates
- An estimate of total income of the previous year relevant to the assessment year (9)
- The total amount of tax, including the interest payable on the income at (10)
- How the liabilities mentioned in (9) and (10) is proposed to be discharged
- Details of the payment of advance and tax which is already deducted or collected for the AY relevant to the current previous year till date ( TDS, Advance tax and TCS)
- Details of the income claimed to be exempted and not included in the total income.
FAQ’s on Tax Exempt Certificate
Question 1.
What is a tax exemption certificate?
Answer:
A Tax Exempt Certificate is a legal document which authorises a payer of income (the person who deducts taxes) to deduct tax at a much lower rate or at Nil rate.
Question 2.
Who is exempted from income tax in India?
Answer:
Generally, individuals who earn less than INR 250,000/- are exempt from income tax (as per the Income tax rates and slabs under the new tax regime for the Financial Year 2020-21)
Question 3.
What is the validity of the tax exemption certificate?
Answer:
In India, a tax exemption certificate is valid for the period for which the certificate is obtained (i.e, the financial year).
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