Application for lower deduction of tax by the non-residents

1. Background

The rates for tax deduction at source (hereinafter “TDS”) for non-resident tax payers in India is higher than a resident assessee under the Income Tax Act 1961 (hereinafter the Act). Except for certain specific items where the TDS rate is lower than 20%, the usual tax rate for non-residents is 20% for any income earned in India as provided in section 195 of the Act.

1.1 However, it may so happen that the income of a non-resident, based on the slab rates or the special rates specified under different provisions of the Act as applicable to him may not attract the tax at the rate of 20%(the rates in force) due to lower taxable income, computed after claiming deduction /exemption available to the non-resident under the various provisions of the Act.

A few such examples are:

1.2 in case of rental income from house property, due to the deductions available for:

1.2.1 Property taxes paid on the properties rented [proviso to section 23(1)]

1.2.2 a sum equal to thirty per cent of the annual value for repairs @ 30%  of the annual value [section 24(a)]

1.2.3 Interest expenditure on borrowings if any allowed to the extent of Rs 2 lakhs [Section 24(b)]

1.2.4 Set off available for unabsorbed brought forward losses available for eight years under the house property [Section 71B]

1.3 Similarly, in case of sale of a long term capital assets, due to the deductions available for:

1.3.1 Indexation available for the long term assets (other than capital gain arising from the transfer of shares in, or debentures of, an Indian company [second proviso to section 48]

1.3.2 Profit on sale of property used for residence [sectin54]

1.3.3 Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases [Section 54B]

1.3.4 Capital gain not to be charged on investment in certain bonds [section 54EC] and so on

1.3.5 Set off brought forward capital losses [section 74]

2. Provisions of section 195 for TDS applicable to a non-resident:

2.1 Section 195 (1) of the Act provides that any person responsible for paying to a non-resident any interest (not being interest referred to in section 194LB or section 194 LC or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

2.2 So the rate of tax in force other than interest under sections 194LB, 194LC and 194LD (which is between 4% to 5%) is 20% in case of a non-resident. Tax deduction on salary is not covered under the provisions of section 195.

2.3 Thus, a non-resident can have taxable income under the heads of;

(i) Income from house property,

(ii) Business or professional income,

(iii) capital gains and

(iv) income from other sources

where the tax rate applied may be as high as 20% for TDS.

2.4 As stated in para 1.1. above, the taxes payable by a non-resident may be lower than the TDS rate applicable to him under section 195 of the Act.

2.5 Therefore Section 195(2) and (195(3) of the Act provides that:

2.5.1 where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.  [Section 195(2)] (Emphasis supplied)

2.5.2 Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).

Thus, either the payer of the income or the receiver of the income can make an application for lower deduction of tax under section 195(2) and 195(3) of the Act respectively.

2.5.3 Section 195(4) provides that a certificate granted under sub-section (3) (i.e to the receiver of the income, the non-resident) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.

Thus the Certificate for lower or nil deduction of tax is issued by the Assessing officer to the non-resident for a specified period mentioned in the certificate for which it is valid unless it is cancelled by the assessing officer.

2.5.4 Section 195 (5) provides that the Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

Accordingly the Board has prescribed Form no. 13 for making an on line application for lower deduction of tax read with rule 28B of the Income tax Rules 1962 (herein after “the Rules”)

2.5.5 Section 195(6) and section 195(7) provides for information to be submitted by certain TDS payers which is not relevant for this article and therefore not considered here.

3. Prescribed application for lower deduction of tax under section 197(3)

3.1 So if the tax is deducted at the prescribed rate of income tax as provided under section 195 or other applicable provisions to a non-resident, the deduction could be higher than the actual tax liability, thus blocking his/her funds. As a result, (s)he will be required to make a claim for refund at the time of filing the return, which will delay the availability of the funds still further, otherwise available to him/her at their disposal.

3.2 Therefore, either the non-resident assessee, himself/herself can make an application under section 195(3), or request the payer of the income under section 195(2), to make an application for lower or no deduction of tax from his/her income under section 197(3) of the Act read with rule 28 of the Income tax Rules 1962 in the prescribed form 13. A specimen copy of the form 13 is provided at the end of this article for a ready reference.

3.3 Rule 28 of the Rules provides that application in form 13 can be filed on line at the web portal of income tax department i.e. Traces at, https://www.tdscpc.gov.in. The application is required to be signed either under (i) digital signature; or (ii)  through electronic verification code.

4. Procedure/steps for filing the on line application in the prescribed form 13 under section 197(3)

4.1 Log in at the web site https://www.tdscpc.gov.in in already registered. If not, then registration on the above website is compulsory.

4.2 If the application is being made by the:

4.2.1 payer/deductor under section 195(2), then the registration should be done as a deductor

4.2.2 Payee/receiver under section 195(3), then the registration should be done as a tax payer.

4.2.3 Download form no. 13 from the website

4.2.4 Fill up the details asked for in form no. 13 and upload the documents in support of the fact that the income is lower/nil and therefore no tax should be deducted.

4.2.5 Electronically sign the form and submit on line.

4.3 An illustrative Checklist for making application for sale of a residential house and investment of the long term capital gain in a new house is given is given at the end.

An illustrative check list for  making application for nil/lower deduction of tax under section 197(3) for form  no. 13 in the case of long term capital gains

Serial No.	Documents/details/ information required for the purpose of the application	Whether taken on record Yes/No/NA
1	Name and address (both Indian as well as foreign) of the applicant
2	Status
3	Residential Status
4	Passport (Scanned copy to be collected) in case of non residents
5	Previous year wise details of stay in India (in case of non residents) – will be required to establish residential status
6	PAN  (Scanned copy)
7
8	Adhar card (Scanned copy) if available
9	OCI Card no. (Scanned copy) if available
10	Email id of the assessee
11	Mobile no. of the assessee and /or his representative
12	Details of existing tax liabilities, Assessment year wise  if any. Lower deduction of tax certificate will be issued only if the liabilities are paid before issuing the certificate
13	Previous year to which the payments/receipts relate  for which application is made
14	Estimated Computation of Income for the previous year relevant to the assessment year for which lower/nil deduction application is being made
15	Tax payable on the above income
16	Statement of exempt income for the previous year relevant to assessment year for which application is being made
17.	Details of any advance tax /TDS already paid for the previous year for which lower deduction for tax certificate is applied for.
18	Whether exemption under section 10, 11 and 12 claimed (applicable in the case of the trusts)
19	Estimated Computation of Income for the previous four years if the Income tax returns are not filed
20	Copies of the returns if filed in paper form for the last four years
21	Final agreement for purchase of the existing property (being sold now)
22	Draft/final agreement for sale of the above property
23	Draft/final agreement for purchase of new property  which is exempt under section 54 or investments made claiming exemption under any other provision
24	Bank Account no. (Scanned copies to be submitted for the last four years) and for the previous year for which the application for lower deduction of the tax is to be made.
25	Application (form no.13) in the prescribed format duly filled in with all the supporting documents
26	Bank loan sanction for the purchase of the existing old flat Some times the TDS officer may ask for the sources for buying the old flat purchased
27	Certificate from the Bank for interest and principal repayment made during the last four years (final) and for the current year (estimated) If any claim is made in the computation for interest on housing loan for any previous years (four earlier previous years and the current one)
28	Letter of indemnity Certain times the TDS officers ask for such a letter
29	Engagement letter for the above assignment
30	Letter of authority for presenting the case to the TDS officer

Download Format of Form No. 13