Tax Exemption Certificate is a document issued by the income tax authorities that exempts a person or entity from the deduction of tax at source (TDS) on certain types of income.
In situations where an individual or entity is eligible for income that’s generally subject to TDS, they can apply for a non-TDS certificate from the income tax department. This certificate essentially instructs the payer not to deduct tax at the source for the specified income or to deduct tax at a lower rate than the usual prescribed rate.
Common instances where a non-TDS certificate might be applicable include:
- Lower Deduction or No Deduction: If an individual’s estimated tax liability is lower than the tax required to be deducted at source, they can request a certificate that allows for a reduced TDS or exempts TDS entirely on certain income sources.
- Avoidance of Double Taxation: Non-resident individuals or entities who are eligible for benefits under a Double Taxation Avoidance Agreement (DTAA) can obtain a non-TDS certificate to avail themselves of lower withholding tax rates or exemption from TDS.
- Specific Incomes: In cases where a certain type of income is exempt from TDS under income tax laws, an individual can procure a non-TDS certificate to ensure no tax is deducted from that income.
This certificate is obtained by applying to the relevant income tax authority and providing the necessary documentation to support the claim for exemption or lower deduction. Once approved, the payer is legally bound to honor the certificate and not deduct tax at source or deduct tax at the reduced rate as specified in the certificate.
It’s important to note that these certificates have a specified validity period and conditions attached, and they need to be renewed or reissued as per the regulations laid down by the tax authorities.