The Indian Income Tax Act mandates Tax Deducted at Source (TDS) on various types of payments such as rent, professional fees, lottery winnings, interest, and property purchases. TDS ensures that tax is collected when income is earned rather than when it is assessed, providing a steady cash flow to the government.
The Act requires TDS to be deducted at prescribed rates on gross payments without considering whether the recipient has an actual taxable income. If the deductee has a lower taxable income or incurs a loss, they have two options:
1) Claim a refund for excess TDS while filing their Income Tax Return.
2) Apply for a Lower TDS Deduction Certificate, which permits the deductor to deduct TDS at a lower or NIL rate, ensuring that funds are not unnecessarily blocked with the government.
Lower TDS Deduction for Domestic Deductees
For resident payees, TDS provisions under Sections 192 to 194N apply. Different TDS rates and threshold limits are prescribed for different types of payments. For example:
⇒ Rent: TDS at 10% if rent exceeds ₹50,000 per month (for individuals).
⇒ Commission: TDS at 2%.
⇒ Professional Fees: TDS at 10%.
For Example:
If a landlord earns rental income but has a home loan with significant interest payments, their net taxable income could be minimal. Instead of waiting to claim a refund, they can apply for a Lower TDS Deduction Certificate under Section 197. This allows the tenant (deductor) to deduct tax at a lower rate or NIL rate based on the certificate.
Key Features::
⇒ The certificate is issued for a specific deductor and a defined transaction limit.
⇒ It is not a blanket exemption for all transactions.
Lower TDS Deduction for Non-Resident Deductees
⇒ Under Section 195, TDS applies to payments made to non-residents. Unlike residents, no threshold exemption exists for non-residents. The applicable tax rate is also determined based on Double Taxation Avoidance Agreements (DTAA) between India and the non-resident’s home country.
⇒ Here too, the non-resident can apply for a Lower TDS Deduction Certificate, allowing the deductor to deduct tax at a lower rate than the default rates prescribed under Section 195.
Lower TDS Deduction for NRIs Selling Property in India
⇒ When an NRI sells property in India, TDS is applicable under Section 195 at 12.5% plus surcharge and cess on the sale price. The property buyer is required to deduct this tax from the payment.
To reduce the TDS burden, the NRI seller can apply for a Lower TDS Deduction Certificate by submitting the following documents:
⇒ Agreement to Sell with the buyer.
⇒ TAN Number of the Buyer.
⇒ Computation of Capital Gains.
⇒ Proof of Property Cost & Guidance Value on Sale Date.
⇒ Past Four Years’ Income Tax Returns (or an affidavit confirming income below the taxable limit).
⇒ Proof of Non-Resident Status for the last three years (Passport immigration stamps).
If the property is jointly owned, separate applications must be made for each owner. The Income Tax Department aims to process these applications within 30 days. Applications with a TDS rate below 3% require additional approval from the Commissioner.
Important Note: Any planned reinvestment of sale proceeds that may qualify for capital gains tax exemption is not considered during application processing, as proof of such investment cannot be provided at the time of filing the application.