Ajayan T, a resident of Bangalore, was shocked when he was asked to produce a tax-clearance certificate by a prospective buyer, when he was trying to sell his flat a year ago. The buyer, Ajayan recalls, was sure he would consider another property in case of any tax dues.
As the name suggests, a tax-clearance certificate shows that there is no outstanding tax liability in your name. In other words, it is a no-objection certificate (NOC) from the Income Tax Department.
In case of dues, the authority would ask you to clear it, failing which the asset you planned to transfer would be used to clear the outstanding liability. Experts say, this has left buyers or recipients of the asset in a lurch several times.
According to the Income Tax (I-T) Act, certain transfers can be considered void without a tax-clearance certificate (Section 281B). "This can be transfer of immovable property, that is, sale or mortgage of housing property, any gift, or exchange," explains Homi Mistry, tax partner, Deloitte, Haskins & Sells.
Though this seldom happens, tax experts say, you may be asked to produce a tax-clearance certificate when gifting shares or any other valuable to your relative(s). "We've seen relatives demanding a tax-clearance certificate for sale or transfer of valuables like paintings, jewellery, land or businesses," says a tax consultant. That's why those into family businesses are asked to keep this certificate handy.
Tax laws say that a clearance certificate is required for tax dues of more than Rs 5,000 when an asset values over Rs 10,000. However, it mostly happens in the case of much bigger transactions.
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K H Vishwanathan, executive director, RSM Astute Consulting, says: "A tax-clearance certificate is more important at the time of third-party mortgage, that is, when someone mortgages his/her asset for someone else. In such a case, the bank asks the third-party mortgagor for a clearance certificate.”
That is a reason why it becomes important to check your tax deducted at source (TDS), experts say. A tax-clearance certificate, if not submitted to the tax department, can land you in trouble, as TDS would show tax liability.
To get a certificate, you need to file an application with the assessing officer of your ward or area, stating the need for a tax-clearance certificate and the purpose for it. The officer would then review your case and accordingly honour or reject the application. Typically, it is issued in 10-15 days after payment of a nominal fee.
Here, if you have not filed your tax returns or filed it late, the tax-clearance certificate can be delayed, because there are high chances that the department would first scrutinise your case before giving the certificate. There will be a clarity on your certificate only after a review of your bank statement, past transaction records and income.
Those in transferable jobs could also face problems because it could take time to assess their file, as they would have filed their returns in different cites or wards.
Kaushik Mukherjee, executive director, PwC, says earlier a tax-clearance certificate was also required for residents migrating out of India with some wealth. But, such individuals are now required to only submit form 30C to the immigration officer. Foreign nationals going back from their deputation in India also require a tax-clearance certificate before leaving the country.