Rule 209 — Application by payee for certificate authorising receipt of interest and other sums without deduction of tax. Made under s.395 of the Income-tax Act, 2025.
Rule 209 gives effect to Section 395 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) lets a person in column B of the Table, entitled to receive interest or any other sum of the nature specified in section 393(2) [Table: Sl. No. 17], apply in Form No. 126 for a certificate under section 395(1) authorising receipt of that income or sum without deduction of tax, provided the conditions in column C are fulfilled. Column D limits what the certificate may cover.
Entry 1 covers a banking company, or an insurer as defined in section 2(9)(d) of the Insurance Act, 1938, which is not a domestic company and which carries on operations in India through a branch. Three conditions apply: the person has been regularly assessed to income-tax in India and has furnished returns of income for the last five tax years for which such returns became due on or before the date of the application; he is not in default or deemed to be in default in respect of any tax, including advance tax and tax payable under section 266, or any interest, penalty, fine or other sum payable under the Act; and the interest or other sum is receivable by the branches on their own account and not on behalf of the head office, any branch situated outside India, or any other person. The certificate may cover any income by way of interest, not being interest on securities other than interest payable on securities referred to in section 393(4) [Table: Sl. No. 6], or any other sum not being dividends.
Entry 2 covers any other person carrying on a business or profession in India through a branch. The conditions in entry 1 apply, and two more: he has been carrying on business or profession in India continuously for not less than five years immediately preceding the date of the application, and the value of the fixed assets in India of that business or profession, as shown in his books of account for the tax year ending immediately before the date of the application — or, where the accounts for that year have not been made up by then, for the preceding tax year — exceeds fifty lakhs rupees. For this entry the certificate may cover any sum not being interest or dividends.
Sub-rule (2) fixes the life of the certificate: it is valid for the tax year specified in it, unless the Assessing Officer cancels it at any time before that year expires.
Sub-rule (3) allows an application for a fresh certificate, if required, after the expiry of the validity of the earlier certificate, or within three months before its expiry.
Section 395(1) allows a certificate authorising receipt of a sum without deduction of tax, but the Act cannot say which payees are safe to release from deduction. A branch of a foreign bank or an overseas business collects income in India while its head office is beyond ordinary reach, so the rule requires a five-year assessment record, a clean default position and — for the second class — five years of continuous presence and a substantial fixed asset base in India before the deduction is switched off. The own-account condition keeps the concession with the branch that is actually assessed.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Assessment record required of every applicant | Returns of income for the last five tax years | The tax years for which such returns became due on or before the date on which the application is made, and the applicant must have been regularly assessed to income-tax in India | Sub-rule (1), Table Sl. No. 1(a) |
| Continuous presence required of an entry 2 applicant | Not less than five years | Carrying on business or profession in India continuously, immediately preceding the date of the application | Sub-rule (1), Table Sl. No. 2(b) |
| Fixed asset test for an entry 2 applicant | Exceeding fifty lakhs rupees | Value of the fixed assets in India of the business or profession as shown in the books of account for the tax year ended immediately before the date of the application, or for the preceding tax year where those accounts have not been made up | Sub-rule (1), Table Sl. No. 2(c) |
| Validity of the certificate | The tax year specified in the certificate | Unless cancelled by the Assessing Officer at any time before the expiry of that tax year | Sub-rule (2) |
| Window for applying for a fresh certificate before expiry | Within three months before the expiry | Of the validity of the earlier certificate; an application may also be made after that expiry | Sub-rule (3) |
The two entries do not buy the same thing, and that is the point most easily missed. Entry 1 can cover interest — though not interest on securities, unless it is interest payable on securities referred to in section 393(4) [Table: Sl. No. 6] — and any other sum that is not a dividend. Entry 2 covers only sums that are neither interest nor dividends, so an ordinary overseas business with an Indian branch cannot use this certificate to receive interest gross. The conditions stack: an entry 2 applicant must satisfy the entry 1 conditions as well as its own two. The own-account condition in entry 1(c) is a real filter — a branch collecting for its head office or a foreign branch is outside it however good its own compliance record. And the certificate is fragile: sub-rule (2) lets the Assessing Officer cancel it at any time before the tax year expires, so a payer who has stopped deducting on the strength of it is relying on a document that can be withdrawn mid-year. Sub-rule (3) is what keeps a gap from opening — the fresh application may be made within three months before expiry rather than only after it.
A foreign bank operating in India through a branch has been regularly assessed here, has filed returns for the last five tax years that became due before its application, and is not in default on any tax, interest or penalty. The interest it expects is receivable by the branch on its own account. It applies in Form No. 126 and receives a certificate under section 395(1) valid for the tax year specified. Two months before that year ends it applies again under sub-rule (3), which permits an application within three months before expiry. An overseas consultancy with an Indian branch, fixed assets in India of Rs 80 lakh and six years of continuous operation could also apply, but its certificate could not extend to interest — entry 2 covers any sum not being interest or dividends.
A payee meets it as the Form No. 126 application and the certificate that follows, which it hands to payers so they release the sum without deduction. A payer meets it as that certificate, and has to watch its stated tax year and any cancellation.
The person concerned has been regularly assessed to income-tax in India and has furnished the returns of income for last five tax years for which such returns became due on or before the date on which the application under this rule is made
the interest or other sum is receivable by the branches on their own account and not on behalf of its head office or any branch situated outside India, or any other person
An application for a fresh certificate may be made, if required, after the expiry of validity of the earlier certificate, or within three months before the expiry thereof.