CBDT Circular No. 4/2002 & TDS on Exempt Institutions: A Forgotten Relief Every Taxpayer and Deductor Must Understand
For decades, companies, banks, PSUs, Government departments, universities, educational institutions, and even seasoned tax professionals have routinely deducted TDS from payments made to entities whose income is entirely exempt from income tax.
Ironically, the Central Board of Direct Taxes (CBDT) itself had recognized this practical difficulty more than 20 years ago through CBDT Circular No. 4/2002 dated 16 July 2002.
Even today, many deductors remain unaware of:
• the scope of the circular,
• its practical implications,
• the later legal developments,
• and the continuing relevance of its underlying principle.
As a result:
• unnecessary TDS deductions continue,
• exempt institutions face refund delays,
• working capital gets blocked,
• and avoidable compliance litigation increases.
This issue has again become highly relevant in cases involving:
• IITs,
• Government universities,
• educational institutions,
• Government-funded trusts,
• statutory authorities,
• and institutions covered under Section 10(23C)(iiiab).
The most common question being asked today is:
Is CBDT Circular No. 4/2002 Still Valid for Non-Deduction of TDS?
The answer requires careful understanding.
Technically, CBDT Circular No. 4/2002 was subsequently revisited and superseded by later CBDT instructions/circulars issued in 2017. However, the fundamental principle behind the circular still continues to hold significant relevance in TDS jurisprudence.
That principle is simple:
If the recipient’s income is wholly and unconditionally exempt under Section 10 of the Income-tax Act, compelling deduction of TDS merely to later claim refund serves little practical purpose.
This was the very logic recognized by CBDT.
What Exactly Did CBDT Circular No. 4/2002 Provide?
CBDT Circular No. 4/2002 dated 16.07.2002 clarified that where:
1. the recipient’s income is unconditionally exempt under Section 10, and
2. the entity is statutorily not required to file return under Section 139,
then there may not be any requirement for deduction of tax at source.
The relevant portion of the Circular reads as under:
“It has been decided that in case of those funds or authorities or Boards or bodies, by whatever name called, whose income is unconditionally exempt under section 10 of the Income-tax Act and who are statutorily not required to file return of income as per section 139 of the Income-tax Act, there would be no requirement for tax deduction at source since their income is anyway exempt under the Income-tax Act.”
The Circular specifically referred to:
• universities,
• educational institutions under Section 10(23C)(iiiab),
• hospitals under Section 10(23C)(iiiac),
• certain statutory authorities,
• and Government-financed institutions.
This is why several IITs, Government universities, and educational institutions still issue declarations or certificates requesting deductors not to deduct TDS.
One Important Point Most Professionals Miss
Many people incorrectly believe that Circular No. 4/2002 was restricted only to Section 193.
That is not correct.
The Circular discussed TDS provisions generally under Chapter XVII of the Income-tax Act. Therefore, its principle was considered applicable across multiple TDS provisions such as:
• Section 193,
• Section 194A,
• Section 194C,
• Section 194I,
• Section 194J,
• and similar provisions.
This is precisely why the circular became extremely important in practice.
Then Why Did Confusion Start Later?
The confusion began because of later amendments and the widening scope of Section 139(4C).
At the time when Circular No. 4/2002 was issued, CBDT proceeded on the assumption that certain exempt institutions were not required to file return of income.
However, over time, Section 139(4C) expanded substantially and today many exempt institutions are specifically required to file Income Tax Returns even though their income remains exempt.
This includes many:
• educational institutions,
• universities,
• hospitals,
• trusts,
• and institutions covered under Section 10(23C).
Accordingly, the second condition of Circular No. 4/2002 — namely “not required to file return under Section 139” — may no longer be satisfied in many modern cases.
This is the most important legal development that taxpayers and professionals must understand.
Does This Mean the Circular Became Completely Irrelevant?
No.
The circular may have been technically superseded and legally diluted in certain situations, but its underlying rationale still survives.
Even today, the following argument continues to hold substantial force:
Where the recipient institution is wholly Government financed, enjoys unconditional exemption under Section 10, and no tax is ultimately payable, compulsory TDS deduction creates unnecessary compliance hardship.
This principle continues to influence:
• departmental practice,
• professional interpretation,
• and litigation strategy.
Practical Position Today: Should TDS Be Deducted or Not?
This is where practical tax administration differs from theoretical legal interpretation.
Legally, a strong argument may still exist for non-deduction in suitable cases involving:
• Government educational institutions,
• IITs,
• statutory authorities,
• and certain exempt bodies.
However, from a compliance perspective, many deductors still prefer deduction because:
• CPC-TDS notices are automated,
• Sections 201 and 271C consequences are severe,
• disallowance exposure exists,
• and litigation costs are high.
Therefore, deductors usually adopt a conservative approach.
Important Safeguards Before Claiming Non-Deduction of TDS
No deductor should rely merely on oral assurances.
Proper documentation is essential:
• PAN of recipient,
• exemption notification/order,
• Government financing proof,
• declaration from institution,
• copy of relevant CBDT Circular,
• and preferably a professional certificate.
In sensitive or high-value matters, obtaining a certificate under Section 197 may still remain the safest practical route.
Special Position of IITs and Government Educational Institutions
Institutions such as IITs often rely upon Section 10(23C)(iiiab), which grants exemption to educational institutions wholly or substantially financed by Government.
In such cases:
• the income may indeed be exempt,
• but return filing under Section 139(4C) may still apply.
Therefore:
• exemption from tax does not automatically mean exemption from filing return,
• and exemption from filing return does not automatically eliminate TDS obligations.
This distinction is extremely important and frequently misunderstood.
Why This Issue Matters So Much Today
This issue is no longer merely academic.
Huge amounts of TDS are routinely deducted from exempt institutions, resulting in:
• blockage of Government and educational funds,
• unnecessary refund claims,
• increased departmental workload,
• and avoidable compliance costs.
At a time when “Ease of Doing Business” and “trust-based tax administration” are repeatedly emphasized, this remains one of the most under-discussed areas of TDS law.
Final Takeaway
CBDT Circular No. 4/2002 may not operate today in its original unrestricted form due to later legal developments and Section 139(4C) implications. However, the fundamental principle recognized by the CBDT still carries substantial legal and practical significance.
The key lesson is this:
Exempt income, return filing obligations, and TDS applicability are three different concepts – and confusing them often leads to unnecessary litigation and compliance burden.
For tax professionals, educational institutions, Government-funded bodies, IITs, universities, and deductors, understanding this distinction is absolutely essential in modern TDS practice.
The CBDT Circular NO. 4/2002 reads as under:
CBDT Circular No. 4/2002 dated 16.07.2002
Subject: No requirement for deduction of tax at source in case of entities whose income is exempt under section 10 of the Income-tax Act.
Representations have been received by the Board that various entities whose income is exempt from tax under section 10 of the Income-tax Act are facing hardship because tax is being deducted at source from payments made to them and thereafter they are required to claim refund of such tax deducted at source.
The matter has been examined by the Board. It has been decided that in case of those funds or authorities or Boards or bodies, by whatever name called, whose income is unconditionally exempt under section 10 of the Income-tax Act and who are statutorily not required to file return of income as per section 139 of the Income-tax Act, there would be no requirement for tax deduction at source since their income is anyway exempt under the Income-tax Act.
The institutions covered under this circular would include entities whose income is exempt under clauses such as section 10(20), 10(20A), 10(23BBA), 10(23BBE), 10(23BBF), 10(23BC), 10(23C)(iiiab), 10(23C)(iiiac), etc.
However, if any such entity is required to file return of income under section 139 of the Income-tax Act, this circular shall not apply.
Circular No. 4/2002
Dated: 16 July 2002
Issued by: Central Board of Direct Taxes (CBDT)
The CBDT Circular NO. 18/2017 reads as under:
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
F.NO.385/01/2015-IT(B)
CIRCULAR NO. 18/2017
New Delhi, dated 29th May, 2017
SECTION 197 OF THE INCOME-TAX ACT, 1961 – DEDUCTION OF TAX AT SOURCE – CERTIFICATE FOR DEDUCTION AT LOWER RATE – REQUIREMENT OF TAX DEDUCTION AT SOURCE IN CASE OF ENTITIES WHOSE INCOME IS EXEMPTED UNDER SECTION 10 OF SAID ACT – EXEMPTION THEREOF – SUPERSESSION OF CIRCULAR NOS. 4/2002 AND NO. 7/2015, DATED 16-7-2002 AND 23-4-2015 RESPECTIVELY
The Central Board of Direct Taxes (the Board) had earlier issued Circular No. 4/2002, dated 16-7-2002 and Circular No. 7/2015, dated 23-4-2015 which laid down that in case of such entities, whose income is unconditionally exempt under Section 10 of the Income-tax Act (the Act) and who are also statutorily not required to file return of income as per Section 139 of the Act, there would be no requirement for tax deduction at source (TDS) from the payments made to them since their income is anyway exempted from tax under the Act. The issue of whether exemption from TDS can be extended to more entities on these principles and whether the exemption is needed to be withdrawn in respect of some of the exempted entities was examined by the Board.
2. Examination of the eligibility of entities for exemption from TDS on the principle of unconditional exemption and no requirement to file return revealed that Circulars No. 4/2002 and 7/2015 are required to be updated to make the following changes:
| – | Entities that meet both the above-mentioned conditions but are not mentioned in the aforesaid Circulars need to be included in the list of exempted entities. |
| – | Entities that are mentioned in Circular No. 4/2002 but their exemption from income tax has since been withdrawn need to be removed from the list of exempted entities. |
| – | Entities that are mentioned in Circular No. 4/2002 but because of subsequent amendment they are now required to mandatorily file their returns of income u/s 139 need to be removed from the list of exempted entities. |
3. In view of the above, a revised list of entities exempted from TDS has been drawn by adding entities in the first category listed above to the entities mentioned in Circular No. 4/2002 and Circular No. 7/2015 and removing entities in second and third categories from the list of existing entities eligible for exemption from TDS.
4. Accordingly, it has been decided that in case of below mentioned funds or authorities or Boards or bodies, by whatever name called, referred to in section 10 of the Income-tax Act, whose income is unconditionally exempt under that section and who are also statutorily not required to file return of income as per section 139 of the Income-tax Act, there would be no requirement for tax deduction at source, since their income is anyway exempt under the Income-tax Act —
| (i) | “Local authority”, as referred to in the Explanation to clause (20); |
| (ii) | Regimental Fund or Non-public Fund established by the armed forces of the Union referred to in clause (23AA); |
| (iii) | Fund, by whatever name called, set up by the Life Insurance Corporation of India on or after 1st August, 1996, or by any other insurer referred to in clause (23AAB); |
| (iv) | Authority (whether known as the Khadi and Village Industries Board or by any other name) referred to in clause (23BB); |
| (v) | Body or authority referred to in clause (23BBA); |
| (vi) | SAARC Fund for Regional Projects set up by Colombo Declaration referred to in clause (23BBQ); |
| (vii) | Insurance Regulatory and Development Authority referred to in clause (23BBE); |
| (viii) | Central Electricity Regulatory Commission referred to in clause (23BBG); |
| (ix) | Prasar Bharati referred to in clause (23BBH); |
| (x) | Prime Minister’s National Relief Fund referred to in sub-clause (i), Prime Minister’s Fund (Promotion of Folk Art) referred to in sub-clause (ii), Prime Minister’s Aid to Students Fund referred to in sub-clause (iii), National Foundation for Communal Harmony referred to in sub-clause (iiia), Swachh Bharat Kosh referred to in sub-clause (iiiaa), Clean Ganga Fund referred to in sub-clause (iiiaaa) of clause (23C); |
| (xi) | Provident fund to which the Provident Funds Act, 1925 (19 of 1925) referred to in sub-clause (i), recognized provident fund referred to in sub-clause (ii), approved superannuation funds referred to in sub-clause (iii), approved gratuity fund referred to in sub-clause (iv) and funds referred to in sub-clause (v) of clause (25); |
| (xii) | Employees’ State Insurance Fund referred to in clause (25A); |
| (xiii) | Agricultural Produce Marketing Committee referred to in clause (26AAB); |
| (xiv) | Corporation, body, institution or association established for promoting interests of members of Scheduled Castes or Scheduled Tribes or backward classes referred to in clause (26B); |
| (xv) | Corporation established for promoting interests of members of a minority community referred to in clause (26BB); |
| (xvi) | Corporation established for welfare and economic upliftment of ex-servicemen referred to in clause (26BBB); |
| (xvii) | New Pension System Trust referred to in clause (44). |
5. This circular supersedes earlier Circulars on this issue e.g. Circular No. 4/2002, dated 16-7-2002 and Circular No. 7/2015, dated 23-4-2015 with effect from the date of issue of this Circular.
(Dr. T.S. Mapwal)
Under Secretary to the Government of India
