Section 197 – Nil or Lower rate deduction of TDS
An explanation of Section 197- lower deduction certificate for tds
In this post, We will go through Section 197 of the Income Tax Act of 1961 – Nil or reduced rate TDS deduction. Let’s go through each section in detail:
- What is section 197?
- What is a lower deduction certificate?
- Who is eligible for TDS lower deduction-certificate
- Income Covered Under Section 197
- Process of filing the application for Lower Deduction Certificate:
- Documents Required with Form 13
- Sample Form 13
- What happens after deductor receives certificate
- FAQ
What is section 197?
Section 197 of the Income Tax Act of 1961 provides the taxpayer with the option of a NIL or Lower tax rate deduction of TDS (or TDS exemption). Taxpayer must submit Form 13 to the assessing officer to apply for this. The assessing officer (AO) would assess the total income of the taxpayer and their anticipated tax liability, then issue a certificate for TDS at either a Nil rate or a reduced rate based on their findings.
What is a lower deduction certificate?
Tax Deducted at Source (TDS) requires payers to deduct tax before making payments. The TDS amount can sometimes exceed the recipient’s actual tax liability.
This is where the concept of a lower tax/Nil tax deduction comes in.. Section 197 of the Income Tax Act allows you to request a certificate known as a Lower Deduction Certificate (LDC) from your Assessing Officer. This certificate provides for a lower tax deduction, either at a reduced rate or with no TDS, depending on the precise details of your case as stated in your application.
Who is eligible for TDS lower deduction-certificate
According to the provisions of the Income Tax Act, if the taxpayer’s actual income tax liability on taxable income is less than the amount of TDS deducted by the payer, the assessee may file an application for LDC (Lower Deduction Certificate) with the Income Tax Authorities in accordance with Rule 28 of the Income Tax Rules.
Income Covered Under Section 197
Section 197 application can be made by the recipient of income in case of the following category of receipts where TDS is required to be made under the following Sections:
- Section 192 – Salary income
- Section 193 – Interest on securities
- Section 194 – Dividends
- Section 194A – Interest other than interest on securities
- Section 194C – Contractors income
- Section 194D – Insurance commission
- Section 194G – Commission/remuneration/prize on lottery tickets
- Section 194H – Commission or brokerage
- Section 194-I – Rent
- Section 194J – Fee for Professional or technical services
- Section 194LA – Compensation on acquisition of immovable property
- Section 194LBB – Income in respect of units of investment fund
- Section 194LBC – Income in respect of investment in securitization trust
- Section 195 – Income of non residents
Process of filing the application for Lower Deduction Certificate:
To apply for Form 13, follow the below steps;
- You must file Form 13 to the Income Tax Department/Assessing Officer (AO) to request an exemption of NIL or a lower tax rate deduction of TDS.
- Form 13 can be completed online or manually; however, taxpayers in the Mumbai, Karnataka, and Tamil Nadu regions can only fill out Form 13 for income tax online for quicker processing.
- Within a frame of 30 days, the Assessing Officer has to dispose of the applications.
- The taxpayer should file the complete and relevant details required in the first instance for processing the application.
- If the application is correct, the Assessing Officer will issue the certificate.
- A copy of the certificate is attached to the invoice and provided to the TDS deductor to request a lesser or no TDS deduction.
- This certificate is only valid if the assessing officer does not cancel it.
- TDS exemption / reduced TDS is not available under Sections 194B, 194BB, 194DA, 194E, and 194IA.
Documents Required with Form 13
Below are the documents required for applying for Lower deduction certificate through Form 13;
- Signed Form 13
- PAN card copy
- Tax Deduction Account Number (TAN) of parties paying you
- Estimated income during the financial year
- Computation of income statement for last 3 financial years
- Estimated computation of income for the current financial year
- Copies of assessment orders for the last 3 financial years (if applicable)
- Copies of IT returns with enclosures and acknowledgment for the last 3 financial years
- Copies of financial statements and audit reports for the last 3 financial years (if applicable)
- Projected profit and loss account for the current financial year
Sample Form 13
What happens after deductor receives certificate
- Check if the certificate is real: Use the government’s website to verify that it is genuine.
- Check that the following details are correct: Verify the person’s PAN, claimed tax break amount, and validity dates.
- Apply the tax break: If everything is fine, deduct less tax from the individual’s payment.
- Save a copy: Keep the certificate for a while in case the government needs it later.
- Report the tax break: Inform the authorities about the tax break you provided in your tax return.
- Raise flags:
- Flag A: Used for specific types of income breaks.
- Flag B: Used for breaks given to people without a tax ID.
FAQ
1, How does one validate a Section 197 certificate?
Ans: Individuals must log in to the TRACES website as a deductor using their login credentials to validate their certificate. After that, the home page will be shown. To validate a certificate, go to the statements/payments area and choose “197 certificate validation.”
