As per the Indian tax laws, every payment liable to tax, has to be subjected to deduction of tax at source (TDS) at applicable rates. Such tax deducted at source by the person making the payment, can later be claimed while filing the Income Tax Return by the Recipient of the payment/ deductee.

However we do have scenarios where the total income of recepient/ deductee at the year end is either under the taxable limit i.e. not taxable or subject to minimum tax at lower rates. In such cases, it is burdensome for the deductee to wait till the filing of Return to claim the refund of TDS.

To reduce the hardship faced by the deductee, the Government introduced section 197 to the Income Tax Act, 1961, wherein a certificate is issued to the Deductee permitting the latter to get tax deducted at lower/specific rates as mentioned in the said certificate.

Let us now go ahead to understand the meaning, purpose, challenges etc. of a Lower Deduction Certificate.

What is Lower Deduction/ No Deduction Certificate?

Lower deduction/No Deduction Certificate is a Certificate given by the deductee to the deductor either for reduction in rate or NIL rate of TDS on the receipt amount due to the deductee. This certificate is obtained by the deductee from the Jurisdictional TDS Officer on providing relevant information as required under the Rules.

Need for Application of Lower TDS Certificate

  • The incomes/ receipts represent the working capital of the deductee.
  • Every time tax is deducted from any receipt, the funds equal to the amount so deducted are deposited with the Government.
  • In cases where the total income of the deductee is not liable to tax or liable to  pay tax a lower rate, the amount so withheld and deposited with Government can be claimed by the Deductee only at the time of filing return of income.
  • This leads to blockage of working capital of the deductee with the Government until the same is claimed in the return of Income at the end of the year.
  • In order to avoid / prevent the hardship faced by the deductee, an application under section 197/197A of the Income Tax Act (ITA) needs to be filed thereby claiming lower / NIL rate of deduction.
  • This will result in higher cash flows upfront for the Company and no funds are locked up with Government.

Governing Sections and Rules

Section 197 and 197A [1] of the Income Tax Act, 1961 provides for the facility of NIL or lower tax rate deduction of TDS. Section 197 talks of obtaining certificate of lower deduction by any person from Assessing Officer whereas section 197A provides for obtaining lower deduction by Self Declaration of Individuals resident in India.

  • As per section 197, in the case of any income of any person the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the Assessee in this behalf, give him such certificate as may be appropriate.
  • Further the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.
  • As per section 197A, if any Individual resident in India, provides a declaration in writing in duplicate, to the person responsible to deduct tax, in the prescribed form to the effect that the tax on his estimated total income of the relevant previous year including the specific income will be nil, no deduction of tax shall be made under any of the specified Sections.
  • Also, this application is governed by provisions of Rules 28, 28AA, 28AB and 29 of the Income Tax Rules[2].
  • While Rule 28 provides for filing of Form 13 electronically either under Digital Signature or through Electronic Verification Code, Rule 28AA provides for Certificate for deduction at lower rates or no deduction of tax from income other than dividends, Rule 28AB provides for Certificate of no deduction of tax in case of certain entities and Rule 29 provides for Certificate of no deduction of tax or deduction at lower rates from dividends.

[1] For Relevant Sections from the Income Tax Act, 1961 click on ;
Section 197 : https://bit.ly/2GbiDzH
Section 197A :
https://bit.ly/2QK8I6p
[2] For Relevant Rules from the Income Tax Rules click on
;
Rule 28 : https://bit.ly/3beRreR
Rule 28AA : https://bit.ly/3jsCgl6
Rule 28AB : https://bit.ly/3lAiS7R
Rule 29 : https://bit.ly/31J3XAk

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