Section 197 Certificate: Lower Deduction Certificate (LDC)

Last updated : June 4th, 2024 02:49 pm

Section 197 Certificate: Lower Deduction Certificate (LDC)

The Section 197 Certificate, often called the Lower Deduction Certificate (LDC), is a significant provision under the Income Tax Act. It enables taxpayers to benefit from a Nil or reduced Rate of Tax Deducted at Source (TDS) on their income. To obtain this advantage, individuals or entities whose income is liable for TDS must submit an application, typically in the prescribed Form No. 13, to the assessing officer (AO) with jurisdiction over their case. This application entails a thorough assessment by the assessing officer, considering factors such as the taxpayer’s total income and estimated tax liability. Upon approval, the certificate authorizes the deduction of TDS at a Nil or lower Rate on specified receipts. This article provides comprehensive answer to what is certificate under section 197 and instructions on how to obtain and validate it.

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What is Section 197 under the Income Tax Act?

Section 197 of the Income Tax Act, 1961 addresses situations where the tax deducted at source (TDS) on a taxpayer’s income may be higher than their actual tax liability. This section empowers taxpayers to apply for a certificate that reduces or eliminates TDS on their income. By submitting Form 13 to the Assessing Officer, taxpayers can request a lower deduction certificate. The Assessing Officer will assess the taxpayer’s total income and anticipated tax liability. If justified, a certificate will be issued specifying a reduced TDS rate or complete exemption from TDS for the financial year. Ensure you’re complying with Section 197 regulations.

What is a Section 197 Certificate?

A Section 197 Certificate allows taxpayers to receive income with a lower or nil rate of Tax Deducted at Source (TDS). The TDS process typically involves the payer deducting a specified percentage of tax before making a payment and depositing it with the government. With a Lower deduction certificate under section 197, eligible taxpayers can present this document to the payer, enabling the payer to deduct tax at a reduced rate or not at all. Thus, it ensures that the taxpayer’s income is not unnecessarily reduced and eliminates the need for a refund claim later. 

Benefits of Obtaining Section 197 Certificate

The following benefits you will get with the help of the Section 197 Certificate,

• Improved Cash Flow: The certificate allows a lower or nil TDS rate, ensuring you keep more of your income upfront and enhance your cash flow.
• Reduced Need for Refunds: With less tax deducted initially, you avoid the hassle and delay of claiming refunds for overpaid taxes at the end of the financial year.
• Better Financial Planning: Knowing the exact amount of tax deducted helps in clearer financial planning and budgeting throughout the year.
• Administrative Ease: Simplifies the tax procedures and administrative efforts associated with claiming tax refunds.
• Increased Compliance: Ensures you comply with tax regulations while benefiting from lower deductions, keeping your tax affairs in order.
• Operational Efficiency: Streamlines the process for you and the payer, making transactions smoother and more efficient.
• Enhanced Profitability: Retaining more income upfront can improve your business’s overall profitability and financial health.

Eligibility Criteria for Obtaining Section 197 Certificate

According to provisions of Section 197 under the Income Tax Act, If the taxpayer’s actual tax liability is less than the amount of TDS that will be deducted from his income, then the assessee can file a Form 13 application with Income tax authorities to avail Section 197 LDC certificate as per the Rule 28 of the Income-tax rules.  

Income Covered under Section 197 of the Income Tax Act

Section 197 application can be filed by the taxpayer whose income falls under the following categories

• Salary income: This includes wages, bonuses, and other earnings from your employer.
• Interest on securities: This applies to interest earned on investments like bonds, debentures, and government securities.
• Dividends: This refers to the portion of a company’s profit that is distributed to its shareholders.
• Interest other than interest on securities: This covers interest earned from fixed deposits, savings accounts, and other similar sources.
• Contractors’ income: This includes payments made to contractors for carrying out specific work or services.
• Insurance commission: This is the commission earned by insurance agents for selling insurance policies.
• Commission/remuneration/prize on lottery tickets: This covers income from selling lottery tickets, commission earned on lottery sales, and any prizes won in lotteries.
• Commission or brokerage: This refers to fees earned by brokers for facilitating transactions in the stock market or other financial markets.
• Rent: This is the income earned from leasing out property.
• Fee for Professional or technical services: This covers fees earned by professionals like doctors, lawyers, chartered accountants, and engineers for their services.
• Compensation on acquisition of immovable property: This applies to compensation received for acquiring land or building.
• Income with respect to units of investment fund: This refers to income earned from mutual funds or similar investment schemes.
• Income in respect of investment in securitization trust: This covers income earned from investing in securitization trusts.
• Income of non-residents: This refers to income earned in India by individuals or entities who are not residents of India.

Documents required for Getting Section 197 Certificate

The following documents are required to avail of the sec 197 certificate of Income Tax Act.

• Signed Form 13: Get Form 13 from the Income Tax Department website and fill it out accurately. 
• PAN Card Copy: Ensure you have a clear copy of the PAN card.
• Income & Tax Details:
  • Estimate your total income for the current financial year.
  • Provide income computation details for the last three financial years.
  • Attach copies of your Income Tax Returns (ITR) with acknowledgement receipts for the previous four financial years.
  • Include copies of assessment orders received from the Income Tax department for the previous four years (if applicable).
• Business Documents:
  • For businesses, submit copies of financial statements and audit reports for the last three financial years (if applicable).
  • Project your profit and loss account for the current financial year.
• Registration/Exemption Certificates: If you’re a specific type of entity registered or exempted under sections 11, 12, or 139(4C) of the Income Tax Act for income exempt under section 10, submit the relevant certificate.

How to Apply for Certificate under Section 197 Online?

Follow the below instructions to obtain a Certificate under section 197 from the Income Tax Department.

• Step 1 – Register on the TRACES portal: Use your PAN to register on the Income Tax Department’s TRACES portal.
• Step 2 – Apply for Form 13:
  • Login to TRACES and navigate to the “Statements/Forms” tab.
  • Select “Request for Form 13”.
  • Fill out the online application for a Nil or lower tax deduction. You’ll need a Digital Signature Certificate (DSC) or an Electronic Verification Code (EVC) to submit the application.
• Step 3 – Assessment:
  • The Income Tax department will assess your estimated tax liability based on various factors.
  • They will consider your estimated current-year income, tax paid/payable on previous years’ income, and advance tax payments/deductions for the current year.
• Step 4 – Issuance of Certificate:
  • If your estimated tax liability is minimal, the department will issue a Nil or lower TDS/TCS certificate under Section 197.
  • The certificate applies to a specific deductor and type of income.
  • It’s valid from the date of issue until the end of the financial year or until the department cancels it.

Also read: TDS Form 16

Form 13 Application

Here’s the detailed view of the Form 13 application to help you fill the form effortlessly, 

1. Standard Applicant Information:

• Name: As per your PAN/TAN card.
• PAN: Your Permanent Account Number.
• Assessing Officer Details: Include Range, Circle/Ward, and AO number from your latest Income Tax Return.
• Business/Income Details: Briefly describe the nature of your business or income source.

2. Contact Person Details:

Provide information for a designated contact person who can be reached for any queries or document requests during application processing.

3. Income & Tax Payment Details:

• Income Details: Fill in your income for the last three years and provide a projection for the current year.
• Tax Payment Details: Include tax payments made in the last three years.
• Current Year TDS: Specify any TDS deducted or paid for the current financial year.
• Outstanding Tax Demands: List any outstanding tax demands before any Income Tax authority, including details like Assessment Year (AY), the amount outstanding, relevant section, and current status (any stay granted).
• Tax Audit Report Defaults: If a tax audit report (Form No. 3CD) was filed for the past three years, mention any reported defaults in column 27. Explain the reasons for this and any corrective actions taken.
• Pending Assessments/Penalties: Provide details of any pending scrutiny assessments or penalty proceedings.
• Receipt/Utilization/Accumulation Details (if applicable): If you fall under Rule 28AB(1), provide details of receipt, utilization, and accumulation for the past ten years.

4. TAN Details:

Include your tax deduction and collection account number (TAN) if you deduct TDS from the source for payments you make.

5. Cumulative Tax Foregone:

• Section: The Income Tax Act section under which the income is subject to TDS.
• Projected Amount: The total projected income expected under this section.
• Number of Parties: The number of parties from whom you expect this income.
• Normal TDS Rate: The standard TDS rate is applicable as per the Income Tax Act if no certificate is issued.
• Lower Rate Requested: The Rate at which you seek a lower deduction certificate for this income section.
• Tax Foregone: The estimated tax amount saved by obtaining the certificate.
• Total Tax Foregone: The total tax relief anticipated from the proposed certificate.
• Previous Year’s Certificate (if applicable): If you received a lower deduction certificate earlier in the current financial year, mention the tax foregone amount.
• Cumulative Tax Foregone: The total estimated tax saved considering both current and previous certificates (if any).

6. Deductor Details:

Provide details for each deductor (payer of your income) for whom you seek the certificate:

• Name: As appearing in their TAN allotment letter.
• TAN: Their Tax Deduction and Collection Account Number.
• Address: Their current correspondence address.
• Email: Their email address.
• Receipt Amount: The expected income amount from this deductor.
• TDS Section: The relevant Income Tax Act section under which TDS applies to this income.

Here’s the Form 13 application from the Income Tax Department for your reference,

How to validate the Lower deduction certificate under section 197?

Here are the step-by-step instructions on how to validate the Lower deduction certificate u/s 197,

• Step 1 – Login to TRACES: Go to the TRACES portal and log in using your registered user ID and password.
• Step 2 – Navigate to the Validation Section: Once logged in, locate the “Statements/Payments” tab and select the “197 Certificate Validation” option from the dropdown menu.
• Step 3 – Enter Certificate Details: On the validation page, enter the following details:
  • The 10-digit certificate number.
  • The taxpayer’s PAN.
  • Select the relevant financial year.
• Step 4 – View Certificate Information: Upon entering the details and submitting, the portal will display information about the certificate, including:
  • Validity period
  • Authorized lower TDS rate or nil TDS status
  • Any consumed amount

Validity Period of the Section 197 Certificate

The validity of a Section 197 certificate is typically limited to the remaining period of the financial year in which it’s issued. This means it generally expires on March 31st of that year. You must reapply for a new certificate if you require a lower TDS rate or nil TDS for the following financial year.

Conclusion

The certificate under Section 197 of Income Tax Act 1961 empowers taxpayers to optimize their cash flow and potentially minimize tax refunds by reducing or eliminating TDS on specific income streams. You can effectively utilize this valuable provision under the Income Tax Act by understanding the eligibility criteria, application process, and validation steps. Remember, the certificate typically expires on March 31st of the issued financial year, requiring a fresh application for the subsequent year.

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