How to Apply for a Lower Tax Deduction Certificate (LTDC)

Summary: In the current business scenario liquidity of fund play very vital role. If you seek to effectively manage your cash flow or optimize the allocation of working capital, Section 197 represents a pivotal instrument enabling you to assert a reduction or exemption from Tax Deducted at Source (TDS) on your income. Should you possess substantiated grounds indicating that your annual tax liability is lower than the TDS deducted by your payer, you have the opportunity to apply for Lower Tax Deduction Certificate (LTDC) through Form 13 before the competent income tax authority. Following approval, the Income Tax department will issue a certificate specifying the revised TDS rate applicable to you, which can subsequently be furnished to your payer. This proactive measure serves to mitigate excessive tax deductions, thus enhancing financial efficiency and obviating the necessity for subsequent refund claims
So this article deals with the analysis of section 197 i.e. lower Tax deduction certificate: its applicability, process, validity, time limit and benefits etc.

What is Lower Tax Deduction Certificate(LTDC)?

Lower tax deduction certificate is a certificate which is issued by AO after assessing your Income on which TDS is deductable. If your Income Tax on your expected Income is lower in comparison to the TDS deductable on your income as per the Income Tax Act, 1961 then AO will issue the LTDC directing to a specific deductor to deduct TDS at either nil/lower rate.

Section 197 is reproduced as under:

197(1) [Subject to rules made under sub-section (2A), 14 [where, in the case of any income of any person [or sum payable to any person], income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of sections 192, 193, [194,] 194A, [194C,] 194D, [194G] [, 194H] [, 194-I] [, 194J] [, 194K] [***] [, 194LA,] [194LBA] [, 194LBB, 194LBC] [, 194M] [, 194-O] and 195, 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 to him such certificate as may be appropriate. (2) Where any such certificate is given, 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. [(2A) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under subsection (1) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.][Source: Taxman]

How to Avail facility of Lower Tax Deduction Certificate (LTDC)

To avail this facility of Nil deduction/Lower Deduction of Tax assessee whose TDS is likely to be deducted on certain receipts should file an application in Form 13 before the TDS Assessing officer via online mode through traces https://tdscpc.gov.in/ as taxpayer, who has a jurisdiction over his/her in that case. The Form should be submitted with all the required documents to be assessed by the Assessing Officer.

Form 13 serves as an application under sections 197 and 206C of the Income Tax Act, in conjunction with rules 28 and 37G. It facilitates the request for a certificate enabling the option of reduced deduction/collection or exemption from deduction/collection of Tax Deducted at Source (TDS).

Applicability of Lower Tax Deduction Certificate (LTDC)

This Section is applicable for any person for any Income whose TDS is deductible under the purview of section 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K, 194LA, 194LBB, 194LBC, 194M, 194O and 195.

Process for making an application u/s 197 for Lower Tax Deduction Certificate 

a) An application for nil/lower tax deduction in From 13 has to be filled to the concerned officer in online mode through Traces as a taxpayer.

b) The officer may request additional clarification if deemed necessary.

c) Upon the submission of clarification by the assessee, the officer will thoroughly review the documents. If the Assessing Officer is convinced that the Tax Deducted at Source (TDS) on the recipient’s total income should be applied at a nil or reduced rate, as the case may be, the Assessing Officer shall issue the certificate provided that the application submitted by the assessee is duly filled out in the appropriate form and accompanied by supporting evidence.

d) Copy of the certificate has to be provided to the deductor by the assessee to justify the nil/ lower tax deduction.

Validity of the Lower Tax Deduction Certificate (LTDC) issued u/s 197

Time period for which certificate is valid is mentioned in the Certificate itself. It will be valid till the date certificate is cancelled by the officer or specified date in the certificate whichever is earlier.

Documents required for filling application in Form 13 for Lower Tax Deduction Certificate:

a. Pan and Aadhar Card of Assessee

b. Communication details: Mobile and Email id

c. Income Tax Login credentials (in case)

d. Copies of return of income along with enclosures and acknowledgment for previous 3 financial years and Computation of income

e. Estimated income during the financial year

f. Any other documents depending on the nature of income

g. Tax Deduction Account Number of all parties responsible for paying Income

h. Copies of Form 26 AS for the past 3 financial years

Time Limit of applying for Lower Tax Deduction Certificate:

While the Income Tax Act doesn’t prescribe a specific deadline for applying for a Lower Tax Deduction Certificate (LTDC), it is recommended to initiate the application process at the commencement of the financial year, particularly for regular income streams. This proactive approach aligns with the ongoing nature of Tax Deducted at Source (TDS) applicable to the financial year.

Benefits of Lower Tax Deduction Certificate:

a) Reduced Tax Withholding: The LTDC allows you to benefit from a lower tax withholding rate on payments received.

b) Maximized Tax Savings: By obtaining the LTDC, you can optimize your tax savings and improve your overall financial efficiency.

c) Improved Cash Flow: By reducing the amount of tax deducted at the source, LTDC enhances the cash flow of the assessee. This can be particularly advantageous for individuals and businesses with tight financial constraints or seasonal income fluctuations.

d) Enhanced Interest Earnings: By retaining more income upfront due to lower tax deductions, the assessee can invest or earn interest on the additional funds, potentially leading to higher overall returns on investments.

Can Form 13 be modified?

No, once application for issuance of certificate is filled, cannot modify the application. In case of any alteration, application filled for LTDC is to be withdrawn before it is approved by Officer and apply for fresh Certificate by filling fresh application.

Key Points related to Lower Tax Deduction Certificate:

1. As per the Guidelines issued by Commissioner of Income tax to AO to dispose the application u/s 197 within 30 days from the end of the month in which application completes in ALL respect is received.

2. Usually Clarifications are asked by AO regarding the application submitted within the required time frame so constant tracking of application is required.

3. Form 13 can be filled not only for Lower Deduction of Tax rather it can be filled for lower collection of tax(TCS) u/s 206C(9) of Income Tax act, 1961