Lower Deduction Certificate for TDS and TCS as per Income Tax Act, 1961

The Indian taxation system, governed by the Income Tax Act, 1961, mandates the deduction or collection of tax at source (TDS/TCS) on various transactions such as salaries, interest, professional fees, rent, other specified payments or receipts, etc. TDS (Tax Deducted at Source) is deducted by the payer, while TCS (Tax Collected at Source) is collected by the seller from the buyer. However, in certain cases, the standard rates of TDS or TCS may result in excessive tax deduction or collection, especially when the actual tax liability of the recipient is lower than the tax deducted or collected. To address this, the Income Tax Act provides a mechanism for obtaining a Lower Deduction Certificate under Sections 197 (for TDS) and 206C(9) (for TCS). This certificate allows taxpayers to have tax deducted or collected at a reduced rate or even at nil, ensuring better cash flow and avoiding the need for refunds.

This article explains the concept of a Lower Deduction Certificate, its legal basis, eligibility, and the detailed procedure for applying for it under the Income Tax Act, 1961.

What is a Lower Deduction Certificate?

A Lower Deduction Certificate is a document issued by the Income Tax Department that authorizes a deductor (in the case of TDS) or a collector (in the case of TCS) to deduct or collect tax at a rate lower than the prescribed statutory rate—or even at zero—based on the taxpayer’s actual tax liability. This certificate ensures that taxpayers are not burdened with excessive tax deductions/collections, particularly when their income is below the taxable threshold, they have losses, or they are eligible for exemptions/deductions.

Legal Provisions

Certificate for deduction at lower rate.

(1) Subject to rules made under sub-section (2A), 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, ¹¹[194LBA,] 194LBB, 194LBC, 194M, 194-O¹²[,194Q] 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 sub-section (1) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

206C(9) Where the Assessing Officer is satisfied that the total income of the buyer or licensee or lessee justifies the collection of the tax at any lower rate than the relevant rate specified in ³⁴[sub-section (1), sub-section (1C) or sub-section (1H)], the Assessing Officer shall, on an application made by the buyer or licensee or lessee in this behalf, give to him a certificate for collection of tax at such lower rate than the relevant rate specified in ³⁵[sub-section (1), sub-section (1C) or sub-section (1H)].

Explanations for Applicability

1. Section 197 (TDS):  This section applies to TDS and allows an assessee to apply for a certificate for lower or nil deduction of tax on specified incomes, such as:

– Salary (Section 192)

– Interest on securities (Section 193)

– Dividends (Section 194)

– Interest other than interest on securities (Section 194A)

– Professional or technical fees (Section 194J)

– Rent (Section 194-I)

– Payment to contractors (Section 194C)

-Commission or Brokerage (Section 194H), Insurance Commission(Section 194D), Commission on

Sale of Lottery  Tickets( Section 194G)

– Income in Respect of Units (Section 194K)

– Income from Units or Trusts(Section 194LA, 194LBA, 194LBB, 194LBC)

– Payment of certain sums by certain individuals or Hindu undivided family(Section 194M)

– Payment on certain sum for Purchases(Section 194Q)

–  Payment by Ecommerce Operator to Ecommerce Participant (Section 194O)

– Payment to Non-Residents (Section 195)

2. Section 206C(9) (TCS): This section pertains to TCS and allows an assessee to apply for a certificate for lower or nil tax collection on transactions like the sale of

Eligibility for Lower Deduction Certificate

Not every taxpayer can apply for a Lower Deduction Certificate. The following conditions generally apply:

– The applicant’s total tax liability for the financial year must be lower than the tax that would be deducted/collected at the standard rate.

– The applicant must have a valid Permanent Account Number (PAN).

– The income or transaction must fall under the categories specified in Sections 197 or 206C(9).

– The applicant should not have any outstanding tax demands or unresolved disputes that could affect their tax liability assessment (though this is assessed on a case-by-case basis).

For instance:

– A low margin business having TDS deducted u/s 194J for 10% rate may opt for a lower TDS certificate if their Profits are low and TDS amount is affecting their cash flow adversely and creating huge amounts of refunds.

– A Scrap Dealer working on very thin margins or an entity having tax exemptions may seek a lower TCS certificate for specified transactions.

Benefits of a Lower Deduction Certificate

1. Improved Cash Flow: Reduces the amount of tax deducted/collected at source, leaving more funds available for personal or business use.

2. Avoidance of Refund Process: Eliminates the need to wait for a refund of excess tax deducted/collected.

3. Customized Tax Deduction: Aligns tax deduction/collection with the taxpayer’s actual liability, ensuring fairness.

Procedure for Applying for a Lower Deduction Certificate

The process for obtaining a Lower Deduction Certificate is streamlined and can be completed online via the TRACES (TDS Reconciliation Analysis and Correction Enabling System) portal. Below is a step-by-step guide:

Step 1: Assess Eligibility

– Evaluate your total income, deductions, and tax liability for the financial year.

– Determine whether the TDS/TCS being deducted/collected at normal rates exceeds your tax liability.

Step 2: Gather Required Documents

The following documents are typically required:

– Tax Returns: Copies of income tax returns (ITR) for the previous three years.

-Financial Statements: Profit and loss account, balance sheet(Audited and Provisional), audit reports and financial projections (for the year for which the application is being made).

– Details of Deductor/Collector: Name, TAN (Tax Deduction and Collection Account Number), and details of the deductor/collector and estimated amount on which deduction/collection will be made.

-PAN Card: A copy of the applicant’s PAN.

– Justification: A statement explaining why a lower rate or nil deduction/collection is justified.

Step 3: File Form 13 Online

1. Login to TRACES Portal:

– Visit [www.tdscpc.gov.in](https://www.tdscpc.gov.in).

– Log in using your PAN and password (or register if you’re a new user).

2. Access Form 13:

– Navigate to the “e-File” section and select “Form 13 – Application for Lower/Nil Deduction Certificate.”

3. Fill in Details:

– Provide personal details (name, PAN, address).

– Specify the section under which TDS/TCS is applicable (e.g., 194J, 206C).

– Enter details of the deductor/collector (e.g., TAN, name).

– State the requested rate of deduction/collection (e.g., 2% instead of 10%, or nil).

– Upload supporting documents in PDF format/ZIP Folder.

4. Submit the Application:

– Verify the details and submit the form electronically using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

Step 4: Processing by Assessing Officer

– The application is forwarded to the jurisdictional Assessing Officer (AO).

– The AO evaluates the application based on:

• • The taxpayer’s past income and tax records.
  • Estimated income and tax liability for the current year.
  • Supporting documents and justification provided.
  • Applications approved/rejected in any previous years

– The AO may request additional information or clarification if needed.

• • Usually the AO asks for information like Affidavit, Copy of ITRs for previous years, Copies of Tax Audit Reports, Computation of Income, 26AS, Details of Proceedings Pending if any whether u/s 148 or 143(3), etc, Copies of Contracts with the various clients/customers, Proof of No Income tax or TDS demand pending, comparative of GP/NP ratio of various years, etc

Step 5: Issuance of Certificate

– If approved, the AO issues the Lower Deduction Certificate with:

– Validity period (usually for the financial year or a specified period).

– Applicable lower rate (or nil rate).

– Details of the deductor/collector to whom it applies.

– The certificate is sent electronically to the applicant and deductor/collector via the TRACES portal or email.

Step 6: Submit to Deductor/Collector

– Provide a copy of the certificate to the deductor (for TDS) or collector (for TCS).

– The deductor/collector is legally bound to comply with the certificate and deduct/collect tax at the specified lower rate.

Key Points to Remember

1. Timeframe: The application should be filed well in advance, preferably at the start of the financial year, to ensure timely processing.

2. Validity: The certificate is valid only for the period mentioned (usually the from the date of approval to the end of financial year) and must be renewed if required.

3. Non-Transferable: The certificate applies only to the specific deductor/collector and maximum transaction limit mentioned in the application.

4. Penalties for Misuse: Providing false information in Form 13 can lead to penalties under the Income Tax Act.

Conclusion

The provision for a Lower Deduction Certificate under Sections 197 and 206C(9) of the Income Tax Act, 1961, is a taxpayer-friendly measure that ensures tax deductions and collections align with actual tax liabilities. By following the prescribed procedure and submitting Form 13 with accurate details, individuals and businesses can optimize their cash flow and avoid the hassle of claiming refunds. For those anticipating lower tax liability due to exemptions, losses, or other factors, applying for this certificate is a prudent step toward efficient tax planning.