Lower or nil rate tax deduction certificate- Duty of deductor

This article provides important information related to a Certificate issued for Deduction of Tax at Lower/ NIL Rates under section 197/197A of the Income Tax Act, 1961.

About Certificate u/s 197/ 197A:

Assessing Officer can issue a certificate for lower or no deduction of tax:

• To the deductee, if is a resident or
• To the deductor, where the deductee is a non-resident
• If the Assessing Officer is satisfied that the total income of the deductee justifies deduction of tax at a lower or nil rate.

Accordingly, the clause provides that the deduction shall be made in accordance with the certificate, until such certificate is cancelled by the Assessing Officer or the expiry of the validity of the certificate, whichever is earlier.

Actions to be taken by the deductor on receipt of the certificate:

• Please validate the PAN of the deductee submitting the certificate.
• The Certificate should be valid for the PAN, Section and Rate which has been mentioned in the statement filed.
• Check that the certificate is valid for the relevant Financial Year.
• Verify that the threshold limit for the certificate has not been exceeded in previous quarters.
• Correct certificate number should be quoted in the statement. Example of Correct Certificate Number – 2XXXAH7XXE.
• Raise the Flag “A” in the statement for a certificate u/s 197 and Flag “B” for certificate u/s 197A.
• Please ensure that the Certificate Number is mentioned in the Deductee detail of the statement. (For F.Y.2013-14 Onwards).
• If you are in receipt of a CPC(TDS) Intimation u/s 200A/ 154 for Short Deduction, you are requested to download the Justification report. The details of the Short Deduction due to an issue with the 197/197A certificate can be checked under the TAB “Short Deduction due to 197 Certificates”. You may verify the details and correct in accordance with the above guidelines.
• If a Correction Statement is being submitted, please ensure that the above has been taken care of for the Conso File downloaded from TRACES.

Caution to be exercised for the following:

• Please ensure that Flag A/B is not raised for any Invalid PAN.
• Please do not raise Flag A/ B for a PAN which does not have the above certificate.
• Avoid mentioning Section code in the “Certificate Number” field of the statement.
• Expired certificates are not to be used.
• Please check that the threshold limit has not been exceeded in the previous quarter.

Extract of Section 197 of the Income Tax Act, 1961

Certificate for deduction at lower rate.

197. (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] 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.]

Extract of Section 197A of the Income Tax Act, 1961

No deduction to be made in certain cases

197A. (1) Notwithstanding anything contained in  section 194 [or section 194EE], no deduction of tax shall be made under any of the said sections in the case of an individual, who is resident in India, if such individual furnishes to the person responsible for paying any income of the nature referred to in  section 194  or, as the case may be, section 194EE], a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner to the effect that[the tax on his estimated total income of the previous year in which such income is to be included in computing his total income will be nil.]

[(1A) Notwithstanding anything contained in [section 193 or] section 194A or section 194K, no deduction of tax shall be made under [any] of the said sections in the case of a person (not being a company or a firm), if such person furnishes to the person responsible for paying any income of the nature referred to in [section 193 or] section 194A or section 194K, as the case may be, a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner to the effect that the tax on his estimated total income of the previous year in which such income is to be included in computing his total income will be nil.]

[(1B) The provisions of this section shall not apply where the amount of any income of the nature referred to in sub-section (1) or sub-section (1A), as the case may be, or the aggregate of the amounts of such incomes credited or paid or likely to be credited or paid during the previous year in which such income is to be included exceeds the maximum amount which is not chargeable to income-tax.]

[(1C) Notwithstanding anything contained in section 193 or section 194 or section 194A or section 194EE or section 194K or sub-section (1B) of this section, no deduction of tax shall be made in the case of an individual resident in India, who is of the age of [sixty] years or more at any time during the previous year , if such individual furnishes to the person responsible for paying any income of the nature referred to in section 193 or section 194 or section 194A or section 194EE or section 194K, as the case may be, a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner to the effect that the tax on his estimated total income of the previous year in which such income is to be included in computing his total income will be nil.]

[(1D) Notwithstanding anything contained in this section, no deduction of tax shall be made by the Offshore Banking Unit from the interest paid—

(a)  on deposit made on or after the 1st day of April, 2005, by a non-resident or a person not ordinarily resident in India; or

(b)  on borrowing, on or after the 1st day of April, 2005, from a non-resident or a person not ordinarily resident in India.

Explanation.—For the purposes of this sub-section “Offshore Banking Unit” shall have the same meaning as assigned to it in clause (u) of section 2 of the Special Economic Zones Act, 2005.]

[(1E) Notwithstanding anything contained in this Chapter, no deduction of tax shall be made from any payment to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10.]

[(1F) Notwithstanding anything contained in this Chapter, no deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette, in this behalf.]

(2) The person responsible for paying any income of the nature referred to in sub-section (1) [or sub-section (1A)] [or sub-section (1C)] shall deliver or cause to be delivered to the [Chief Commissioner or Commissioner] one copy of the declaration referred to in sub-section (1) [or sub-section (1A)] [or sub-section (1C)] on or before the seventh day of the month next following the month in which the declaration is furnished to him.]