Given the tendency of taxpayers to evade taxes, Income Tax provisions provide for the collection of tax from the very source of income. Under this system, the person liable to make the payment (payer) is responsible for deducting tax before making the payment to the recipient at the rates specified by the revenue department.
Such tax has to be deducted either at the time of crediting the amount in the books or when making payment to the recipient, whichever is earlier. It ensures the timely collection of revenues by the government and controls tax evasion.
Concept of Lower Deduction of Tax
In some situations, the TDS amount might be higher than the recipient’s actual tax liability. This is very common in the case of the sale of immovable property of NRI, wherein TDS at the rate of 20% gets deducted on the entire sale value instead of being deducted on the amount of capital gains value only.
In such a scenario, the assessees have to face difficulties as they have to pay tax in the form of TDS despite not having any earnings liable to tax for the year, which they can claim as a refund only by filing their return of income.
This situation leads to unnecessary blockage of funds until the refund is received. Furthermore, assessees have to comply with filing their Income Tax return to claim it even if they are otherwise not required to do so on account of their total income being lower than the basic exemption limit that applies to them.
Therefore, to eliminate this unnecessary load on such assessees, the Income Tax Act provides the option to obtain a certificate, known as Lower Deduction Certificate (LDC) from the Assessing Officer under the provisions of Section 197, allowing the deduction of tax either at a lower rate compared to the effective rate or at NIL rate of TDS, depending on facts and features of each case based on the application made.
Situations in which it is beneficial to get the LDC issued
* Loss-making businesses
* Assessee having carried forward losses to set off with future year’s income
* Assessee having net total income below the applicable basic exemption limit
* Receipt of the payment for the sale of property in India by a non-resident seller from an Indian buyer
* Receipt of the payment by a company that does not have Permanent Establishment in India from the customer who is liable to deduct tax at source under section 195
This list, as mentioned above, is not exhaustive and there might be other cases also where LDC issuance would be beneficial.
Prescribed Form for LDC Application
Application for a lower deduction certificate under section 197 of the Income-tax Act, 1961, for no tax deduction or tax deduction at a lower rate, must be made in Form 13 online.
Details/Documents to be submitted and how to apply for Lower Deduction Certificate
The documents and details that are required to be submitted with Form 13 online application are –
* Mobile number of the applicant
* E-mail ID of the applicant
* Copy of PAN card
* Tax Deduction Account Number of all the parties responsible for making the payment
* Copies of return of income and computation of income of previous three financial years
* Copies of Form 26AS of previous three financial years
* In case of the assessee having business or professional income, copies of financial statement along with audit report if any for previous three financial years
* Projected profit and loss account for the ongoing financial year
* Estimated income during the financial year
* Any other document depending on the nature of the income
Once the application has been filed successfully, the assessing officer will review the documents/information submitted and might ask for further queries and documents before issuing the certificate/rejecting the application.
On being satisfied that the lower deduction of TDS is justified, he shall issue the certificate u/s 197.
On successful allotment of the lower deduction certificate, the tax will be deducted at the rate stated therein. The Lower Deduction Certificate will be issued online, and the applicant can download it from the Traces portal.
Eligibility for Making an Application for the LDC
The application can be made where the particular income of any person attracts TDS as per the relevant sections concerned with tax deduction at source and estimated total income of the recipient justifies no deduction or lower deduction of Income Tax for the relevant financial year.
Time Limit for Making LDC Application
The Income Tax Act specifies no time limit for applying for the lower deduction certificate. However, as TDS applies to income of the ongoing financial year, it is recommended to make the application at the beginning of the financial year in case of regular income throughout the year and as and when it is required in case of one-off incomes.
Lower Deduction Certificate Validity
A lower deduction certificate is granted for a specific financial year. Its validity period is from the date of its issuance until the end of such financial year unless revoked by the assessing officer before its expiry.
Advantages of obtaining LDC
The option of applying for a lower deduction certificate proves to be beneficial for an assessee because of the following reasons-
* It prevents needless blockage of funds in the form of TDS.
* There is no need to file the income tax return if tax has been deducted at NIL rate (i.e., no tax has been deducted) and if the assessee is not liable to file the return according to his total income for the financial year.
* In the case of an NRI selling immovable property in India, such NRI does not have to bother about any future scrutiny notices to a possible extent if he makes the application for issuance of a lower deduction certificate as he has already undergone pre-assessment of capital gains amount while getting the LDC issued.
How SAAAR can help?
Providing a nil or lower rate for tax deduction helps strike a balance between the need to ensure cash flow to the taxpayer and receiving government dues at the earliest. If the assessee does not obtain this certificate, he will have to apply for a refund of the excess tax deducted by filing the Income Tax return at the end of the year. Hence, he should avail the benefit of this option to avoid blockage of funds and the hassle of filing the ITR to claim the refund, if any.
However, if the procedure of getting the lower deduction certificate issued seems complicated to you and if you are confused on how to apply Form 13, we, at MAG will be happy to help you out. We are the best lower deduction certificate service provider. We have a team of LDC experts in Delhi who will assist you in matters related to making Form 13 online application, issuance of lower deduction certificate for NRIs and fulfilment of other procedural compliances while getting the Lower Deduction Certificate issued.
Frequently Asked Questions
- What is the objective behind the concept of the Lower Deduction Certificate?
In some cases, the TDS amount might be higher than the recipient’s actual tax liability. In such a situation, the assessees have to face difficulties as they have to pay tax in the form of TDS in spite of not having any earnings liable to tax for the year, which they can claim as a refund only by filing their return of income. This problem leads to unnecessary blockage of funds until the refund is received.
Furthermore, the assessees have to comply with filing their Income Tax return to claim it even if they are otherwise not required to do so.
Hence, to eliminate this unnecessary load on such assessees, the Income Tax Law gives the option to obtain a Lower Deduction Certificate (LDC) from the assessing officer under the provisions of Section 197, permitting the deduction of tax either at a lower rate compared to the effective rate or at NIL rate, depending on facts of each case based on the application made.
- What are the rates at which taxes are to be deducted at source?
Taxes are to be deducted at source at the rates prescribed in the relevant provisions of the Act or the First Schedule of the Finance Act. However, in the case of payment to non-resident persons, the withholding tax rates specified under the Double Taxation Avoidance Agreements shall also be considered.
- Who has to apply for the issuance of LDC – the taxpayer or the tax deductor?
Application for Lower Deduction Certificate has to be made by the deductee/taxpayer in Form 13. Once the Lower Deduction certificate is issued, the person responsible for paying the income (tax deductor) shall deduct tax at source according to rates specified in such certificate or deduct no tax, as the case might be, till the end of the relevant financial year unless cancelled by the assessing officer before its expiry.
- Can a person who is a non-resident in India apply for LDC?
Yes, any person, resident or non-resident in India, can apply for LDC.
- Can Form 13 be modified?
No, once submitted, Form 13 cannot be altered. However, the taxpayer has the option to withdraw the application until it is approved by the assessing officer.
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