Section 197 – Certificate for Nil or Lower TDS Deduction under Income Tax

Section 197 of the Income Tax Act, 1961, provides a crucial mechanism for taxpayers to apply for a certificate for nil or lower deduction of Tax Deducted at Source (TDS). This is particularly beneficial for individuals or entities whose actual tax liability for the financial year is lower than the TDS that would otherwise be deducted at the standard rates. This provision helps in managing liquidity and ensuring that excess tax is not withheld unnecessarily.

Purpose and Objective of Section 197

The primary goal of Section 197 is to alleviate liquidity issues for taxpayers by ensuring that excessive tax is not deducted at source, thereby reducing the need for them to claim large refunds later when filing their income tax returns. It balances the government's need for advance tax collection with the taxpayer's cash flow requirements.

Eligibility and Applicability

Any person or entity whose estimated total tax liability for the financial year is less than the amount of TDS that would be deducted at the standard rates can apply. This includes salaried individuals, freelancers, businesses, and entities receiving income subject to TDS, such as:

• Interest on securities
• Dividends
• Interest other than on securities
• Payments to contractors and sub-contractors
• Insurance commission
• Commission on lottery tickets
• Brokerage or commission
• Rent payments
• Professional fees
• Compensation on acquisition of immovable property (Section 194LA)
• Income from units (Section 194K)
• Payments to Non-residents
• Payments for purchase of goods (Section 194Q)
• And other specified incomes subject to TDS.

Common scenarios where this is applicable include:

• Loss-making businesses: When the business has incurred losses or has very low profit margins.
• Carried forward losses: When the taxpayer has past losses to set off against current income.
• Exemptions/Deductions: When the taxpayer is eligible for significant exemptions or deductions under Chapter VI-A (e.g., Section 80C, 80D, 80E, 80TTA) that reduce their overall tax liability.
• Non-residents (NRIs): NRIs often face higher TDS rates (e.g., 20% to 30% on property sales) and can apply for a lower or nil TDS certificate if their actual tax liability, considering DTAA benefits or capital gains calculations, is lower.

Application Process: Filing Form 13

To avail this benefit, an assessee needs to file an application in Form 13 to the jurisdictional Assessing Officer (AO). The application process generally involves the following steps:

• The application can typically be filed online through the TRACES portal (TDS Reconciliation Analysis and Correction Enabling System) using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC). In some regions, manual filing might also be an option.
• Documents required for the application usually include:
  • Signed Form 13.
  • PAN card copy.
  • Estimate of total income for the current financial year.
  • ITR acknowledgments for the previous three to four financial years.
  • Assessment orders received from the Income Tax Department for previous assessment years (if applicable).
  • Financial statements and audit reports (if applicable, for businesses or professionals) for the last three years.
  • Projected profit and loss account for the current financial year.
  • Tax Deduction Account Number (TAN) of the deductors from whom payments are expected.
  • Details of any advance tax paid or TDS/TCS already deducted in the current financial year.

Assessment and Issuance of Certificate

• The Assessing Officer reviews the application, considering the taxpayer's estimated total income, projected tax liability, and other relevant factors.
• If the AO is satisfied that the estimated tax liability justifies a lower or nil TDS, they will issue a certificate under Section 197.
• The certificate specifies the rate at which TDS is to be deducted (which can be nil) and is usually specific to the deductor and the type of income.
• The AO is generally expected to dispose of applications within 15-45 days, though in some cases, it can take longer.

Validity and Deductor's Responsibilities

• A Section 197 certificate is generally valid from the date of its issuance until the end of the financial year (March 31st), or until it is canceled by the Assessing Officer, whichever is earlier. A fresh application is required for each subsequent financial year if the taxpayer wishes to continue availing the benefit.
• Once the taxpayer receives the certificate, they must provide a copy to the person responsible for deducting the tax (the deductor).
• The deductor then deducts tax at the rate specified in the certificate or deducts no tax, as the case may be. The deductor is required to mention the certificate number when filing their TDS return.

Benefits of a Section 197 Certificate

• Improved Cash Flow: Allows taxpayers to retain more of their income upfront, leading to better liquidity.
• Reduced Need for Refunds: Minimizes the instances of over-deduction of tax, thereby reducing the hassle and delays associated with claiming refunds later.
• Simplified Compliance: Streamlines the tax filing process by ensuring accurate TDS deductions from the outset.

It is advisable for taxpayers to apply for this certificate at the beginning of the financial year to ensure that TDS is deducted correctly throughout the year.