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Low Tax Deduction Certificate

February 02, 2024 | Taxation, Direct and Indirect

Provisions of section 197 of the Income Tax Act, 1961 provide taxpayers with a lower tax rate or NIL deduction of TDS (TDS exemption). This section maintains a delicate balance between the requirement of cash flow to the taxpayer and realizing the Government dues at the earliest.

What is TDS?

Tax deducted at source, as per the Income Tax Act, is a percentage deducted as a tax from the payments such as salaries, professional fees, commissions, interest on investments, rent, etc. that exceeds certain threshold limits. A person or company that is making the payment is accountable for deducting the tax and depositing it with the government is called a Deductor whereas the person or company receiving the net payment is called Deductee. Irrespective of the mode of payment – cash, cheque or credit – TDS is to be deducted and is linked to the PAN of both parties.

TDS is a kind of advance tax that needs to be deposited with the government periodically and the onus of doing the same lies on the deductor. For the deductee, the deducted TDS can be claimed in the form of a tax refund after they file their income tax return. Generally, the TDS rate varies from 1% to 30%.

What is Section 197 and 197A?

Section 197 and 197A of the Income Tax Act, 1961 provides for the facility of NIL or lower tax rate deduction of TDS (or TDS exemption). If at the time of filing returns, the taxpayer realizes that his tax liability is considerably less than what he paid, then he can claim the refund for the same. However, in the case where the taxpayer thinks that his tax liability for the year will be NIL or less than the TDS rate applicable on a particular source of income, section 197 and 197A permits him to apply for a lower rate of TDS or no TDS. A taxpayer claiming low rate or no TDS needs to apply to the Assessing Officer (AO) in the prescribed form 13. In case the taxpayer does not apply for the certificate, they can still claim the refund in their annual return. Considering the merits of the case, AO issues a certificate-seeking a list of customers of the assessee to neither deduct taxes or deduct at a lower rate.

One can opt for lower or no TDS in the following scenarios:

  • Loss-making businesses
  • Least profitable business (profit margins being less than the rate of tax deduction)
  • Assessee having carried forward losses to set off with future year’s Income
  • Assessee eligible for deductions of profits (U/s. 10 or under chapter VI A etc.)
  • Assessee eligible for weighted deduction of expenditure
  • A non-resident selling immovable property to a resident buyer
  • A non-resident selling units of mutual fund
  • A person or company receiving dividend from an Indian Company
  • Receipt of 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 is indicatory and subject to change on case-to-case basis.

It is mandatory to deduct TDS even if the assessee falls below the minimum tax bracket. However, in such a scenario, the assessee can avoid unnecessary TDS by filing Form 15G/15H to the banks or can submit a lower/nil TDS certificate to the deductor.

Circumstances under which a lower TDS would be allowed:

As mentioned above, section 197 provides if the assessing officer is satisfied that the total income of the recipient justifies the deduction of tax at lower rates or no deduction should be made, shall grant a certificate for the same.

How a lower or no TDS can be moved?

Assessee needs to follow the below-given procedure, if tax is deducted at source u/s 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA, 194LBA, 194LBB, 194LBC, 194M, 194-O and 195 but he feels that no or lower tax deduction of TDS should be done.

  • Submit an application with the Assessing Officer (AO) in Form 13 seeking permission for lower or no TDS.
  • AO has to dispose of the applications within a time frame of 30 days.
  • It’s favourable for the taxpayers to file correct information in the first instance itself. If the AO is satisfied then he will expedite the issuance of certificate u/s 197.
  • Copy of this certificate should be attached to the invoice raised to the deductor, who can present this certificate to justify lower tax deduction.
  • This certificate is valid till the period applied for in application of such certificate or until the AO cancels it.
  • The deductee needs to apply separately for each financial year

Lower tax rate or NIL deduction of TDS is not applicable under sections 194B, 194BB, 194DA, 194E, 194IA.

After receiving the certificate, the deductor has to validate the PAN details, check validity for the current financial year and correct the certificate number. He raises flag A in a statement for a certificate u/s 197 and flag B for certificate u/s 197A.

What is Form 13?

The application for lower or no TDS u/s 197 is to be made by the taxpayer to AO in a predefined format i.e., Form 13. The following information is to be furnished:

  • Name and PAN of the dedcutee
  • Purpose of the refund being received
  • Ensure the specification of the certificate number in the statement
  • Income details of last three years and projected income of the current year
  • Tax paid in the last three years and also tax paid/deducted in the current year.
  • Tax Deduction Account Number of all parties responsible for paying you
  • Ratios of income and turnover of the deductee
  • Any other documents or information as required by the Assessing Officer

What is Form 15G and Form 15H?

Under the provisions of section 197A, if any individual or a Hindu Undivided Family (HUF) has divided their income under Section 2(22)(e) or interest income under Section 57 is

a.    not exceeding the exemption limit and;
b.    the tax liability is also nil,

Then such assessee can furnish a self-declaration in Form 15G to the person who is liable to pay such dividend (or interest). In such cases, no tax is to be deducted at the source.

Self-declaration under the Form 15H is to be submitted by the assessee who is above 60 years of age and whose tax liability is supposed to be nil. No deduction of tax at source is made at the time of disbursement of income to such assessee.

Notwithstanding anything contained in this section, no deduction of tax shall be made by the Offshore Banking Unit from the interest paid when:

  • deposit made on or after the 1st day of April 2005, by a non-resident or a person not ordinarily resident in India; or
  • borrowing on or after the 1st day of April 2005, from a non-resident or a person not ordinarily resident in India.
The certificate issued under Section 197 is only valid for the assessment year mentioned in the certificate unless it is cancelled or the date mentioned on the certificate expires

Lower TDS on sale of property by NRI/OCI Sellers

When an Indian property seller is a resident Indian, the Tax Deducted at Source (TDS) is governed by section 194IA, with a prescribed rate of 1% of the sales value.

However, if the seller is a Non-Resident (NRI, OCI, Foreign Resident), TDS is regulated by section 195 of the Income Tax Act. Under these provisions, TDS rates apply at maximum rates on the Property's Sale Value as follows:

  • The rate is 20% of the sales value for long-term capital assets (held by the buyer for over 24 months).
  • The rate is 30% of the sale value for short-term capital assets (held by the buyer for less than 24 months).
Additionally, applicable surcharge (SC) and 4% cess are added on top of these rates.

Since TDS is deducted on the sales value, it doesn't reflect the actual capital gain for the Non-Resident. If the actual tax payable by the non-resident is less than the TDS deducted, the NRI/OCI can file an Income Tax Return (ITR) after the end of the financial year in which the property was sold to claim the refund of excess tax paid. However, this process is time-consuming and may lead to the blocking of the NRI's funds with the Income Tax Department, resulting in a loss of bank interest.

For instance, if an NRI sells a property for INT 200 lakh, with a purchase cost (after indexation) of Rs 180 lakh, resulting in a capital gain of INR 20 lakh, the TDS under Non-Resident TDS provisions (Sec 195) would be 23.92% (20% + SC 15% + cess 4%) of INR 200 lakh (sale amount), which amounts to Rs 47.84 lakh. However, the actual tax liability is only INR 4.08 lakh, which is 20.80% of INR 20 lakh (20% + 4% cess; SC not applicable on gains below INR 50 lakh). Consequently, the excess TDS deducted is INR 43.76 lakh, which the NRI can claim as a refund through filing an ITR, albeit with the drawback of blocked funds.

To mitigate such hardships faced by Non-Residents (NRIs, OCIs) during property transactions in India, the Income Tax Act (sec 197) provides for a Lower TDS Certificate option. By applying in Form 13, NRIs/OCIs can obtain TDS relief before the sale transaction, avoiding the blocking of their funds with the Income Tax Department.

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