This blog will explore the idea of the Lower Tax Deduction Certificate (LTDC) under Section 197 of the Income Tax Act, 1961. Though necessary for prompt tax collection, the TDS system sometimes causes too high deductions for companies with little or no tax obligation. This causes a requirement for continual refund claims and cash flow restrictions. A key relief, the LTDC lets qualified taxpayers ask for deduction at either nil or reduced rate. Especially for companies with particular financial or operational circumstances, we will investigate its necessity, relevance, advantages, and the procedure to get it.
In line with Section 197 of the Income Tax Act, 1961, the Income Tax Department grants a Lower Tax Deduction Certificate. This certificate lets the deductor deduct tax at a lower rate or sometimes at a zero rate on certain payments to the deductee. The main purpose of this certificate is to stop the too high deduction of TDS (Tax Deducted at Source), which might cause an unreasonable obstruction of operating capital.
Many times, taxpayers find themselves in complex situations wherein they face high tax deductions (TDS) despite having lesser tax obligation towards government and gets its adjustment/ refund after months. Few exceptional situations which arise with different businesses include :
In these cases, tax deduction by the payer will unnecessarily lead to blockage of taxpayers’ money, government liability of tax refund, compliance burden for claiming such tax refunds, potential loss on amount blocked and liquidity crunch for business entities. It becomes an undue hardship on non-liable assesses.
The income tax act, 1961 states that a taxpayer can make an application to the Assessing Officer for LTDC in case of Interest Income, Income from Rent, Professional Fees, Commission and brokerage, Dividend Income, Payment to Contractors and others. And, the validity of Lower Tax Deduction Certificate is the financial year for which it is issued and is specific to the deductor(s) and nature of income provided in the certificate.
Taxpayers who are eligible to apply for a Lower or Nil Tax Deduction Certificate includes resident individuals or HUFs having exempt or low income, companies or LLPs with tax holidays or MAT/AMT applicability, charitable trusts or NGOs with income exempt under Section 11, Non-residents having income covered under Double Taxation Avoidance Agreements (DTAA), Start-ups and export-oriented units and the businesses with heavy capital expenditure or loss situation.
To prevent unnecessary deductions, it is advised that the LTDC be applied at the start of the financial year or as early as feasible. The application requires to be filed annually as the certificate is only valid for the financial year in which it was granted.
Filing Form 13 online via the TRACES portal starts the procedure for applying for a Lower Tax Deduction Certificate (LTDC) under Section 197 of the Income Tax Act. The applicant has to log in using their PAN credentials and go to the "Request for Form 13". It requires the applicant's PAN, projected income for the current FY, information on prior years' income, nature and amount of payments expected and details of deductors.
Applicants are also required to provide supporting papers including tax computation, Form 26AS, anticipated profit and loss accounts, prior years' tax returns, and financial statements. A digital signature or an electronic verification code (EVC) must validate the application. Once filed, the jurisdictional Assessing Officer (AO) examines the information and may ask for more documentation or explanation if necessary. The AO certifies, if happy, the lower or nil rate of TDS applicable, the pertinent deductors, the kind of income, and the validity term.
It is important to note that there are some common mistakes related to LTDC, like – Delayed application which leads to TDS deduction at full rates, using an invalid or expired certificate for current transactions or failing to track communication with the Income Tax Department timely. These mistakes need to be taken care of.
Let's take a software development company that receives significant payments from clients across the globe. Despite having a high turnover, it qualifies for tax exemption under Section 10AA (SEZ units) and has no tax liability. However, clients continue to deduct TDS at 10% on professional payments. By applying for a Lower Tax Deduction Certificate (LTDC) India, the company can receive payments without TDS, improving its cash flow. This lower deduction certificate service provider helps eligible entities navigate the application process smoothly.
In summary, the Lower Tax Deduction Certificate India is a strategic tool to achieve withholding tax reduction in India, aligning TDS with actual tax obligations. It minimizes reliance on refunds and ensures better liquidity. Whether you are an Indian company or seeking a lower TDS certificate for NRI or lower deduction certificate for NR, obtaining an LDC certificate under Section 197 is a smart move for efficient tax management.
If you're an NRI dealing with income or property transactions in India, securing a Lower Deduction Certificate (LDC) can help you avoid excessive TDS and improve cash flow. For a step-by-step guide to applying for an LTDC, click here. Also, if you're selling any property in India, don’t miss our detailed blog on how to avoid unnecessary TDS on NRI property sales with expert assistance – read more.
No, the LTDC is a deductor-specific certificate which is issued for specified deductors listed in the application.
The validity for the certificate is 1 year and it can not be extended. Taxpayer has to file an application every financial year to enjoy the benefit of lower tax deductions.
You should actively notify the Assessing Officer if your income rises considerably following receipt of the certificate and your tax obligation rises as well. The AO may examine and change the certificate to guarantee proper deduction if a revised application is filed.
There is no fixed timeline, but usually it takes 2 to 4 weeks depending on the department and assessing officer’s workload.
Yes, if the total income including the FD interest is below the taxable limit or the taxpayer is eligible for lower tax.
A taxpayer can re-apply for the certificate. If application is in progress (before approval), application can be withdrawn and a fresh application can be made. But if certificate is issued, then applicant can make a revised or fresh application in Form 13 with corrected details.
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