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Nil or Lower Tax Rate Deduction of TDS u/s 197 of Income Tax Act

By gkkedia Dt. September 23rd, 2020

What is TDS?
TDS (Tax Deducted at Source) was introduced to collect tax at the source from where an individual’s income is generated. The government uses TDS as a tool to collect tax in order to minimise the tax evasion by the taxpayers by taxing the income (partially or wholly) at the time it is generated itself.

Purpose and Functioning of TDS
Both the government and the Tax-payers get benefitted from TDS. Few of such advantages are enumerated below:

  • No Advance Tax: Getting TDS deducted on the income earned can dispense the assessee from the calculation as well as deposit of Advance Tax.
  • No Interest Charge: If a person does not pay Advance Tax within due time, he is levied with interest under section 234B and 24C. However, if the assessee has already got TDS deducted from his income no such interest shall be imposed.
  • Benefit to the Government: Imposition of TDS prevents people from evading taxes thus leading to a wider Tax Collection Base. It acts as a steady source of revenue to the Government.

 
However, with advantages also come some disadvantages. If TDS deducted is more than the actual tax liability of an individual then he is eligible to claim refund of the same while filing his return of income. However, such refund may be delayed by the income tax department thus leading to block of working capital of the assessee.

Therefore, to help taxpayers falling in the above-mentioned categories, where there is no tax liability at all or where the tax liability is lesser in terms of their current rate of TDS, the Income Tax Law provides for an option under Section 197 of the Act where the taxpayer by way of an application, can obtain a certificate from the Assessing Officer (AO) for either a Nil or a low rate of TDS.

Applicability of TDS exemption
Not everyone can claim TDS exemption under section 197. Only the following persons are eligible for NIL or Lower Rate of TDS:

  • Loss making businesses
  • Least profitable business (profit margins being less than 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

 
How to claim lower or Nil TDS u/s 197?

  • You need to file an application electronically under digital signature or through electronic verification code in Form 13 under Rule 28 to Income tax department/Assessing Officer (AO) for exemption of NIL or Lower tax rate for deduction of TDS. The following details are required to be furnished in this Form 13:
    1. Name and PAN of the taxpayer/assessee
    2. Reason/s for being eligible for the claim
    3. Details of the tax eligibility as per the existing income tax slabs
    4. The details of payment of tax for the last three years
    5. Details of the advanced tax paid
    6. Amount deducted/collected as TDS for the current assessment year
  • Within a frame of 30 days, Assessing Officer has to dispose off the applications.
  • If the assessing officer is satisfied, then he will issue a certificate u/s 197 to the following person:
    1. To the deductor, in consultation with the applicant
    2. To the deductee, when the number of persons deducting tax exceed 100
  • The copy of this certificate can be attached to the invoice raised to the client to claim the exemption.
  • This certificate is valid only until the assessing officer does not cancel it.

 
Section 197A
A recipient is also entitled to submit a declaration under Section 197A to the person making payment. Section 197A states, if any individual or Hindu Undivided Family has interest income from deposits not exceeding the exemption limit and also his tax liability is NIL, such individual (whose age is less than 60 years) or HUF can furnish a declaration in Form No. 15G to the person making payment of interest and in that case no tax shall be deducted at source. A senior citizen can give such declaration in Form No. 15H if his tax liability is NIL.
If the recipient makes a declaration without his PAN, then TDS or tax is to be deducted at higher of the following rates:

  • At the rate specified in the re​levant provision of the Act.
  • At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
  • At the rate of 20%.​

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