Obtaining a Nil / Lower Withholding Tax Certificate
One Step ahead and 2 steps backwards. Why? This principle of the dilemma is equally applicable in the tax mechanism also. The same error/ fault was persisting in the regime of Tax Deducted at Source (TDS) for certain categories of taxpayers. But now, by inserting section 197 related to the Income-tax Form 13, no more hardships to the people on whom Tax deducted at source is imposed.
Examples of Hardships faced are:
(a) In case taxpayer has incurred a loss during the year, or
(b) Taxpayer has carried forward losses of earlier years which are available for set-off in the current year, or
(c) Taxpayer is eligible to claim tax-exemptions or deductions during the year, or
(d) In case of capital gain, the amount of gain / income might be lower than the base amount of consideration on which tax is required to be deducted at source.
Steps Taken by Government to Avoid Such Inconvenience
Section 197 has been inserted by the Central Government. As per this amendment, the person caught in the aforesaid dilemma shall compose and submit an application to the Income Tax Officer to give him a certificate for Nil/ Lower deduction of TDS. The application is required to be filed in Form 13 under section 197 to the Income Tax Officer & after being satisfied the lower tax deduction is justifiable, he/she shall issue the certificate.
Once the above-mentioned certificate is issued under section 197, the TDS will be deducted after considering the TDS rate mentioned in the certificate in Income tax form 13. Worth mentioning here that the certificate shall be issued via online mode and the taxpayer could download the same from the web portal of the Income Tax Department.
Benefits of the Lower Deduction Certificate
- Improved Cash Flow: By avoiding unnecessary TDS deductions, taxpayers have better access to their funds, improving their cash flow situation.
- Reduced Blockage of Funds: No more waiting for refunds! The LDC eliminates the blockage of funds that occurs when excess TDS is deducted.
- Simplified Tax Compliance: For eligible taxpayers, the LDC simplifies tax compliance by ensuring they pay the correct amount of tax upfront.
Timeline for Submission of Application
For recurring income, it is preferable to submit the application before the start of FY, so that maximum benefit of the nil / lower withholding tax certificate can be availed during the coming FY. In other words, for recurring income to be received during FY 2024-25, it is preferable to submit the application latest by 15 March 2024, for Non-Recurring Income or one-off Income , it is preferable to submit the application at least 30 to 60 days in advance prior to receiving the income from the payer
Who can Apply for the LDC?
As per section 197(1), subject to the rules made by the Board under section 197(2A), where in the case of any income of any person, income-tax is required to be deducted at the time of credit or as the case may be, at the time of payment, at the rate in force under the following sections the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the Assessing Officer shall on the application made by the assesses in this behalf, given to him such certificate as may be appropriate.
The Said Deduction can be obtained on Income from Salary, Interest on securities, Dividends, Interest other than ‘Interest on securities’, Payments to contractors and sub-contractors, Insurance commission, Commission, etc. on sale of lottery tickets, Brokerage, Rent, Fees for professional or technical services, Payment of compensation on acquisition of certain immovable property, Income in respect of units of investment fund and Other Sums.
Procedure For Submission of Application of Form-13
The application needs to be submitted online on the Income-tax portal of the Government of India. Form 13 needs to be prepared & submitted along with all the necessary details which enable the tax authorities to assess genuineness of the claim for nil / lower withholding tax certificate. Once the application is scrutinized by the tax authorities & subject to their satisfaction, the nil / lower withholding tax certificate will be issued by the authorities. Usually, the lead time for issue of the certificate is approx. 60 to 90 days after submission of the application. In practice, the tax authorities usually prefer to grant a lower withholding tax certificate (instead of nil) because then it is possible for the Government to at least track the payments / transactions made within the economy Following details shall be required:
- Name and Permanent Account Number
- Information of income of the last three years & the projected current year’s income
- Information about the purpose for which the payment is being received
- Information of tax deducted paid for the current year
- Information of tax payment of the last 3 years
- Email ID
- Mobile Number
- Tax Liability Estimated for the current year
Conclusions:
The Lower Deduction Certificate (LDC) helps taxpayers avoid paying higher TDS than their actual tax liability, ensuring cash flow to them and receiving government dues at the earliest. The LDC eliminates the unnecessary blockage of funds caused by paying tax in the form of TDS, even if the recipient has no earnings liable to tax for the year, which can only be claimed as a refund by filing an income tax return.
