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Section 197 of the Income Tax Act: A Guide to Lower TDS Rates and No TDS

Updated: Feb 12


Section 197 of the Income Tax Act: A Guide to Lower TDS Rates and No TDS
Section 197 of the Income Tax Act: A Guide to Lower TDS Rates and No TDS

Section 197 of the Income Tax Act, 1961 is a provision which allows for a lower rate of tax to be deducted at source / no tax to be deducted at source, i.e. the lower rate of TDS / no TDS. This section strikes a delicate balance between the requirement of cash flow to the taxpayer and realizing the government dues at the earliest.

 

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To avail this benefit, the assessee whose TDS is likely to be deducted on certain receipts should make an application before the Assessing Officer who has a jurisdiction over his/ her/ its case. The assessee/ deductee concerned may apply for a certificate for Nil or lower deduction of TDS on their receipts. This application is to be submitted to the assessing officer in the prescribed Form 13 along with necessary attachments. The application is a letter to assessing officer requesting the matter and providing the details of concern. Various details & documents are required to be furnished by the tax payer like:

  1. Copy of Permanent Account Number (PAN ) & address proof of deductee

  2. Copy of Tax deduction and Collection Number( TAN) & PAN of deductor

  3. Signed & Filled Form 13 (various details need to be filled in the form)

  4. Last 3 years ITR Copies

  5. Original Letter of Authority

  6. Copy of Balance Sheet, Statement of Profit & Loss Account (SPL) and Audit report of last three previous year


Understanding the Essence of Section 197

Section 197 of the Income Tax Act, 1961, is a pivotal provision in the realm of taxation in India, primarily dealing with the deduction of tax at source, commonly known as TDS. Because it affects the money coming in for taxpayers with certain income types, this section is very important. The purpose of Section 197 is to lessen the potential financial burden that the standard TDS rates may cause, as they may not be in line with the recipient's actual tax liability.

Key Features of Section 197:

  • Lower or Nil TDS: Section 197 allows taxpayers to apply for a certificate authorizing the payer to deduct tax at a lower rate or even forgo it entirely (nil rate), provided certain conditions are met.

  • Applicability: It applies to various income streams subject to TDS, such as interest, dividends, rent, commission, professional fees, and others.

  • Preventive Measures Against Excess Deduction: The provision is designed to prevent situations where the TDS deducted at source is higher than the actual tax liability of the taxpayer, leading to unnecessary blockage of funds and subsequent refund processes.

  • Beneficial for Certain Taxpayers: Particularly advantageous for those whose total income falls below the taxable threshold or who are eligible for lower tax rates due to deductions, exemptions, or lower income slabs.


Exploring the Purpose and Application

The Income Tax Act of 1961's Section 197 was created with the intention of enabling taxpayers to match their TDS with their tax obligation. This section is essential for people and organizations who think they will pay little or no taxes on their annual income.

Purpose of Section 197

  • Preventing Over-Deduction: The primary purpose is to prevent the over-deduction of tax at the source for taxpayers whose income falls below the taxable limit or who are eligible for lower tax rates due to various deductions and exemptions.

  • Facilitating Cash Flow: By reducing the TDS rate, Section 197 helps in maintaining the liquidity for taxpayers, ensuring that they are not unduly burdened by tax deductions that exceed their actual tax liability.

  • Streamlining Tax Compliance: It simplifies the tax compliance process by reducing the need for taxpayers to claim refunds for excess TDS, thereby easing the administrative burden on both the taxpayer and the tax authorities.


Clarifying Tax Deduction at Source (TDS) Applicability

One important component of the Indian tax system is Tax Deduction at Source (TDS), which is intended to collect taxes at the point of income generation. Taxpayers and tax professionals must have a firm grasp of its relevance, particularly regarding Section 197 of the Income Tax Act, 1961. With TDS, taxes are withheld right when money is earned. 


Instead of depending on the taxpayer to pay the tax later, it allows the government to collect taxes straight from the source of income. TDS's primary goal is to collect taxes right at the source of income. This system ensures a steady flow of revenue to the government and reduces the burden of lump-sum tax payments for the taxpayer.

Role of Section 197 in TDS

  • Reducing TDS Burden: Section 197 comes into play when the amount of TDS likely to be deducted during the financial year is higher than the actual tax liability of the recipient. This section allows taxpayers to apply for a lower or nil rate of TDS.

  • eligibility for Lower TDS: To be eligible, taxpayers must prove that their estimated total income justifies a lower rate of TDS. This involves providing detailed financial information and projections.


Identifying the Scope of Section 197 in Taxation

Section 197 of the Income Tax Act, 1961, plays a significant role in the landscape of Indian taxation, particularly in the context of Tax Deduction at Source (TDS). Understanding its scope is essential for taxpayers and tax professionals to navigate the complexities of TDS regulations effectively.


Broad Scope of Section 197

Different Income Streams: Section 197 covers many TDS-taxable income streams. Income sources include dividends interest on securities, rent, commission, fees for technical or professional services, and more.

Covering all industries and sectors: It covers taxpayers in all sectors and sectors, not just individuals or corporations. This solution is essential for many economic participants due to its broad applicability.


Specific Areas of Impact

Lowering TDS Rates: The primary area where Section 197 is impactful is in the authorization of lower TDS rates than those prescribed under the Act. This is particularly relevant for taxpayers whose actual tax liability is expected to be lower than the TDS deducted.

Nil Rate Certificate: In certain cases, where the taxpayer’s income is below the taxable limit or eligible for deductions that significantly reduce tax liability, Section 197 can be used to obtain a certificate for nil deduction of TDS.


Significance for Taxpayers: Benefits and Provisions

Section 197 of the Income Tax Act, 1961, holds substantial significance for taxpayers in India, offering benefits and provisions that can greatly influence their financial planning and tax liability. Understanding these benefits is crucial for taxpayers to manage their tax obligations effectively.


Key Benefits for Taxpayers

  • Reduced Cash Outflow: One of the primary benefits of Section 197 is the reduction in immediate cash outflow due to lower TDS. This is particularly beneficial for those with lower income or higher deductible expenses.

  • Improved Cash Flow Management: By reducing the TDS rate, taxpayers can have better control over their cash flow throughout the year, avoiding the situation where a significant portion of their income is locked as TDS.

  • Minimizing Refund Claims: Taxpayers can avoid the lengthy process of claiming refunds for excess TDS deducted, which can be a time-consuming and sometimes complex process.


Professional Insights: Navigating Section 197 for Clients

For tax professionals, guiding clients through the intricacies of Section 197 of the Income Tax Act, 1961, is a critical aspect of their advisory role. Understanding and effectively navigating this situation can provide significant benefits to clients, particularly in managing their tax liabilities and cash flows.


Key Considerations for Tax Professionals

  • Accurate Income estimation: Professionals must assist clients in accurately estimating their annual income. This includes not just the regular sources of income but also any occasional or seasonal income that might be subject to TDS.

  • Client’s Tax Profile: For effective Section 197 application, one must understand the client's overall tax profile, including deductions, examples, and credits.

  • Documentation and Compliance: ensuring that all necessary documentation is accurately prepared and submitted key. This includes income projections, tax calculations, and any other relevant financial information.


Advising on Application Process

  • Guiding Through the Application: Professionals should guide clients through the process of applying for a lower or nil TDS certificate, ensuring that the application is complete and compliant with the requirements.

  • Handling Queries from Tax Authorities: In cases where the tax authorities have queries or require additional documentation, professionals should be prepared to respond promptly and effectively.


Evaluating Threshold Limits for TDS Deduction

Understanding and evaluating the threshold limits for Tax Deduction at Source (TDS) is a crucial aspect for both taxpayers and tax professionals. These thresholds determine when TDS should be deducted and are essential for compliance with tax laws under the Income Tax Act, 1961, including the provisions of Section 197.


Overview of Threshold Limits

Threshold limits are the minimum income or pay over which TDS must be deducted. These limits depend on income type. The threshold limits exempt low-value transactions from TDS, simplifying compliance for payers and recipients.


Key Threshold Limits for Common Income Types

  • Interest Income: Interest from banks or post office savings accounts has a specific threshold, beyond which TDS is applicable.

  • Rental Income: There is a defined limit for rental income from property, above which TDS needs to be deducted.

  • Professional or Contractual Payments: Payments to professionals or contractors are subject to TDS beyond a specific limit.

  • Commission or Brokerage: TDS on commission or brokerage is deducted once the payment exceeds a specified threshold.


Role of Section 197 in Relation to Thresholds

If the total income of a taxpayer is expected to be below the taxable limit, or if the applicable tax rate is lower, they can apply under Section 197 for a lower TDS rate or nil deduction. Section 197 allows for an assessment of actual tax liability against the standard threshold limits, providing relief to taxpayers who might otherwise be subject to unnecessary TDS.


Various details are required to be furnished in Form 13 like:

  1. Status & Residential status

  2. Permanent Account Number (PAN)

  3. Assessment year to which payment relates

  4. Estimated total income of previous year relevant to assessment year

  5. Total tax including interest payable on the income

  6. Detail of returned Income/ assessed income for last three assessment years

  7. Tax payment for the last three assessment year

  8. Details of payment of advance tax and tax already deducted/collected for the assessment year relevant to the current previous year till date i.e. Advance Tax, TDS & TCS

  9. Details of income claimed to be exempt and not included in total income in.[Annexed reason of it as a note to it.]

  10. Details of existing liability under Income Tax Act, 1961

  11. Respective Annexure with schedule need to be filled as per the nature of receipt/Income

After disclosing all this information with relevant evidence or supporting documents to substantiate the information true and correct, the applicant is required to mention date, place and affix the signature of applicant itself on Form 13.

In order to streamline the procedure of handling the applications received u/s 197 and disposing the same in a time bound manner in consonance with the Citizens’ charter, the commissioner of Income tax (TDS) has issued certain guidelines for the Assessing Officers. These guidelines make it mandatory for the Assessing Officer to dispose of the applications u/s 197 within a time frame of 30 days from the end of the month in which application complete in ALL respect is received. Taxpayers are, therefore, advised to file complete details required for processing the application in the first instance itself. This will expedite the issuance of certificate u/s 197. Delays in this matter can be avoided by filing the prescribed form correctly and submitting the required details along with the form itself.

The Income-tax Officer is satisfied that the total income or the total world income of the recipient justifies the deduction of income-tax or super-tax at any lower rates or no deduction of income-tax or super-tax, as the case may be, the Income-tax Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.

Certificate of no deduction of tax or low rate of tax shall be valid only with regard to the person responsible for deducting tax and named therein. The certificate approving deduction under Section 197 will be valid for the assessment year specified in the certificate or until cancelled by the Assessing Officer. Once the certificate received by deductee, he/she/it can submit to deductor to deduct the TDS at NIL rate or lower rate.

Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the income-tax Officer, deduct income-tax and super-tax at the rates specified in such certificate or deduct no tax, as the case may be.

Understanding exemptions and Criteria

In the, context of Section 197 of the Income Tax Act, 1961, understanding the exemptions and criteria for lower or nil Tax Deduction at Source (TDS) is crucial for taxpayers. This knowledge helps in effective tax planning and ensures compliance with tax laws.


exemptions Under Section 197

Criteria for exemption: exemptions under Section 197 are granted based on the taxpayer's estimated total income for the financial year. If this estimated income is below the taxable limit or qualifies for a lower tax rate, the taxpayer may be exempt from the standard TDS rates.

Specific Income Types: The exemptions apply to various types of income such as interest, dividends, rent, professional fees, etc., where TDS is applicable.


Criteria for Lower or Nil TDS

Income estimation: The taxpayer must estimate all income sources for the year.

Tax Calculations: The estimated income tax must be calculated accurately, taking into account all Income Tax Act deductions and exemptions.

To claim lower or no TDS, the taxpayer must submit a prescribed application to the Assessing Officer with supporting documentation.


Meeting Conditions for Availing Lower TDS Rates

Availing lower Tax Deduction at Source (TDS) rates under Section 197 of the Income Tax Act, 1961, requires taxpayers to meet specific conditions. These conditions are designed to ensure that the provision is used appropriately and benefits those whose actual tax liability justifies a reduction in TDS rates.

Key Conditions for Lower TDS Rates

  • Accurate Income estimation: The taxpayer must estimate their annual income accurately. Income sources include salary, interest, rent, dividends, and others.

  • Calculation of Tax Liability: The taxpayer must estimate their annual tax liability using all Income Tax Act deductions and exemptions.

  • Justification for Lower Rate: The application for a lower TDS rate must justify why the standard TDS rate is higher than the taxpayer’s estimated tax liability.


Procedural Aspects: Application and Compliance

Navigating the procedural aspects of applying for lower Tax Deduction at Source (TDS) rates under Section 197 of the Income Tax Act, 1961, is crucial for ensuring compliance and successfully availing the benefits. This process involves specific steps, documentation, and adherence to tax laws.

Application Process for Lower TDS

  • Form Submission: Taxpayers must apply the prescribed form (Form 13 or its equivalent) to the Assessing Officer (AO) of their jurisdiction. This form is used to request a certificate for lower or nil TDS.

  • Required Information: The application should include detailed information about the taxpayer's income, tax liability, and justification for the reduced TDS rate.

  • Supporting Documentation: Along with the application, taxpayers need to attach supporting documents such as income statements, proof of investments, previous year’s tax returns, and any other relevant financial documents.

Compliance with Tax Laws

  • Adherence to Guidelines: It’s imperative to adhere to the guidelines and provisions outlined in the Income Tax Act while applying for lower TDS rates.

  • Accuracy of Information: The information provided in the application must be accurate and truthful. Any misrepresentation can lead to legal consequences.

  • Timely Submission: Applications should ideally be submitted before the start of the financial year or as soon as it is apparent that the TDS will exceed the actual tax liability.


Updates and Changes: evolving Nature of Section 197

Like many tax provisions, Section 197 of the Income Tax Act, 1961 is updated and changed to reflect economic and tax policy changes. It is imperative that professionals and taxpayers remain up to date on these changes in order to guarantee compliance and maximize the benefits that are offered.

Keeping Up with Legislative Changes

  • Annual Budget Amendments: The provisions of Section 197 can be affected by changes announced in the Union Budget. These changes may pertain to threshold limits, applicable rates, or procedural aspects.

  • Policy Revisions: From time to time, the government may introduce policy revisions that impact how Section 197 is applied or interpreted. This could include modifications in the application process, documentation requirements, or eligibility criteria.

Impact of Technological Advancements

  • Digitalization of Processes: With the increasing digitalization of tax processes, applications for lower or nil TDS, submission of documents, and issuance of certificates are becoming more streamlined and user-friendly.

  • easier Compliance and Monitoring: Technological advancements have made it easier for both taxpayers and tax authorities to monitor compliance, track applications, and maintain records.


FAQs

Q1 What is section 197 of the Income Tax Act 1961?

Section 197 of the Income Tax Act, 1961, allows Indian taxpayers to apply for lower or no TDS on their income. This section is especially relevant for individuals or entities whose total income for the financial year is expected to be below the threshold that mandates standard TDS rates or who qualify for tax deductions. It allows taxpayers to match TDS deductions with tax liabilities, avoiding large refunds. This section requires applications for lower or no TDS to be made to the Assessing Officer, who issues a certificate allowing the reduced rate or exemption.


Q2 How to check 197 certificates?

To check a Section 197 certificate, which is issued for lower or nil deduction of Tax Deduction at Source (TDS), you typically need to log in to the e-filing portal of the Income Tax Department of India. Once logged in, navigate to the TDS section where you can view and verify the status of your 197 certificate. The portal provides details such as the certificate number, the rate at which TDS is to be deducted, and the certificate's validity period. It's essential to ensure that your TDS deductor also has access to this certificate to apply the correct rate of TDS on your transactions.


Q3 In what way can I obtain a 197 certificate from traces?

To obtain a Section 197 certificate from TRACeS (TDS Reconciliation Analysis and Correction enabling System), follow these steps:

  • Login to TRACeS.

  • Navigate to the Relevant Section.

  • Request/Form Submission.

  • Download Certificate.


Q4 What does the TDS deduction exemption mean?

An exemption from Tax Deduction at Source (TDS) applies to certain types of income. An income payer does not withhold tax at the source when paying the beneficiary under this exemption. The recipient receives such exemptions when their income falls below the taxable threshold or in some instances, such as interest income, agricultural income, etc., as outlined in the Income Tax Act. The exemption prevents unnecessary tax deductions for non-taxable income, preventing tax refunds later.


Q5 What is the purpose of section 197?

Section 197 of the Income Tax Act, 1961, helps taxpayers with higher Tax Deductions at Source (TDS) than tax liability. This section lets taxpayers apply for a certificate to reduce or eliminate TDS on their income. It is especially beneficial for those with estimated income below the taxable limit or eligible for deductions that significantly reduce their tax liability. This certificate helps taxpayers match TDS deductions to tax liabilities, improving cash flow and reducing the need for large tax refunds.


Q6 Who is eligible to apply under Income Tax Act Section 197?

Section 197 of the Income Tax Act, 1961 allows taxpayers who expect their total income in a financial year to be lower than the taxable limit or their tax liability after deductions and exemptions to be lower than the TDS rate to apply. This includes salaried employees, freelancers, professionals, and businesses receiving TDS-taxable income like interest, rent, commission, or professional fees. eligibility requires that the estimated tax liability for the year be less than the TDS deducted at the standard rate, justifying a lower or no TDS deduction. 


Q7 What is the 197 certificate's time limit?

A Section 197 certificate, which authorizes lower or no Tax Deduction at Source (TDS), usually expires in the fiscal year it is issued. The certificate is valid from issuance until March 31st, the Indian financial year. For the next financial year, a new application and certification are needed. If the conditions that warranted the lower or nil TDS deduction continue in the new financial year, taxpayers should renew promptly.


Q8 What does Income Tax Act 197 A 1C mean?

To avoid TDS on certain income, Indian Income Tax Act 197A(1C) allows taxpayers to submit Form 15G or Form 15H to their income payer, such as banks. Taxpayers, usually seniors or those earning less than the taxable limit, can declare their total income as non-taxable for incomes like bank deposit interest. Thus, the payer will not deduct TDS on interest income. Form 15G is for under-60s and HUFs, while Form 15H is for seniors over 60. This provision avoids TDS for taxpayers with no tax liability. 


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