As a taxpayer, you are required to pay tax on your income at the rates specified by the revenue department. Under the system of Tax Deducted at Source (TDS), the payer is responsible for deducting tax before making payment to the recipient. However, in some situations, the TDS amount may be higher than the actual tax liability of the recipient.
This is where the concept of Lower Deduction of Tax comes in. The Income Tax Act provides the option to obtain a certificate, known as Lower Deduction Certificate (LDC) from the Assessing Officer under the provisions of Section 197, allowing the deduction of tax either at a lower rate compared to the effective rate or at NIL rate of TDS, depending on facts and features of each case based on the application made.
At Ahuja & Ahuja Chartered Accountants, we understand that obtaining an LDC can be a complicated and time-consuming process. Our team of expert and experienced Chartered Accountants can assist you in obtaining an LDC, thereby reducing your tax burden and saving your valuable time.
Situations in which it is beneficial to get the LDC issued include, but are not limited to:
- Loss-making businesses
- Assessees having carried forward losses to set off with future year’s income
- Assessees having net total income below the applicable basic exemption limit
- Receipt of payment for the sale of property in India by a non-resident seller from an Indian buyer
- 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
Our team of experts can help you navigate through the complicated process of obtaining an LDC and ensure that you benefit from it. Contact us today to learn more about our services and how we can assist you in obtaining an LDC.
At Ahuja & Ahuja Chartered Accountants, we understand the challenges faced by assessees who have to pay TDS despite not having any earnings liable to tax for the year. To eliminate this unnecessary load on such assessees, the Income Tax Act provides the option to obtain a certificate known as a Lower Deduction Certificate (LDC) under the provisions of Section 197.
Prescribed Form for LDC Application
To apply for an LDC, you must file an online application in the prescribed Form 13.
Details/Documents to be submitted and how to apply for Lower Deduction Certificate
The documents and details required to be submitted along with the application include your mobile number, email ID, copy of PAN card, Tax Deduction Account Number (TAN) of all parties responsible for making the payment, copies of the return of income and computation of income of the previous three financial years, and copies of Form 26AS of the previous three financial years.
If you have business or professional income, you must also submit copies of financial statements along with an audit report, if any, for the previous three financial years. You must also submit a projected profit and loss account for the ongoing financial year, estimated income during the financial year, and any other documents depending on the nature of the income.
Once the application has been filed successfully, the assessing officer will review the documents and information submitted and may ask for further queries and documents before issuing the certificate or rejecting the application. If the lower deduction of TDS is justified, the assessing officer will issue the certificate under section 197.
The Lower Deduction Certificate will be issued online, and you can download it from the Traces portal. The tax will be deducted at the rate stated in the certificate.
Eligibility for Making an Application for the LDC
To apply for a Lower Deduction Certificate (LDC), an individual’s specific income should attract tax deduction at source (TDS) as per the relevant sections of the Income-tax Act. Additionally, the estimated total income of the recipient should justify either no deduction or a lower deduction of Income Tax for the relevant financial year.
The Income Tax Act does not specify any deadline for applying for an LDC. However, since TDS applies to ongoing financial year income, it is advisable to apply for the certificate at the beginning of the financial year, in the case of regular income throughout the year. For one-off incomes, the application should be made as and when it is required.
A lower deduction certificate is valid for a specific financial year, starting from the date of issuance until the end of that financial year, unless it is revoked by the assessing officer before its expiry.
Advantages of obtaining LDC
Obtaining a Lower Deduction Certificate (LDC) can have several advantages for taxpayers. Here are some of them:
- Reduced Tax Deduction: With an LDC, the taxpayer can get a lower rate of TDS deducted from their income, or in some cases, no TDS at all. This can help the taxpayer with cash flow management, as they have to pay lesser taxes in advance.
- Reduced Compliance Burden: TDS provisions require taxpayers to file regular TDS returns and obtain TDS certificates. With an LDC, the taxpayer can avoid this compliance burden, as TDS may not be deducted or may be deducted at a lower rate.
- Reduced Tax Liability: By obtaining an LDC, the taxpayer can ensure that their tax liability is reduced, as TDS is deducted at a lower rate. This can help in tax planning and managing tax liabilities.
- Avoidance of Refunds: If TDS is deducted at a higher rate than necessary, the taxpayer may be entitled to a refund. However, this can be a cumbersome process, and obtaining an LDC can help avoid the need for refunds altogether.
- Savings on Interest: If the taxpayer has to pay advance tax or self-assessment tax, and TDS is deducted at a higher rate, they may end up paying excess taxes. This can result in an interest liability on the excess tax paid. Obtaining an LDC can help the taxpayer avoid such interest liabilities.
Frequently Asked Questions
What is the objective of the Lower Deduction Certificate?
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.
Who has to apply for the issuance of LDC – the taxpayer or the tax deductor?
The application for a Lower Deduction Certificate has to be made by the deductee/taxpayer in Form 13. Once the certificate is issued, the person responsible for paying the income (tax deductor) shall deduct tax at source according to the rates specified in such a certificate or deduct no tax, as the case might be, till the end of the relevant financial year unless cancelled by the assessing officer before its expiry.
Can a person who is a non-resident in India apply for LDC?
Yes, any person, resident or non-resident in India, can apply for LDC.
Can Form 13 be modified?
No, once submitted, Form 13 cannot be altered. However, the taxpayer has the option to withdraw the application until it is approved by the assessing officer.
What are the rates at which taxes are to be deducted at source?
Taxes are to be deducted at source at the rates prescribed in the relevant provisions of the Act or the First Schedule of the Finance Act. However, in the case of payment to non-resident persons, the withholding tax rates specified under the Double Taxation Avoidance Agreements shall also be considered.