A lower deduction certificate under Section 197 of the Income-tax Act 1961 authorises your deductors to cut tax at source from your payments at a rate lower than the normal rate, or not at all. You apply in the prescribed form on the income-tax e-filing portal with your computation of income, prior returns and the contracts behind the receipts; the Assessing Officer works out the tax likely to be due and issues the certificate. You then give a copy of the certificate to each person who pays you, and that deductor applies the reduced rate.
Before you start
The application lives or dies on the computation, so prepare these first:
- A computation of your estimated income for the financial year, head by head, and the tax that would be payable on it at the rates in force. This is the single document the officer relies on.
- Your income-tax returns for the earlier years, and the assessment or intimation orders where they exist. A consistent record helps; a year of non-filing invites questions.
- Proof of carried-forward losses, brought-forward depreciation or credit of tax paid, because these are what usually create the gap between the normal rate and the rate you are asking for.
- Bank statements for the year to date, showing receipts, expenses and any advance tax already paid.
- The contracts, purchase orders or work orders from the deductors, showing the value receivable and the tax deducted at source section that applies to the payment.
- The names, TAN and address of each deductor, and a rough estimate of the payments expected from each.
Steps
- 1. Work out whether the certificate is really needed. It is granted where the tax on your estimated income is less than the tax that would be deducted at source at the normal rate. Thin margins on a contract, brought-forward losses, or a large refund position from earlier years are the usual reasons the two figures diverge.
- 2. Prepare the application in the prescribed form. The application for a certificate of lower or nil deduction for residents is made in the form the Income-tax Rules 1962 prescribe, and it is filed electronically. State the financial year, the section under which the certificate is sought, the section governing the deduction at source, and the deductor details.
- 3. Attach the supporting papers. The computation of income, the returns, the financial statements, the contracts and a note of the tax already paid go with the form. Where the request rests on losses, attach the orders or returns that establish them.
- 4. Submit and keep the acknowledgement. File the application through the portal, note the acknowledgement number, and keep a full copy of what you submitted. The department disposes of the application by notice and order, and the reference number is how you track it.
- 5. Answer the officer's queries. The Assessing Officer may call for further documents or explanation. Reply through the portal within the time given, attaching the papers sought; a request that is not substantiated is normally refused.
- 6. Receive the certificate. If satisfied, the officer issues a certificate specifying the rate, the section it applies to and the period for which it holds good. Where the request is partly allowed, the certificate may apply a rate lower than the normal rate but not nil.
- 7. Pass it to the deductors. Send a copy of the certificate to each deductor. The deductor deducts at the certified rate, quotes the certificate reference in the quarterly tax-deduction statement, and keeps the copy. Tell each deductor in writing before the next payment goes out.
- 8. Watch the validity. The certificate runs for the period stated on its face, usually the financial year it is granted for. Where the position continues, apply afresh before the next year's payments begin; a lapsed certificate is no authority for a lower rate.
Documents to keep
- The application and its acknowledgement, and the certificate as finally issued.
- The computation of income and the workings behind the estimated tax.
- The returns, financial statements, loss orders and challans relied on.
- Proof that the certificate was sent to each deductor, with the date, so the reduced deduction can be defended later.
- The deduction statements and the annual tax statement, to confirm the deductor actually applied the certified rate.
What goes wrong
- Applying with no computation, or with an estimate of income that is plainly optimistic. The officer compares your figure with the receipts and the earlier returns and refuses a request that does not add up.
- Forgetting to mention a carried-forward loss or the tax already paid, which is usually the whole reason a lower rate is justified.
- Not listing every deductor, so a payer who was not covered continues to deduct at the normal rate.
- Using a certificate after the period stated on its face, when it is no longer an authority for a lower rate.
- Quoting the certificate against the wrong section of deduction, so the deductor is not protected.
Common questions
Who can apply for a lower deduction certificate?
Any resident taxpayer who expects that the tax on the estimated income for the year will be less than the tax that would be deducted at source at the normal rate. It is common for contractors, professionals and suppliers of goods whose margins are thin, and for those carrying forward losses.
For how long is the certificate valid?
The certificate is valid for the period stated in it, ordinarily the financial year for which it is issued, and it applies to the deductors and the section named. A fresh application is needed once it lapses, and it should be filed before the payments for the new year begin.
What rate will the officer allow?
The rate, or nil, is fixed after the officer works out the tax likely to be due on your estimated income against the deductions expected. The certificate records the rate, and it may be lower than the normal rate rather than nil where the estimate does not fully support a nil deduction.
What does the deductor have to do with the certificate?
The deductor takes a copy, deducts at the certified rate, quotes the certificate reference in the tax-deduction statement, and applies it only for the period and section named. Until the deductor is served with the certificate, the normal rate continues.
A certificate is only as good as the computation behind it, and the wider services we offer cover the return and assessment work that the computation draws on.
FileX Advocates & Legal Consultants, Kolkata, prepares lower-deduction applications, computations and the papers that go with them, and answers department queries through the e-proceedings route. Call +91 7439811422 or WhatsApp us for a first consultation. Our tax practice and the tax and regulatory formats page cover the documents you will need.