Section 197 of the Income Tax Act

What is Section 197 of the Income Tax Act?

Section 197 of the Income Tax Act, 1961, allows taxpayers to apply for a certificate that authorizes them to have Tax Deducted at Source (TDS) at a reduced rate or even at a nil rate. This provision is particularly beneficial for individuals or entities whose income is subject to TDS, but whose actual tax liability is lower than the TDS amount.

By obtaining a Section 197 certificate, taxpayers can avoid excessive deductions and streamline their tax compliance process. It applies to various income streams subject to TDS, such as interest, dividends, rent, commission, and professional fees.

Types of Certificates

The TDS certificates are of the following categories:

1. Certificate for Lower Deduction

   Issued when the taxpayer can prove that their income tax liability is lower than the prescribed TDS rate.

2. Certificate for No Deduction

   Issued when the taxpayer is eligible for no TDS to be deducted.

Validity of the Certificate

A Section 197 certificate is valid for a specific period, usually the financial year in which it is issued. If the circumstances necessitating a lower TDS deduction continue, it's crucial to apply for a fresh certificate each financial year.

Eligibility to Apply for TDS Certificate under Section 197

A taxpayer can apply for this certificate when they expect their income to be lower than the income on which tax is regularly deducted. This typically occurs in the following situations:

• Lower Income: When the recipient's total income, including the income on which TDS is being deducted, falls below the basic exemption limit.

• Tax Benefits: When the recipient is eligible for deductions, exemptions, or other tax benefits that reduce their overall tax liability.

• Specific Circumstances: In cases such as retirement, where income may temporarily decrease, applying for this certificate becomes relevant.

How to Obtain a Section 197 Certificate

To obtain a Section 197 certificate, taxpayers must submit an application to their assessing officer, typically using Form No. 13. This application requires a thorough assessment by the assessing officer, who considers factors such as the taxpayer's total income and estimated tax liability.

Steps to Apply for TDS Certificate under Section 197

You can follow the steps mentioned below for TDS certificate application under Section 197:

1. Form 13

   Taxpayers need to file an online application using Form 13 on the Income Tax Department’s e-filing portal.

2. Supporting Documents

   A taxpayer must provide income details, deductions, exemptions, and any other relevant documents.

3. Assessment of Application

   The Income Tax Department will assess the application and issue a certificate, if applicable.

4. Validity

   Once granted, the certificate is valid for the financial year specified, and the payer will deduct tax at the rate mentioned in the certificate.

Documents Required to Get TDS Certificate under Section 197

1. Signed Form 13

   Fill out Form 13 accurately from the Income Tax Department’s website.

2. PAN Card Copy

   Submit a clear copy of your PAN card.

3. Income & Tax Details

   • Estimate current year’s income.

   • Provide income details for the last three years.

   • Attach ITRs with acknowledgement and assessment orders for the last four years.

4. Business Documents (If Applicable)

   • Provide financial statements and audit reports for the last three years.

   • Submit the projected profit and loss account for the current year.

Benefits of Section 197 of the Income Tax Act

The key benefits of the Section 197 are listed below:

1. Avoidance of Excess TDS

   It helps taxpayers avoid over-deduction of tax at source, which can otherwise be a hassle to reclaim during the income tax return filing.

2. Relief for Senior Citizens & Small Taxpayers

   It provides relief for senior citizens and small taxpayers who may have lower or no tax liability.

3. Faster Refunds

   By applying for a lower or no TDS certificate, taxpayers can reduce their tax burden immediately instead of waiting for refunds.

4. Facilitating Cash Flow

   Reducing the TDS rate helps maintain liquidity for taxpayers, ensuring they are not unduly burdened by excessive tax deductions.

5. Streamlining Tax Compliance

   It simplifies tax compliance by reducing the need to claim refunds for excess TDS, easing the administrative burden.

Illustration of the Benefits under Section 197

For instance, consider a consultant whose annual income is ₹5,00,000 and is below the taxable limit due to applicable deductions. If their income is subject to TDS at 10%, they would have ₹50,000 deducted as TDS. By obtaining a Section 197 certificate, they can reduce the TDS rate to nil, thus avoiding the unnecessary deduction and the need to claim a refund.

Conclusion

Section 197 is a useful provision that ensures taxpayers are not subjected to excessive TDS deductions and offers them the opportunity to align their TDS deductions with their actual tax liabilities. By applying for a certificate, taxpayers can avoid the stress of reclaiming excess TDS and streamline their financial planning.