Introduction

Section 197 of the Income Tax Act, 1961 provides for the facility of NIL or Lower tax rate deduction of TDS (or TDS exemption). This section strikes a delicate balance between the requirement of cash flow to the taxpayer and realizing the government dues at the earliest. We all know that, TDS is a method of collection of tax where a certain percentage (1%-30%) of the total amount is payable by the payee.

TDS Exemption is applicable

If tax is deducted at source under section 192,193,194,194A, 194C, 194D,194G, 194H, 194I, 194J, 194LA & 195 and if assessee feels that  no or lower tax deduction of TDS should be there then the following procedure is to be followed to claim exemption under section 197

  • Apply to Income tax department/Assessing Officer (AO) in Form 13 for granting the permission.
  • Assessing Officer has to dispose of the applications within a time frame of 30 days from the end of the month in which application.
  • Taxpayers are advised to file complete details required for processing the application (in Form 13) in the first instance itself. If the assessing officer is satisfied then, will expedite the issuance of certificate u/s 197.
  • The copy of this certificate can be attached to the invoice raised to the client in order to claim the exemption.
  • This certificate is valid until the assessing officer does not cancel it.

TDS Exemption is not applicable

Nil or lower tax rate deduction of TDS u/s 197 is not applicable under Sections 194B, 194BB, 194DA, 194E, 194IA.

  • Under the provisions of section 197A, if any individual or a Hindu Undivided Family (HUF) has divided their income under Section 2(22)(e) or interest income under Section 57 is
  1. not exceeding the exemption limit and;
  2. the tax liability is also nil,

Then such assessee can furnish a self-declaration in Form 15G to the person who is liable to pay such dividend (or interest). In such cases, no tax is to be deducted at source.

  • In the case of a senior citizen (exceeding 60 years of age), they can give a self-declaration in Form 15H, if the tax liability is supposed to be nil. In such case, no deduction of tax at source is made in the case of disbursement of any income to such assessee.
  • Notwithstanding anything contained in this section, no deduction of tax shall be made by the Offshore Banking Unit from the interest paid when:
  1. deposit made on or after the 1st day of April 2005, by a non-resident or a person not ordinarily resident in India; or
  2. borrowing, on or after the 1st day of April 2005, from a non-resident or a person not ordinarily resident in India.

Notes:

  • Form 15G: Declaration under sub-sections (1) and (2) of section 197A of Income Tax Act, 1961 to be made by the individual or a person (not being a company or a firm) claiming certain receipts without the tax deduction of tax.
  • Form 15H: Declaration under sub- section (1C) of section 197A of the Income Tax Act, 1961 to be made by an individual who is of the age of 60years or more claiming certain receipts without tax deduction of tax.
  • Tax Exemption/Lower Deduction Certificate u/s 197 or 197A should be verified through Income Tax TRACES Cautionary measures should be taken to avoid the usage of the expired certificate.

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