Ever wondered how you could reduce your tax deductions legally? Enter Section 197 and 197A of the Income Tax Act—a powerful tool for taxpayers looking to lower their TDS liabilities. If you’re navigating the maze of tax deductions, understanding the Section 197 process could be your game-changer. In this article, we’ll dive into the details of Section 197 of the Income Tax Act, explore how it works, and show you how to make the most of it to keep more of your hard-earned money.

What Is Section 197?

Section 197 of the Income Tax Act offers taxpayers the opportunity to reduce or eliminate their 197 tax deduction at source (TDS) obligations. This provision is particularly beneficial for those whose income is subject to TDS. To avail of this benefit, the assessee must submit an application to the assessing officer within their jurisdiction using Form No. 13. The assessing officer, after evaluating the applicant’s total income and estimated tax liability, may issue a certificate authorising a Nil or lower TDS rate. This certificate allows the taxpayer to minimise their TDS burden legally, ensuring that the deductions are more aligned with their actual tax obligations.

What Section 197 Covers?

Section 197 of Income Tax Act offers taxpayers the chance to apply for reduced or zero TDS on various sources of income. Here’s what it covers:

1. Salary

Under Section 197, taxpayers can apply for a reduction or exemption of TDS on their salary. If your total income is expected to be below the taxable threshold or if your tax liability is lower than the standard TDS rate, you might be eligible for a reduced rate or complete exemption.

2. Interest on Securities

This section allows for a reduction or elimination of TDS on interest earned from securities. If you anticipate your total income will be lower than the taxable limit, you can apply to have the TDS rate on your interest income reduced or waived.

3. Dividends

Tax withheld on dividend payments can be eligible for a lower TDS rate or exemption under Section 197. If your overall tax liability is lower than the TDS rate applicable to dividends, you can apply for a certificate to reduce or eliminate the TDS.

4. Payments to Contractors

Contractors can benefit from reduced TDS on payments received under contracts. Section 197 enables contractors to apply for a lower TDS rate if their total tax liability is expected to be less than the standard TDS rate.

5. Insurance Commissions

Section 197 also applies to TDS on insurance commissions. If you earn commissions from insurance policies and your total tax liability is lower than the TDS rate, you can apply for a reduction or exemption from TDS.

6. Lottery Winnings

For lottery winnings, Section 197 provides an opportunity to lower the TDS rate. If you win a lottery and your projected tax liability is below the standard TDS rate, you can apply to reduce or eliminate the TDS deducted from your winnings.

7. Commission & Brokerage

Commission and brokerage payments may qualify for a reduced or zero TDS rate under Section 197. If you receive payments for commissions or brokerage services and expect your overall tax liability to be lower, you can apply for a reduction in TDS.

8. Rent Income

Rent income can be fully exempt from TDS or subject to a minimal TDS rate under Section 197. If your rental income and total tax liability are below the usual TDS threshold, you can seek a reduction or exemption from TDS on your rental earnings.

9. Professional Income

Professionals, including consultants and service providers, can apply for a reduced TDS rate on their professional income. If your estimated tax liability is less than the standard TDS rate, Section 197 allows for a lower deduction.

10. Dividends from Mutual Funds

Section 194K, which is part of Section 197, applies to dividends from mutual funds. If you receive dividends from mutual funds and your tax liability is expected to be lower than the standard TDS rate, you can apply for a reduction or zero TDS.

How to Apply for a TDS Certificate Under Section 197?

To apply for a TDS certificate under Section 197, follow these simple steps:

1. Register on the Portal

First, visit TRACES and register using your PAN. This is the official TDS-CPC website.

2. Log In and Submit Form 13 

After registration, log in to the portal. Navigate to the ‘Statements/Forms’ tab and select ‘Request for Form 13.’

3. Complete Your Application

You can fill out the application for a Nil or lower TDS deduction online. For this process, you can use a digital signature (DSC) or an electronic verification code (EVC).

4. Documents to Upload

Attach the following documents with Form 13:

• Estimated Income Computation for the current financial year.
• Income tax returns or assessment orders for the last 4 financial years.
• Computation of total income for the previous 4 years if returns haven’t been filed.
• Registration/Exemption Certificate if applicable under Section 11 or 12 of the Income Tax Act.
• Registration/Exemption Certificate if applicable under Section 139(4C), where income is exempt under Section 10.

5. Assessment by the Officer

Once your application is submitted, the assessing officer will review it, considering your estimated tax liability for the current year as well as tax details from the previous 4 years. They will also take into account any advance tax payments and TDS/TCS collected up to the date of your application.

Receiving Your Certificate

If the officer determines that your estimated tax is NIL or very low and that standard TDS rates are unnecessary, they will issue a certificate for a reduced or Nil TDS rate. This certificate will be specific to the deductor and service and will be valid from the issue date until the end of the financial year or until it is cancelled by the officer.

Exceptions and Exemptions Under Section 197

Understanding the exclusions and exemptions for reduced or zero Tax Deduction at Source (TDS) under Section 197 of the Income Tax Act is essential for effective tax planning and compliance. Here’s what you need to know:

1. Exemptions Under Section 197 Process

• Eligibility for Exemption: Exemptions are based on your estimated total income for the fiscal year. If your income is below the taxable limit or qualifies for a lower tax rate, you might be exempt from standard TDS rates.
• Income Categories Covered: Exemptions apply to various income types where TDS is typically deducted, such as interest, dividends, rent, and professional fees.

2. Requirements for Lower or No TDS

• Estimate Your Income: You must estimate all sources of income for the year.
• Calculate Tax: Take into account all deductions and exemptions available under the Income Tax Act when calculating your projected tax liability.

To claim lower or zero TDS, submit the required application along with supporting documents to the Assessing Officer. This helps ensure that your TDS is adjusted according to your actual tax liability.

Consequences of Non-Compliance Under Section 197

Section 197 of the Companies Act, 2013 outlines provisions for management compensation for directors and other key managerial staff in Indian corporations. 

1. Penalties for Non-Compliance

Directors or key managerial personnel may face a penalty of ₹1 lakh if they fail to comply. If the company itself is non-compliant, the penalty increases to ₹5 lakh.

2. Remuneration Limits

Section 197 sets a maximum limit on remuneration for directors and key personnel, ensuring it is reasonable and proportional to the company’s performance.

Conclusion

Section 197 of the Income Tax Act allows taxpayers to apply for a certificate to reduce or eliminate TDS based on their income level. This certificate, valid for the assessment year it is issued, helps ensure compliance with tax regulations by allowing deductions at a lower rate or not at all, depending on the eligibility criteria.

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