MODULE 6: Lower / Nil Deduction Certificates
Introduction
Many taxpayers face a common problem — TDS is deducted at a high rate even when actual tax liability is low or nil. This leads to cash flow blockage and long refund cycles.
To solve this issue, the Income Tax Act provides a legal remedy under Section 197, allowing eligible assessees to apply for a Lower or Nil TDS Deduction Certificate.
In this blog, you will learn:
- What Section 197 is
- Who is eligible for lower or nil TDS
- How to apply using Form 13
- Validity and monitoring requirements
- Risks and consequences of incorrect usage
What is Section 197 of the Income Tax Act?
Section 197 allows an assessee (deductee) to apply to the Assessing Officer for authorisation to receive income with lower or nil deduction of tax at source.
Once approved, the Assessing Officer issues a Lower or Nil Deduction Certificate, which enables the deductor to deduct TDS at the rate specified in the certificate.
Important:
Without a valid Section 197 certificate, the deductor cannot reduce or eliminate TDS.
Lower Deduction vs Nil Deduction Certificate
| Particulars | Lower Deduction | Nil Deduction |
|---|---|---|
| TDS Rate | Reduced rate (e.g. 1%, 2%, 5%) | 0% |
| Tax Liability | Low but not zero | Nil |
| Risk Level | Moderate | High if misused |
| Approval | AO discretion | Strict scrutiny by AO |
Eligibility for Lower or Nil TDS Certificate
An assessee may be eligible for a Section 197 certificate if:
- Income Tax Returns are filed regularly
- Past compliance record is satisfactory
- Estimated income shows lower or nil tax liability
- TDS deduction is disproportionately high compared to actual profits
Common Eligible Assessees
- Professionals (CA, CS, consultants, freelancers)
- Contractors and sub-contractors
- Commission agents
- Service providers with high expenses and low margins
Eligibility is assessed case-by-case by the Assessing Officer.
Application Process Under Section 197 (Form 13)
Step 1: Online Application
The application must be made through Form 13 on the Income Tax Portal.
Step 2: Information Required
- Estimated income for the current financial year
- Details of income for past years
- Previous years’ TDS deducted and tax paid
- TAN-wise details of deductors
Step 3: Verification & Scrutiny
- Form 13 is verified using Aadhaar OTP or DSC
- The Assessing Officer may request additional documents or clarifications
Step 4: Issue of Certificate
- If satisfied, the AO issues the certificate electronically
- The certificate specifies:
- Applicable section
- TAN of deductor
- Lower or nil rate
- Validity period
Validity and Monitoring of Section 197 Certificate
- The certificate is generally valid for a specific financial year
- It is section-wise and TAN-wise, not a blanket approval
- Deductors must quote the certificate number while deducting TDS
- If income levels change, the AO has the power to modify or cancel the certificate
Regular monitoring is essential to ensure continued compliance.
Risks of Wrong Usage of Lower or Nil TDS Certificate
Incorrect use of a Section 197 certificate can result in serious consequences.
Common Errors
- Using the certificate for an incorrect TDS section
- Applying it to incomes or deductors not covered
- Continuing to use an expired certificate
- Underestimating income while applying
Possible Consequences
- Interest liability under the Income Tax Act
- Demand notices from the department
- Penalty proceedings
- Increased scrutiny in future assessments
Practical Compliance Points
- Section 197 benefits the deductee, not the deductor
- Deductors cannot reduce TDS without receiving a valid certificate
- Strict adherence to certificate conditions is mandatory
- Professional review is advisable before application
Conclusion
Section 197 is a powerful tool for managing cash flow and avoiding unnecessary TDS deductions. When used correctly, it helps taxpayers align TDS with actual tax liability. However, improper application or misuse can lead to penalties, interest, and departmental scrutiny.
A careful assessment of eligibility, accurate income estimation, and continuous monitoring are essential for safe and effective use of a Lower or Nil TDS Certificate.
Need Expert Assistance?
Applying for and managing a Lower or Nil TDS Certificate under Section 197 requires technical expertise and regular follow-up with the Income Tax Department.
Verotus Finlegal Solutions LLP provides complete support for:
- Section 197 (Form 13) applications
- Assessing Officer coordination
- Certificate tracking and compliance monitoring
- Practical tax planning for professionals and businesses
📞 Contact Verotus Finlegal Solutions LLP
to ensure smooth, compliant, and risk-free TDS management.
