The Income Tax Act’s Section 197 allows eligible taxpayers to receive TDS relief at a reduced rate or for free. TDS is typically withheld by the deductor from wages and other payments and remitted to the Government. The taxpayer has the option to ask for and get an income tax refund if excessive TDS is deducted by completing an income tax return.

If an Assessing Officer is certain that a person’s current and expected tax liability will be less than the amount of TDS deducted and can demonstrate sufficient justification for the same, the Assessing Officer may award relief from TDS rules. This article provides a concise overview of the section of the Income Tax Act that deals with this clause, Section 197.

What is TDS?

“Tax Deducted at Source” is referred to as TDS. To collect tax at the point where an individual’s income is earned, the TDS idea was established. According to this idea, a person (deductor) who is required to make a payment of a specific sort to another person (deductee) must withhold tax at source and deposit it into the Central Government’s account. On the basis of Form 26AS or a TDS certificate provided by the deductor, the deductee from whose income tax source deductions have been made is entitled to get credit for the amount so deducted.

TDS is imposed on a variety of revenues, including salary, dividends, interest, and commission payments. Not all people and incomes are subject to TDS for all transactions. The Income Tax Act has established distinct TDS rates for certain payments and recipient types.

What do Sections 197 and 197A refer to?

The Income Tax Act of 1961’s Sections 197 and 197A allow for the deduction of TDS at a NIL or lower tax rate (or TDS exemption). The taxpayer may request a refund if, upon filing returns, he discovers that his tax liability is significantly lower than what he actually paid. However, sections 197 and 197A allow the taxpayer to ask for a lower rate of TDS or no TDS if he believes that his tax due for the year will be NIL or less than the TDS rate payable on a specific source of income.

The Assessing Officer (AO) must receive the application in the prescribed form 13 from the taxpayer requesting a low rate or no TDS. The taxpayer may still claim the refund in their yearly return even if they don’t apply for the certificate.

Purpose of TDS

The Income Tax department has implemented the TDS system. By requiring prior tax payments to the government, it ensures that tax avoidance by recipients of specific payments is reduced.

Let’s examine how TDS works.

  • The range of TDS is from 1% to 30%.
  • Form 26AS consolidates TDS for a financial year from all of your sources of income.
  • There are disadvantages to paying advance tax as TDS. Even though paying TDS may reduce some taxpayers’ financial responsibilities when submitting their income taxes, there may be other taxpayers whose income does not even put them in a tax band or whose tax due is less than what they may have paid as TDS.
  • For these taxpayers, who wind up paying TDS in excess of their tax obligations, a refund for the excess amount can be requested.

Areas to Think About

The Assessing Officer determines an Assessee’s eligibility to claim the benefits of this rule by evaluating his or her current and estimated obligation, which is calculated by taking into account the following factors:

  • Tax is due on the anticipated income from the prior year that applies to the assessment year.
  • Tax due on the assessed or refunded income from the three tax years prior.
  • Existing tax debt under the Wealth-tax Act of 1957 and the Income-tax Act of 1961
  • The payment of tax in advance for the assessment year is pertinent to the prior year up until the day that the pertinent application is made.
  • Tax withheld at source for the assessment year pertinent to the year prior up until the day the pertinent application was made.
  • Tax withheld at source for the assessment year pertinent to the prior year up until the time an application is made.

Are TDS regulations still applicable to taxpayers who do not have any taxable income?

A few taxpayers who may not even have taxable income may experience difficulties as a result of this source-based tax deduction method. Situations like these could occur when

  • For the current year, the taxpayer has suffered a loss.
  • The taxpayer has carried forward losses from prior years that can be offset this year.
  • The taxpayer is qualified to use specific exemptions or deductions throughout the year.
  • Taxpayer eligible for weighted expense deductions
  • A taxpayer who qualifies for profit deductions (under Section 10 or Chapter VI A, etc.)

As a result of the aforementioned, the taxpayer might not have any taxable income at all for the year. Although TDS rates are generally set by taking into account the broader income population as a whole and income category, it may cause unnecessary hardship for some taxpayers who do not have any taxable income but nevertheless have tax deducted at source for them and then demand a refund.

The Income tax law offers the option to obtain a certificate from the Assessing officer confirming either a lower rate of TDS compared to the rate specified under the law or a NIL rate of TDS, depending on the facts and circumstances of each case based on the application made, with the objective of removing such undue hardship on such taxpayers.

Section 197 of the Income Tax Act of 1961 gives taxpayers the option of a reduced tax rate or a TDS deduction that is NIL (TDS exemption). This part preserves a balance between the need for cash flow to the taxpayer and the earliest possible realization of government obligations.

What is Form 13?

The taxpayer must submit Form 13 to the AO in order to apply for lesser or no TDS under Section 197. The application must be resolved within 30 days of the end of the month it was received once it has been presented to the jurisdictional assessing officer (TDS) in its entirety. Before issuing the certificate or rejecting the application, the Assessing Officer will analyse the submitted documents and information and may ask for more information and documentation.

What Documents Must Be Included with Form 13?

  • Copies of the last three financial years’ tax returns, along with the accompanying enclosures and acknowledgments.
  • Copies of the assessment orders from the three prior fiscal years.
  • If the assessee has revenue from a business or profession, copies of their financial statements, along with any audit reports for the previous three financial years, are required.
  • Profit and loss account forecast for the current fiscal year.
  • Income statement computation for the last three fiscal years and a projected computation for the current fiscal year.
  • PAN card copy
  • Number of Tax Deduction Accounts for All Parties Paying You
  • Acknowledgment of the previous two financial years’ E-TDS returns
  • Estimated earnings for the fiscal year
  • Depending on the source of income, any further documentation
  • TDS default information

What exactly are Forms 15G and 15H?

Holders of bank fixed deposits (individuals under the age of 60 and HUF) may fill out Form 15G as a declaration to ensure that no TDS is deducted from their interest income for the fiscal year.

The assessee who is over 60 years of age and whose tax burden is supposed to be zero must submit a self-declaration using Form 15H. When income is paid to such an assessee, no tax at source deduction is made.

Unless it is canceled or the date specified on the certificate expires, the certificate issued under Section 197 is only good for the assessment year specified in the certificate.

It is crucial to keep in mind that the lower/Nil certificate will only be valid for the specified period stated in the certificate as well as the income limit that was specified in the certificate for the relevant deductor.

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