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Lower Deduction Certification

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Lower Deduction Certification

It is imperative to understand that some people who are responsible for paying certain amounts viz. dividends, rentals, payment for professional services, etc. to a resident or a non-resident taxpayer are required to withhold certain tax from the said payment as per the domestic tax law of India (“Income-tax act’1961” or “the Act”). Such amount deducted is termed as withholding tax (WHT) and can be claimed as a credit by the recipient of such income while filing the tax return.

In view of the above, the Act provides that such taxpayers can apply for a Lower Tax Deduction Certificate (LDC) to the Indian tax authorities. This certificate specifies a lower rate at which tax can be deducted by the person responsible for the payment of the consideration. Tax authorities may issue an LDC on an application made by the taxpayers as per the provisions contained in Section 197 of the Act.

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Benefits of Lower Withholding Certificate

  • Reduces tax liability with the reduced or nil rates
  • Saves time with streamlined application processes
  • Ensures compliance with Indian tax laws

It includes

  • Collating the documents as required to file the application for Lower withholding certificate with the Jurisdictional Assessing Officer (AO) in India.
  • Filing the Form 13 (application for obtaining lower deduction certificate) with the AO,
  • Representation before the AO
  • Collating the information requested by the AO by way of any notices issued in this regard. 
  • Preparing submissions with respect to the notices issued by the AO to seek additional information.

Frequently Asked Questions (FAQs)

What is a Lower Deduction Certificate and why is it needed?

It is a certificate issued by the tax authorities, allowing deduction of TDS at less than the applicable rate. This type of certificate would be beneficial for companies or an individual who believe that their overall tax liability would be less than the TDS rate and thus help in improving the cash flow by saving excess tax deduction.

Who can apply for a Certificate of Lower Deduction?

Any person estimating his total income for the financial year to be taxed lower than the standard TDS rate may apply for an LDC. This includes businessmen, contractors, freelancers, or anyone else who think that their tax liability at year end may be less than the rate at which TDS is normally deducted.

How can I apply for a Lower Deduction Certificate and what are the required documents?

To apply for an LDC, you will have to submit Form 13 with the tax authorities, accompanied by financial documents such as balance sheet, tax return, and income etc. for the financial year. This application will be checked by the tax authorities to decide on eligibility for the reduced deduction rate.