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Lower Tax Deduction Certificate (LDC) Online

As per the provisions of the Income-tax Act, 1961 (the Act) certain persons who are responsible for paying certain sums 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 the case of a non-resident recipient, such WHT can be claimed as foreign tax credit subject to the domestic tax laws of the concerned country. Sufficient proof is required to be given by the non-resident in his residence jurisdiction which could be in the form of withholding tax certificate

In view of the above, the act provides that such assessee 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 assessee as per the provisions of Section 197 of the Act. Further, Section 195(2) of the act provides that, if the person making payment to non-resident is of the view that the whole of such payment is not chargeable to tax as per the act, it can make an application to the Assessing Officer for determination of appropriate sum chargeable to tax.

How to Apply for a Lower Tax Deduction Certificate (LDC)

In order to understand the procedure for applying for LDC, it is critical to note the sections under which an assessee is eligible to seek a LDC under the act. Below is a list of the sections and income under which LDC can be availed:

  • Section 192: Salary
  • Section 193: Interest on securities
  • Section 194: Dividend
  • Section 194A: Interest other than interest on securities
  • Section 194C: Contract Payments
  • Section 194D: Insurance Commission
  • Section 194G: Commission on Sale of Lottery tickets
  • Section 194H: Commission or Brokerage
  • Section 194G: Commission on Sale of Lottery tickets
  • Section 194H: Commission or brokerage
  • Section 194-I: Rent
  • Section 194J: Professional services, royalty etc
  • Section 194K: Income in respect of units
  • Section 194LA: Compensation on acquisition of certain immovable property
  • Section 194LBA: Certain income from units of a business trust
  • Section 194LBB: Investment fund paying to a unit holder
  • Section 194LBC: Income from the investment made in securitization trust
  • Section 194M: Payment of contract, commission, brokerage, professional services or any work by individuals or HUFs not deducting tax in above sections
  • Section 194-O: Payment of certain sums by e-commerce operator to e-commerce participant
  • Section 195: Payments to non-resident

Step 1: The application shall first be made electronically through Form 13 on the Traces Portal. The traces portal is for TDS Reconciliation Analysis and Corrections. It is an online portal of the Income Tax Department which helps connect all stakeholders involved in the administration and implementation of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS).

Step 2: Along with the application certain documents needs to be provided. Below is the tentative list of documents that are generally required by the tax authorities:

  • Self/Authorized person certified estimated income computation of the financial year for which certification is sought.
  • Details of incomes claimed to be exempt and not included in the total income computed above.
  • Assessment orders, if any, of the last 4 years.
  • Provisional financial statements, if not finalized, of the financial year preceding the year in which the application is made.
  • Projected financial statements of the financial year in which the application is being made.
  • Provisional Computation of Income for the relevant previous year

Step 3: The application will thus be allotted to the Tax authorities in accordance with the concerned jurisdiction.

Step 4: The Tax authorities while scrutinizing the documents may ask for such documents as they think are necessary for granting the certificate. For example, clarifications regarding any pending demands on PAN and TAN of the taxpayer.

Step 5: Upon satisfaction, the Tax authorities shall issue a certificate duly specifying, inter alia:

  1. Sections under which tax is to be deducted,
  2. Corresponding rate at which the deductor shall deduct the tax, and
  3. The threshold upto which the deductor(s) may make the payment to the applicant after deducting tax at the rate(s) specified in the certificate, and
  4. The period for which it is applicable.

Step 6: The certificate shall be issued directly to the person responsible for deducting the tax. However, where the number of deductors is likely to exceed 100 and details of such persons are not available at the time of making the application, the certificate may be issued to the applicant authorizing him to receive income or sum after deduction of tax at a lower rate.

Step 7: After issuance of the certificate, TDS rates, to the extent specified in the certificate, under the act stand modified in respect of such recipient, and tax shall be deducted by the deductor in accordance with the rate mentioned in the certificate.

Step 8: The certificate shall be valid for such period as may be specified in the certificate unless it is canceled by the Tax authorities at any time before the expiry of the specified period.

The above procedure shall also be followed for tax collected at source as well, in which case the buyer or licensee or lessee apply to the tax authorities for granting a lower tax collection certificate.

Lower Deduction Certificate for Non-Residents:

The provisions of Section 195 of the act govern the withholding of tax on payments made to a non-resident (other than salary payment) by any person. The section does not empower the Tax authorities to specify a rate of deduction of tax, instead it empowers him to determine the amount on which tax shall be deducted. In other words, Tax authorities determine the bases on which such tax is needed to be deducted rather than the rate at which such tax is to be deducted. It is pertinent to note that this Section is used mainly for transactions in which Capital Gains are there.

It is worth noting that currently, no form/format of application or manner in which it shall be made has been prescribed by the Income-tax Department.

Procedure to obtain such certificate:

Such an application is made to the jurisdictional Tax authorities on plain paper along with the attachment of the below-mentioned documents.

  • Identity proof viz., passport, PAN, incorporation certificate, etc., of the payer.
  • Identity proof viz., passport, PAN, incorporation certificate, etc., of the payee.
  • Returns of the last 3 years of the payee, if any.
  • Computation of amount chargeable to tax i.e., the base amount on which tax is to be deducted.
  • Computation of tax needs to be deducted in accordance with Section 195(1) of the act.
  • Legal backing of the transaction(s) sought to be executed. E.g., Sale deed, valuation reports, etc.

The tax authorities while scrutinizing the application may ask for such other documents as he thinks necessary from the applicant to grant the certificate. If the authorities are satisfied with the completeness and genuineness of the application and think it justified to do so, they may grant an order specifying the amount on which tax shall be deducted by the payer while making payment to a non-resident.

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