Use Section 197 of I-T Act to manage cash flow

Only payments made after submission of this certificate are eligible for lower or nil tax rate

When it comes to money, it pays to be tactical, and doubly so during a crisis. Even the smallest of steps can help. Take, for instance, utilising Section 197 of the Income-tax (I-T) Act to prevent deduction of excess tax. Tax deducted at source (TDS) is collected by the deductor and is remitted into the government’s account. The deductee, from whose income TDS has been deducted, is entitled to credit for the amount deducted on the basis of Form 26AS or TDS certificate issued by the deductor.

According to Rahul Garg, senior partner, tax & regulatory, PWC India, “TDS rates are prescribed under the law. These are general rates. So, TDS deduction sometimes leads to excess tax deduction, compared to the actual I-T payable by a taxpayer.”

This has a couple of consequences. First, the taxpayer’s cash gets blocked. Says Gopal Bohra, partner, N.A. Shah Associates: “Section 197 was introduced to avoid blockage of cash flow if a taxpayer’s actual tax liability is lower than the TDS. TDS is deducted on gross receipt, whereas tax is levied on taxable income computed after claiming eligible deductions or exemptions. In such a scenario, his/her tax liability may be lower than the TDS, which results in blockage of funds until the I-T department issues a refund while processing his/her tax return.”

Second, the government also becomes liable to pay interest on the excess amount. Says Bohra: “If the refund amount exceeds 10 per cent of the tax payable, the government pays interest at 0.5 per cent for every month, or part of a month, from the first day of April of the assessment year till the date of refund.” If the refund claimed is less than 10 per cent of tax payable, no interest is paid.

Obtaining a certificate under Section 197 helps. Explains Kapil Rana, founder and chairman, Hostbooks: “Under this Section, the taxpayer can obtain a certificate that allows the deductor to deduct tax at a lower or nil rate, as mentioned in the certificate.”

To obtain this certificate, the taxpayer applies using Form 13. Says Vivek Jalan, partner at Tax Connect Advisory Services: “You can apply for a certificate using Form 13 to the assessing officer, who confirms either a lower rate of TDS, compared to the rate specified under the law or a nil rate of TDS, depending on the facts of each case and based on the application made.”

The entity paying the income will then deduct TDS at zero or lower rate, based on the rate specified in the certificate. Says Rana: “Section 197 for lower deduction certificate does not have any relevance in the case of advance tax. If you are liable to pay advance tax, there is very little chance you can get the certificate for lower deduction under this Section.”

Make use of Section 197 to manage your cash flows better. Says Garg: “You can apply for this certificate any time. This certificate works prospectively: it is applicable only to payments received after obtaining the certificate.”