The objective of the Lower Deduction Certificate:

In order to ensure cash flow and timely payment of government dues, taxpayers might avoid paying larger TDS than their real tax liability by using the Lower Deduction Certificate (LDC). Even if the receiver has no earnings liable to tax for the year, refunds can only be looked at through filing an income tax return—the LDC removes the unnecessary blockage of funds due to paying tax in the form of TDS.

LDC Application eligibility:

An individual's specific income must qualify for tax deduction at source (TDS) under the applicable sections of the Income-tax Act in order to apply for a Lower Deduction Certificate (LDC). In addition to that, the recipient's expected total income will require either no deduction at all or a lower income tax deduction for the applicable financial year.

Documents required for LDC:

The application form must include the following details-

• Your mobile number
• E-mail address
• A copy of your PAN card
• The Tax Deduction Account Number (TAN) of each person who is responsible for making the payment
• Copies of your income tax return
• Computation of income from the three preceding financial years
• Copies of Form 26AS from three previous financial years
• You must also send copies of your financial statements for the preceding three financial years, along with any applicable audit report, if you have revenue from a business or profession.
• You also need to submit a projected profit and loss account for the current financial year, an estimate of your income for the current year, and any other required documents based on the nature of your income.

LDC Application Form

The assessee must fill out an online application using the prescribed Form 13 in order to apply for an LDC.

The application process for a Lower Deduction Certificate

• After the successful application submission, the assessing officer will examine the documents and supporting documents submitted and might ask for additional details and documents before granting the certificate or rejecting the application.
• The assessing officer shall issue the certificate under section 197 in the case that the lower TDS deduction is approved.
• You will be able to download the Lower Deduction Certificate from the Traces portal once it is available online.
• The rate specified in the certificate will be further used to deduct the tax.

Cases where issuing of Lower deduction certificate is beneficial:

• Businesses that are losing money
• Assessees who have carried over losses to be adjusted against income in the following year
• Assessees who make less than the applicable basic exemption limit on their net total income
• Money received from an Indian buyer for the sale of property in India by a non-resident seller
• A client who needs to have tax deducted at source under section 195 is paying money to a business without a permanent establishment in India.

Time limit to submit LDC application:

According to the Income Tax Act, there is no deadline for submitting an LDC application. However, as TDS is applied to income received throughout the current financial year, it is best to apply for the certificate before the start of the financial year in case you are getting regular revenue all year long. Applications for one-time revenues should be submitted as soon as needed.

Validity of LDC

If the assessing officer revokes a reduced deduction certificate before it expires, it is valid for a single financial year that starts on the date of issuance and ends at the completion of that financial year.

Lower Deduction Certificate (LDC) Advantages

• Lower Tax Deduction: LDC offers lower rates of Tax Deduction Service (TDS) deducted from income and zero TDS in some cases, which leads to better cash flow management.
• Less Compliance Burden: LDC avoids the need for regular TDS returns and certificates, reducing the compliance burden.
• Lower Tax Liability: LDC reduces taxpayers' tax liability, which helps in tax planning and managing liabilities.
• Irresponsive towards Refunds: LDC helps avoid the need for refunds if TDS is deducted at a higher rate than necessary.
• Savings on Interest: LDC helps avoid interest liabilities on excess taxes paid due to higher TDS deduction rates.

Tax rates deducted at source:

The applicable provisions of the Act or the First Schedule of the Finance Act specify the rates at which taxes must be deducted at the source. However, the withholding tax rates stated in the Double Taxation Avoidance Agreements must also be considered when making payments to non-resident individuals.