Tax Deducted at Source (TDS) is a cornerstone of India’s tax collection system. However, in many cases, the TDS deducted is far higher than the taxpayer’s actual tax liability. This leads to unnecessary blocking of funds and refund delays.
To resolve this, the Income Tax Department allows taxpayers to apply for a Lower Deduction Certificate (LDC) under Section 197 of the Income Tax Act, 1961.
With this certificate, the taxpayer can ask the deductor to deduct TDS at a lower rate (or sometimes not at all), ensuring smoother cash flow and accurate tax compliance.
This article explains what a lower deduction certificate is, its eligibility, required documents, and the complete online process to apply through the TRACES (TDS Reconciliation Analysis and Correction Enabling System) or the Income Tax e-Filing portal.
What is a Lower Deduction Certificate (LDC)?
A Lower Deduction Certificate is an authorization issued by the Assessing Officer (AO) under Section 197 of the Income Tax Act that permits the deductor to deduct tax at a rate lower than prescribed, or at nil rate, for a specified period.
This certificate is generally issued to taxpayers whose total income is below the taxable limit or whose tax liability is lower than the standard TDS rate applicable to certain payments such as:
- Contract payments
- Rent
- Professional or technical fees
- Interest income
- Commission or brokerage
- Dividends (in specific cases)
Purpose of Obtaining a Lower Deduction Certificate
Applying for a Lower Deduction Certificate benefits both individuals and organizations that experience regular TDS deductions on income streams, which ultimately results in refund claims during ITR filing.
The main purposes include:
- Avoiding excessive TDS deduction and later refund claims.
- Maintaining smooth cash flow throughout the year.
- Ensuring compliance with Income Tax provisions while paying the accurate tax amount.
- Reducing administrative delays in refund processing.
Eligibility to Apply for Lower Deduction Certificate
Any resident or non-resident taxpayer who expects a lower tax liability compared to the standard TDS rates can apply for this certificate.
The eligibility conditions include:
- The applicant must have a valid PAN and income tax login credentials.
- The applicant’s last year tax returns should have been filed.
- There should be no significant tax arrears or default history.
- The applicant must have valid income projections or estimated calculations showing that total tax liability is less than TDS applicable under the Act.
Documents Required for Lower Deduction Certificate
To apply for the certificate, the following documents are needed –
- PAN card of the applicant
- Latest income tax return acknowledgment
- Computation of estimated income and tax liability for the current financial year
- TDS details (Form 26AS or TRACES statement)
- Projected profit and loss statement and balance sheet (for businesses)
- Copy of relevant agreements or contracts under which TDS is being deducted
- Details of the deductors (name, TAN, address, nature of payment, etc.)
All documents should be accurate and updated, as discrepancies can delay processing or cause rejection of the application.
Procedure to Apply for a Lower Deduction Certificate Online
The application for a lower deduction certificate under Section 197 is filed online through the TRACES portal. Below is the detailed process –
Step 1: Log in to the TRACES Portal
- Visit https://www.tdscpc.gov.in
- Log in using your TAN and password.
Step 2: Navigate to Form 13
Once logged in, go to –
- Statements / Forms → Request for Form 13 (Application for Lower/Nil Deduction)
- This opens the online form to apply for a lower deduction certificate.
Step 3: Fill in Applicant Details
You need to fill in –
- PAN of the taxpayer
- Assessment year (e.g., 2025–26)
- Type of payment (contract, rent, professional, etc.)
- Estimated income and tax liability
- Details of deductors (with TAN and payment amount)
Be precise, as errors may cause rejection or reassessment by the Assessing Officer.
Step 4: Upload Supporting Documents
Attach all necessary documents, such as –
- Income computation
- ITR acknowledgments
- Financial statements
- Copies of contracts or invoices
Ensure file size and format (usually PDF) comply with the TRACES portal requirements.
Step 5: Submit and Verify
After completing all sections, submit the form and verify using:
- Digital Signature Certificate (DSC), or
- Electronic Verification Code (EVC) via registered mobile/email.
Upon submission, you will receive an Application Reference Number (ARN) for future tracking.
Step 6: Processing by the Assessing Officer
The Assessing Officer will review your application based on:
- Past tax compliance
- Consistency of income estimates
- Pending tax arrears
- Validity of documents provided
If satisfied, the AO issues the Lower or Nil Deduction Certificate electronically.
You can download it directly from the portal once approved.
Validity of the Lower Deduction Certificate
- The certificate is usually valid for one financial year.
- If your income or business scenario changes substantially, a new application must be filed.
- It is deductor specific, meaning if multiple clients deduct TDS, you may need to include each in your application.
When Should You Apply?
You can apply at the beginning of the financial year or before payments subject to TDS start. Early filing ensures the certificate is available before TDS is deducted at higher rates.
If applied mid-year, TDS already deducted at the higher rate cannot be reversed — you will need to claim it as a refund while filing your income tax return.
Checking Status of Lower Deduction Certificate Application
You can track your application status on the TRACES portal using the Application Reference Number (ARN).
Steps –
- Log in to TRACES → “Track Requests”
- Enter ARN and date range.
- Check the current status: Under Processing, Approved, or Rejected.
If approved, download the certificate and share it with your deductors.
Common Reasons for Rejection
Applications may be rejected due to –
- Non filing of previous ITRs
- Outstanding tax arrears
- Inaccurate income estimates
- Missing or incorrect documents
- Mismatch between TAN/PAN details
To avoid rejection, ensure all information is verified before submission.
Advantages of Obtaining a Lower Deduction Certificate
- Prevents excess tax deduction and improves liquidity.
- Reduces refund dependency during ITR filing.
- Ensures accurate TDS compliance for both deductor and deductee.
- Builds clean compliance history with the Income Tax Department.
- Simplifies cash flow planning, especially for consultants, freelancers, and small businesses.
Practical Example
Suppose an individual freelancer earns ₹12 lakh annually from multiple clients.
The clients are required to deduct 10% TDS (₹1.2 lakh).
However, after considering deductions under Section 80C and 80D, the actual tax liability is only ₹80,000.
By obtaining a Lower Deduction Certificate, the freelancer can request clients to deduct only at 6.67% — reducing cash blockage and avoiding refund delays later.
Conclusion
A Lower Deduction Certificate under Section 197 is an effective tool for taxpayers who wish to align their TDS deductions with actual tax liability.
The online process through TRACES has made it simple, transparent, and efficient. However, ensure you apply early, provide accurate data, and maintain compliance with all income tax filing requirements.
By doing so, you’ll not only avoid excess deductions but also enhance your financial efficiency and maintain a clean tax record.
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