Lower Deduction Certificate (LDC): A Smart Way to Ease Your TDS Burden

Introduction:

If you're a taxpayer—whether an individual or a company—struggling with excessive TDS (Tax Deducted at Source) deductions that hurt your cash flow, a Lower Deduction Certificate (LDC) under Section 197 of the Income Tax Act, 1961 can make a big difference. Especially for startups or businesses where maintaining liquidity is crucial, an LDC helps ensure income is received with lower or nil TDS, avoiding cash blockages and unnecessary refunds.

This blog provides a comprehensive guide to what an LDC is, who can apply, the legal framework, application process, benefits, and key points to keep in mind.

1. What is a Lower Deduction Certificate (LDC)?

An LDC is an approval issued by the Income Tax Department that allows certain income to be received at a lower TDS rate—or even a nil rate—based on the applicant’s estimated tax liability. This certificate is granted under Section 197 and is typically used by businesses or individuals who foresee that the default TDS rate would lead to an excessive deduction compared to their actual tax payable. For instance, companies with historical losses or tax exemptions often apply for an LDC to avoid unnecessary cash outflows.

2. Who Can Apply for an LDC?

Any taxpayer who expects income that is subject to TDS but believes their actual tax liability will be lower than the standard deduction rates can apply for an LDC. Eligible applicants include:

• Resident and Non-Resident Individuals (including NRIs selling property in India)

• Companies (Indian or Foreign)

• LLPs and Partnership Firms

• Trusts and Societies

• Freelancers, Consultants, and Professionals

3. Benefits of Obtaining an LDC

• Improved Cash Flow: Reduces excess TDS, keeping more funds available for operational needs.

• Avoid Refund Delays: Eliminates the long wait time and procedural delays associated with claiming TDS refunds.

• Strategic for Low-Income Years: Especially useful during years of losses, exemptions, or lower income.

• Ideal for NRIs Selling Property: Avoids the standard 20%+ TDS rate otherwise applied on sale proceeds.

• Tax Planning Tool: Ensures TDS deducted aligns with actual liability, helping in cleaner financial planning.

4. LDC Application Process

The legal framework for LDCs is governed by Section 197 of the Income Tax Act and Rule 28 of the Income Tax Rules. Section 197 allows the taxpayer to request deduction of TDS at a lower rate or at nil rate, based on their actual tax computation. Rule 28 prescribes the format and manner of applying for such a certificate. The application is submitted online through the Income Tax e-filing portal using Form 13, which is processed electronically by the Assessing Officer (AO) assigned to the applicant.

To apply for an LDC, taxpayers must log in to the TRACES portal and submit Form 13 online. The form requires you to provide estimated details for the financial year, including income sources, total estimated tax liability, and past return filings. Applicants must also upload necessary supporting documents such as ITRs, income computation statements, and agreements (in case of sale or service contracts). The form is digitally signed using either a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC). For NRIs or foreign companies, the application may need to be submitted through an authorized representative or Chartered Accountant.

5. Documents Required

• PAN of the applicant

• Computation of estimated income for the current financial year

• Previous 3 years’ ITRs and acknowledgment copies

• TDS deduction details from Form 26AS

• Tax payment challans, if any

• TAN and PAN details of the deductor(s)

• Contract copies or sale agreements

• Audited financials (for companies and LLPs)

6. Timeline for Approval

Approval timelines generally range between 15 to 45 days, depending on the Assessing Officer's review. In some cases, the department may seek additional clarification or documentation before granting the certificate.

7. Validity of LDC

An LDC is valid only for the financial year for which it is issued. It is specific to the income type and the deductor(s) mentioned in the certificate. Hence, if a taxpayer expects similar conditions in subsequent years, they must reapply for a new certificate each year. Additionally, the certificate must list all deductors for whom the lower/nil TDS rate should apply. It cannot be used for income types or deductors not specified in the original application.

Conclusion

Whether you're a freelancer, a growing startup, a well-established business, or an NRI selling property in India—if you're dealing with high TDS deductions despite having a lower actual tax liability, applying for a Lower Deduction Certificate (LDC) can greatly improve your cash flow and overall tax efficiency.

With a simplified online application process and greater clarity from tax authorities, obtaining an LDC has become more accessible than ever. It’s a smart and proactive tax planning strategy that you should consider every financial year.

Need assistance with your LDC application?

Prolead Financial Solutions is here to guide you through every step of the process—from eligibility assessment to application filing and coordination with the Income Tax Department.