Income Tax Law | Updated 27 October 2026

Section 197 Lower or Nil TDS Certificate: Procedure and New Section 395

A lower or nil tax deduction certificate allows an eligible recipient of income to receive specified payments with tax deducted at a reduced rate, or without deduction, where the tax authority is satisfied that the recipient's estimated tax liability justifies that treatment. The statutory framework changed on 1 April 2026.

Current law from 1 April 2026: Section 395 of the Income-tax Act, 2025 governs lower or nil TDS certificates. Section 197 of the Income-tax Act, 1961 remains relevant to earlier periods and transitional certificates. Applications under the new rules use Form No. 128 (formerly Form No. 13).

Meaning and purpose of a lower or nil TDS certificate

Tax deducted at source (TDS) is an advance collection mechanism under which a payer withholds tax from specified income. A lower deduction certificate authorises withholding at the rate stated in the certificate. A nil deduction certificate authorises no withholding on covered payments. Neither certificate, by itself, makes taxable income exempt from income-tax or eliminates the recipient's return-filing obligations.

Section 197 of the Income-tax Act, 1961

Under section 197(1), where TDS would otherwise be required on payments covered by the specified withholding provisions, the recipient could apply to the Assessing Officer. If satisfied that the recipient's total income justified a lower or nil rate, the officer could issue an appropriate certificate. Section 197(2) required the payer to follow the certificate while it remained operative; section 197(2A) empowered the Board to prescribe procedural rules.

The relevant provisions included sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA, 194LBA, 194LBB, 194LBC, 194M, 194-O, 194Q and 195, subject to the version of the law applicable to the transaction. The original page's shorter list did not reflect all subsequent amendments.

Applications were made in Form 13, generally under rules 28 and 28AA of the Income-tax Rules, 1962. The tax authority considered the applicant's existing and estimated tax liability, including relevant prior tax payments and outstanding demands, before deciding whether relief was justified.

Section 395 of the Income-tax Act, 2025

From 1 April 2026, section 395(1) provides that a payee may apply for lower or no deduction of income-tax where tax is deductible under the relevant chapter. On satisfaction that the payee's total income justifies the relief, the Assessing Officer may issue a certificate. The payer must apply the rate, or nil deduction, stated in the certificate during its validity, subject to its conditions.

Section 395(6), inserted by the Finance Act, 2026, also permits eligible applications to a prescribed income-tax authority through an electronic verification mechanism, subject to prescribed conditions. This is not an automatic entitlement; eligibility and procedural requirements must be checked.

Section 395 also deals with certain other certificates and applications, including the determination of the chargeable portion of payments to non-residents under subsection (2), and lower tax collection certificates under subsection (3). These should not be confused with the payee's lower or nil TDS application under subsection (1).

Form 128: how to apply

Estimate income and tax liability for the relevant tax year, accounting for permissible deductions, credits and advance tax.
Identify the payment types, expected receipts and deductors for which a certificate is sought.
Prepare PAN, tax return information, income estimates, supporting accounts and other documents requested by the portal or tax authority.
Submit Form No. 128 electronically using the procedure prescribed for the Income-tax Rules, 2026.
Respond to any clarification or verification request and obtain the issued certificate before asking the deductor to apply the lower or nil rate.
Provide the certificate particulars to the payer and check the permitted period, amount, rate and any deductor-specific conditions.

The Income Tax Department states that Form 128 may be filed during the tax year for which relief is requested. An application does not itself authorise reduced withholding: the payer must have a valid certificate covering the relevant payment.

Transition from the 1961 Act to the 2025 Act

The Income Tax Department's transition FAQs clarify that payments or credits occurring up to 31 March 2026 remain governed by the earlier TDS provisions, even where deducted tax is remitted later. A section 197 certificate issued under the 1961 Act may also continue to cover payments or credits from 1 April 2026 where it was issued for projected receivables for tax year 2026-27 and remains valid under its terms. Deductors should verify the precise certificate coverage rather than assuming that all earlier certificates continue indefinitely.

Illustrative example

Suppose a contractor expects receipts of Rs. 20,00,000 but, after allowable expenses and applicable tax adjustments, expects a relatively low final tax liability. If the prescribed authority issues a valid certificate specifying 0.5% TDS for the covered contract payments, the payer may deduct at 0.5% instead of the otherwise applicable statutory rate, within the certificate's scope. The rate in this example is illustrative, not a standard prescribed rate.

Important compliance checks for payers and recipients

Confirm that the certificate identifies the correct recipient, income category, tax year and covered payment.
Check its validity, authorised rate, monetary limits and any conditions or cancellation.
Do not treat a pending application or a self-declaration as a section 395 certificate.
Retain the certificate and records supporting the rate applied in TDS returns.
Review other applicable withholding requirements where a certificate does not cover a payment.

Frequently asked questions

Is a lower TDS certificate the same as a tax exemption?

No. It modifies withholding on covered payments, not the substantive charge to tax.

What form replaced Form 13?

Form No. 128 under the Income-tax Rules, 2026 replaced Form No. 13 for the corresponding new-law application process.

Can a payer apply the reduced rate before receiving a certificate?

No. A mere application does not authorise lower deduction. The payer should follow the issued certificate and its conditions.

Can a certificate issued under Section 197 still be used after 1 April 2026?

It may be used where it specifically covers projected receivables for tax year 2026-27 and remains valid, in accordance with official transition guidance.

Official legal references

This article is general legal information, updated 27 October 2026. Always check the operative legislation, rules, notifications and the actual certificate for the relevant tax year and transaction.