Who can help you get a lower or nil TDS certificate, now under Section 395 and Form 128? What a CA does, eligibility, documents, child certificates, timing.
The application for a certificate of lower deduction or no deduction of tax at source is required to be made by the person receiving the income, i.e. the deductee, and not by the payer, and in practice the application is usually prepared and filed on TRACES by a Chartered Accountant, who estimates the income and tax of the year, collects the supporting documents and attends to the queries raised by the Assessing Officer.
A lower deduction certificate is a certificate issued by the Assessing Officer, on an application made by the recipient, directing the payer to deduct tax at source at a lower rate or not to deduct any tax at all, in so far as the tax that would otherwise be deducted at the normal rates exceeds the estimated tax liability of the recipient for the year. Take the case of a Gurugram based civil contracting firm which bills Rs. 4 crore in a year to three developers, each of whom deducts TDS at 2 per cent, as a result of which Rs. 8 lakh is deducted during the year, whereas the actual tax liability of the firm after its costs works out to about Rs. 3 lakh. The balance of Rs. 5 lakh is received back only by way of refund, quite often after a year or more, and in the meantime the firm continues to bear interest on its working capital borrowings, which is precisely the gap that the certificate is meant to address.
It may be noted that the Income-tax Act, 2025 has come into force w.e.f. 1st April 2026, and the provision earlier contained in Section 197 of the Income-tax Act, 1961 is now contained in Section 395(1) of the new Act. The application is now to be made in Form 128 under Rule 213 of the Income-tax Rules, 2026, which has replaced Form 13, though the relief available to the recipient remains the same and it is only the numbering of the section, the form and the rule which has changed.
In the event the payment or credit is made on or after 1st April 2026, the application has to be made under the new provisions. It is pertinent to note that a certificate already issued under the erstwhile Section 197 for the projected receipts of tax year 2026-27 continues to remain valid for payments made on or after 1st April 2026, within the period and the limits specified therein, and the certificate is still commonly referred to as a "197 certificate" or a "lower deduction certificate".
Two related provisions are often confused with the above. The lower collection of tax at source is governed by Section 395(3), for which the same Form 128 is to be used, whereas the self-declarations which were earlier filed in Forms 15G and 15H have now been replaced by a single Form 121 under Section 393(6), which is a declaration furnished by the recipient to the payer himself and not a certificate issued by the Assessing Officer.
An application can be made where the estimated tax liability of the recipient for the year is lower than the TDS that would be deducted at the normal rates. This would generally be the position in the case of a contractor or professional having heavy expenses, inasmuch as the profit is much lower than the gross billing, in the case of a startup or company having brought forward losses, and in the case of a low margin business having a large turnover but thin profits. The same would also be the position where the tax of the recipient is already covered by advance tax or other tax paid, or where the income of the recipient is taxable at a lower rate under the law or under a tax treaty. Whether the recipient qualifies would depend upon the nature of the payment and the overall tax position, and payments to non-residents are governed by a separate route.
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A Chartered Accountant estimates the income for the year, prepares the tax computation, compiles the records, files the application on TRACES and deals with the queries of the Assessing Officer, and is also entitled to represent the assessee before the officer, for which reason a CA is the usual choice in the case of businesses, professionals and startups, more so as the entire application rests on the accounts, the tax computation and the past returns of the assessee.
A tax consultant or tax lawyer would be of help where the issue is a legal one, as for instance a dispute regarding the applicable rate or a pending demand which is holding up the certificate, though where the issue is mostly one of numbers a CA would generally be quicker.
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Some companies file the application through their in-house finance team, which is workable in so far as the team is conversant with the computation of estimated income and maintains clean data, though a number of companies still take outside help for the first application or after a rejection. The payer, on the other hand, cannot apply on behalf of the recipient, but the payer would need a copy of the certificate and its finance team can confirm the TAN and the payment details which are required to appear therein, inasmuch as a certificate bearing a wrong TAN or a wrong section would not be of any use as regards that payer.
The adviser would generally require the PAN of the applicant alongwith the PAN and TAN of every payer to be covered, the income tax returns and computations for the last three years, an estimate of the income for the current year with a provisional profit and loss account, the details of brought forward losses and of the advance tax and self-assessment tax paid so far, and copies of any earlier lower deduction certificates. In addition, the contracts, work orders or agreements with the payers, Form 26AS or AIS for the current year and the preceding year, and the details of any pending demands, notices or appeals are also required to be furnished.
The process begins with an estimate of the income and tax for the year across all sources and after set off of losses, whereafter the same is compared with the TDS that would be deducted at the normal rates, and an application is to be made only where the gap is a real one. The application is filed in Form 128 on TRACES, wherein the applicant has to select the correct category out of the four categories provided in the form and list the payers, the sections and the expected amounts, and thereafter the Assessing Officer may call for further documents or explanations.
The certificate, as and when issued, specifies the payers, the rate and the payment limit covered thereby. In the event the details of a payer were not known at the time of making the application, a payer-specific "child certificate" linked to the main certificate may have to be generated for that payer at a later stage. The certificate is then required to be shared with every payer so that it is applied to the payments made during its validity, and the TDS credits ought to be monitored thereafter to ensure that each payer has actually followed the same.
It is advisable that the application be made early in the year, inasmuch as a certificate received in March is of very little use for the payments already made from April to February, and since a certificate covers only the period and the amount stated therein, the assessee should not wait for the limit to be fully used up before applying for a further certificate.
Applications are quite often rejected or delayed on account of underestimation of income, which besides leading to rejection may also give rise to questions of under-deduction at the time of assessment, as also on account of past returns not having been filed or a demand having been left unpaid. A wrong payer TAN or section results in a certificate which does not match, and missing documents or a weak computation, an application made late in the year or after the payment has already been received, a failure to send the certificate to the payer who then deducts at the full rate, and treating one certificate as permanent when it is limited to a period and an amount are the other common reasons. Where a notice or demand is pending, the same ought to be dealt with first.
Also Read: How to Respond to an Income Tax Notice, Income Tax Notice Reply Format
Disclaimer: The contents of this article are for general information only.
The application can be made only by the person receiving the income, and while the payer may assist by furnishing the payment details and its TAN, the payer is not entitled to file the application on behalf of the recipient.
The provision is now contained in Section 395(1) of the Income-tax Act, 2025 and Form 128 has replaced Form 13, though the certificates already issued for the projected receipts of tax year 2026-27 continue to remain valid for payments made on or after 1st April 2026.
No fixed time has been laid down in this regard and the time taken would depend upon the workload of the Assessing Officer and the completeness of the documents furnished, for which reason the application ought to be made as early in the year as possible.
The adviser ought to be informed as soon as the same comes to notice, inasmuch as it may become necessary to pay further advance tax or to apply for a revised certificate, a wrong estimate being liable to result in action for under-deduction.
In the event the estimated tax liability of the recipient is nil, as for instance on account of losses or exemptions, the Assessing Officer is empowered to issue a certificate for no deduction of tax at source.
DSRV & Co. LLP has handled tax and TDS matters since 1987. We're an ICAI-registered, peer-reviewed CA firm in Gurugram. Send us last year's computation and this year's billing estimate, and we'll tell you whether a certificate makes sense and prepare the Form 128 application.
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