Lower Tax Deduction Certificate — Section 395, Form 128 and the Old Section 197 Route
A written authorisation directing the payer to deduct at a lower rate, or at nil — essential where withholding on gross bears no relation to the tax actually due
Tax deducted at source is calculated on a payment, not on a profit. That works well enough when the two are broadly related. It works very badly when they are not — a contractor on a three per cent margin, a company carrying forward losses, or, most acutely, a non-resident selling a property in India, where the buyer is required to withhold tax on the entire sale consideration rather than on the gain.
The remedy is a certificate directing the payer to deduct at a lower rate, or at nil. It is one of the most effective cash flow tools in Indian tax practice and one of the least used, largely because it has to be applied for in advance and most people discover the problem after the money has already been withheld.
The rules changed on 1 April 2026. The Income-tax Act, 2025 replaced the Income-tax Act, 1961, and what was Section 197 read with Form 13 is now Section 395 read with Form No. 128. N D Savla & Associates prepares and files these applications, handles the Assessing Officer’s queries, and advises on the property sale position where the certificate is usually needed most.
What Is a Lower Tax Deduction Certificate?
A lower tax deduction certificate is a written authorisation from the Assessing Officer permitting a payer to deduct tax at a reduced rate, or not to deduct at all, on payments made to a specified recipient during a specified period.
Under the Income-tax Act, 2025, applicable from Tax Year 2026-27, lower or nil deduction is governed by Section 395(1) and lower collection by Section 395(3). These consolidate what were previously Section 197 for TDS and Section 206C(9) for TCS into a single provision. The application is made in Form No. 128, prescribed under Rule 213 of the Income-tax Rules, 2026, which absorbs the earlier Rules 28, 28AA, 28AB, 29, 37G and 37H.
The mechanism itself has not changed. The recipient of income applies, the Assessing Officer examines the estimated total income and the tax properly payable on it, and where the figures justify relief, a certificate issues stating the rate and the period for which it applies. Once issued, the deductor is bound by it.
Who Actually Needs One?
Non-residents selling immovable property in India
This is the largest and most urgent category. Where a resident sells property above the threshold, the buyer deducts one per cent of the consideration. Where a non-resident sells, the obligation arises under the provision governing payments to non-residents, and tax is withheld at the rate applicable to the capital gain — plus surcharge and cess — computed on the whole sale value. On a flat purchased in 2010 and sold at a modest real gain, the tax withheld can be several times the tax actually due. See property sale advisory for the sequenced version.
Businesses with losses or thin margins
A company carrying forward losses has no tax liability, yet its customers deduct at prescribed rates on gross receipts. Contractors, logistics operators, distributors and staffing companies with margins in low single digits face the same arithmetic. The withheld tax sits with the government for a year or more and is returned as a refund, which is working capital lost in the meantime.
Non-residents receiving Indian-source income
Interest, royalties, fees for technical services, rent and professional fees paid to non-residents attract withholding at rates that frequently exceed the rate available under a tax treaty. A tax residency certificate with the prescribed declaration can secure the treaty rate in many cases, but where the correct rate is lower still, or where the receipt is not taxable at all, a certificate under Section 395 is the cleaner route. Our international tax practice handles this combination.
Recipients of income that is exempt or largely exempt
Charitable institutions, entities with substantial exempt income, and recipients whose income falls below the taxable threshold face deduction on receipts that will never bear tax. Eligible resident individuals and certain non-company entities can self-declare instead, but that route is not open to companies, firms or non-residents.
Sellers of listed and unlisted securities
Non-residents disposing of shares face withholding computed on gross consideration where the buyer is unable to determine the gain. A certificate fixing the rate by reference to the actual capital gain on securities avoids a very large deduction on a transaction that may produce a modest taxable profit or even a loss.
What Changed on 1 April 2026?
| Position | Under the Income-tax Act, 1961 | Under the Income-tax Act, 2025 |
|---|---|---|
| Lower or nil TDS | Section 197 | Section 395(1) |
| Lower TCS | Section 206C(9) | Section 395(3) |
| Application form | Form 13 | Form No. 128 |
| Governing rules | Rules 28, 28AA, 28AB, 29, 37G, 37H | Rule 213 of the Income-tax Rules, 2026 |
| Self-declaration of nil liability | Form 15G and Form 15H | Form No. 121 under Section 393(6) |
| Non-salary TDS provisions | Sections 194A, 194C, 194I, 194J and others | Consolidated into Section 393 with payment codes |
| Period governed | Income up to 31 March 2026 | Income from 1 April 2026 (Tax Year 2026-27) onward |
How Did the Lower Deduction Mechanism Develop?
Withholding at source is old, and the relief valve is almost as old, because the problem it solves appeared as soon as the mechanism did.
Deduction at source entered Indian law through the Income-tax Act, 1922, initially confined to a narrow set of payments — salaries, interest on securities — where the payer was easily identified and the payee was not. The rationale was collection efficiency in an economy where voluntary compliance was limited and the administrative reach of the department was thin. The design assumption was that the payment and the taxable income were roughly the same thing.
That assumption held while the net was narrow. The Income-tax Act, 1961 widened it considerably, and successive Finance Acts widened it further — contractors, professional fees, commission, rent, and eventually property transactions and e-commerce receipts. As withholding extended to gross payments in businesses where gross payment and taxable profit diverge sharply, the mismatch became structural rather than incidental. Section 197 existed to correct it, allowing the Assessing Officer to issue a certificate where the estimated income justified a lower rate.
Liberalisation after 1991 added the cross-border dimension that now dominates this work. The provision requiring deduction on payments to non-residents applies to any sum chargeable to tax in India, and it applies to the whole sum where the payer cannot determine the taxable portion. As foreign investment, property purchases by non-resident Indians and cross-border service payments grew through the 1990s and 2000s, so did the volume of cases where withholding on a gross amount bore no relation to the tax actually due. The certificate route became, for many non-residents, the only practical answer.
Administration then moved online. Manual applications to the Assessing Officer gave way to electronic filing through the department’s systems, with digital issue and validation of certificates so that deductors could verify them at the point of deduction rather than relying on a paper copy. This removed a genuine fraud risk and made certificates enforceable in a way they had not previously been.
The Income-tax Act, 2025 completes a tidying exercise rather than a change of policy. It consolidates the fragmented non-salary withholding provisions into a single section with payment codes, merges the separate lower-deduction and lower-collection provisions into Section 395, and replaces the two self-declaration forms with one. The substantive test — does the estimated income justify a lower rate — is what it always was.
How Do You Apply — Step by Step?
Establish the Correct Statute and Period First
Withholding on payments from 1 April 2026 falls under Section 395 and Form 128. Anything relating to earlier periods remains a Section 197 matter under the 1961 Act. Where a transaction straddles the date, identify which payments fall on which side.
Compute the Estimated Income Properly
This is the substance of the application. For a property sale, that means the full capital gains computation — cost, indexation where still available, improvement, transfer expenses and any reinvestment exemption being claimed. For a business, the projected profit for the year with the basis stated. A number without a working invites a query and adds weeks.
Ensure PAN and Prior Compliance Are in Order
The applicant must hold a valid PAN, and returns for earlier years should be filed. An officer looking at an applicant with unfiled returns or outstanding demands will not issue a certificate readily, and clearing that ground first is faster than arguing about it afterwards.
Collect the Deductor Details
The certificate operates through the payer, so the deductor’s tax deduction account number is needed. For a property sale, the buyer must obtain a deduction account number before deducting on a payment to a non-resident — which surprises most buyers, since the resident purchase route requires no such registration.
File the Application Electronically
Form No. 128 is filed through the department’s portal at incometax.gov.in and routed to the Assessing Officer holding jurisdiction. Attach the computation, the agreement or contract, evidence of cost where a capital gain is involved, and prior year returns. Non-residents are generally assessed by international taxation wards, which have their own jurisdictional mapping.
Respond to Queries Quickly and Completely
The officer will typically seek supporting evidence for the estimate — purchase deed, improvement bills, bank statements, treaty documentation. Partial responses restart the clock. Where a treaty rate is claimed, the residency certificate and the prescribed declaration should already be on file.
Obtain the Certificate and Circulate It
The certificate specifies the rate, the period and generally the deductor. Provide it to the payer before the payment is made, since a deductor who has already deducted at the full rate cannot reverse it — the recipient is left claiming a refund, which is the outcome the exercise was meant to avoid.
Monitor the Deduction and Reconcile
Check that the payer actually deducts at the certified rate and reports it correctly in the quarterly statement, so that the credit appears against your PAN. Where a non-resident is the payee, the payer files the non-resident TDS return and issues the certificate of deduction; errors there are the usual reason credit does not show up at filing time.
How Does This Play Out in Practice?
NRIs Selling Inherited or Long-Held Property
The recurring pattern is a flat bought in the 1990s or 2000s, or inherited, now being sold to fund something abroad. The gain after cost adjustment is often modest, but withholding is computed on the whole sale value. Alongside the certificate, the repatriation route and the certification required for remittance need planning, because the two processes run on different timelines.
Loss-Making and Early-Stage Companies
A company with carried-forward losses has customers deducting at prescribed rates on every invoice. Over a year this can lock up a meaningful share of working capital. A nil or low certificate obtained at the start of the year is worth considerably more than the same amount recovered as a refund eighteen months later.
Contractors & Low-Margin Businesses
Where the margin is three or four per cent and deduction is on gross receipts, the withheld amount routinely exceeds the year’s tax liability. These applications succeed readily where the projections are supported by prior year accounts, because the officer can see the pattern rather than take an assertion on trust.
Foreign Companies Receiving Indian Income
Royalties, technical service fees and interest attract withholding at statutory rates that a treaty may reduce. Where the income is not taxable in India at all — no permanent establishment, or a treaty article that allocates taxing rights elsewhere — a nil certificate is the correct instrument, and it avoids the payer having to form its own view on a chargeability question it is not equipped to decide.
Why Choose N D Savla & Associates
- We work under the Act that actually applies — Section 395 and Form 128 for post-1 April 2026 withholding; Section 197 for earlier periods, without the mix-up that invites queries
- The computation is prepared before the application is filed — capital gains working or business projection filed with the application, supporting documents indexed, so the officer has what they need at first reading
- Property sales handled end to end — buyer’s deduction account number, quarterly reporting, return, refund and remittance certification run as one file
- We tell you when it is not worth applying — where withholding roughly matches liability, the honest answer is to deduct correctly and claim the refund
- Direct engagement with the assessing jurisdiction — knowing what a particular international taxation ward will ask before it asks turns an eight-week application into a four-week one
- Coordinated with seafarer and cross-border engagements where the two overlap
Frequently Asked Questions on Lower TDS Certificates
Has Section 197 been replaced?
Yes, prospectively. From 1 April 2026 the Income-tax Act, 2025 governs, and lower or nil deduction is now dealt with by Section 395 — Section 395(1) for TDS and Section 395(3) for TCS — consolidating what were Section 197 and Section 206C(9). The application form is Form No. 128, prescribed under Rule 213 of the Income-tax Rules, 2026, replacing Form 13. The operative mechanism is unchanged: the payee applies, the Assessing Officer examines estimated total income, and a certificate issues specifying a rate and a period.
Is my existing Section 197 certificate still valid?
A certificate issued under the old Section 197 remains valid for payments and credits made on or after 1 April 2026, provided it was issued in respect of projected receivables for Tax Year 2026-27. Certificates issued for earlier periods expire on their own terms. Where a certificate covers only part of the period you need, a fresh application in Form 128 should be made rather than assuming continuity.
Why does an NRI selling property in India need this certificate so urgently?
Because the buyer is required to withhold tax on the entire sale consideration, not on the gain. Where a resident sells, the buyer deducts one per cent of the consideration. Where a non-resident sells, tax is deducted at the rate applicable to the capital gain, plus surcharge and cess, applied to the whole sale value unless a certificate says otherwise. On a property bought years ago and sold at a modest gain, that can mean many times the actual tax liability being withheld and then reclaimed through a refund a year or more later.
How long does the application take?
Plan on four to eight weeks from a complete application, and longer where the Assessing Officer raises queries or where the jurisdiction is a busy international taxation ward. The application is made electronically and processed by the officer holding jurisdiction over the applicant. The single largest cause of delay is an incomplete computation of estimated income, so the working should be filed with the application rather than supplied after a query.
What replaced Forms 15G and 15H?
Self-declaration of nil tax liability is now governed by Section 393(6) of the Income-tax Act, 2025 through a consolidated Form No. 121, which replaces both Form 15G and Form 15H. It is available only to eligible resident individuals and certain non-company entities, so it is not an alternative to a certificate for a non-resident. A non-resident who needs relief from withholding must apply for a certificate under Section 395; there is no self-declaration route.
Apply Before the Money Moves
Computation prepared, jurisdiction identified, application filed under Section 395 in Form 128 and the certificate in the buyer’s hands before deduction — not a refund claim a year later.
- 📞 +91 98219 32683 | +91 97650 00966 | +91 97650 00388
- ✉ info@ndsavla.in
- 📍 Baner Business Bay, S No 52, Pashan–Sus Rd, behind Audi, Baner, Pune 411045
- 🕐 Monday–Saturday | 10:00 AM – 7:00 PM