Applying for a lower or nil TDS certificate: how a company does it

Your customers pay you, but hold back tax first. That is TDS (tax deducted at source), only an advance. If your company's real tax for the year is smaller, the extra sits with the government until you claim it back through your return.

The law has a fix. You can ask the tax officer for a certificate that tells your customers to deduct tax at a lower rate, or not to deduct at all. This article walks through how that works under the Income-tax Act, 2025, which came into force on 1 April 2026 (s.1(3), Income-tax Act 2025). It applies from tax year 2026-27, the twelve months from 1 April 2026 to 31 March 2027 (s.3(1), Income-tax Act 2025).

Where the power comes from

Section 395(1), Income-tax Act 2025, sets out the three steps. Where tax is required to be deducted on an income or sum, the payee (the person receiving the money) may apply before the Assessing Officer for deduction at a lower rate or no deduction (s.395(1)(a), Income-tax Act 2025). The officer, on being satisfied that the payee's total income justifies it, issues a certificate (s.395(1)(b), Income-tax Act 2025). Once the certificate is issued, the person paying must deduct tax at the rate in the certificate, or deduct nothing, till its validity (s.395(1)(c), Income-tax Act 2025, as substituted by section 86 of the Finance Act, 2026).

The test is your total income: you must show, with numbers, that your tax for the year will be less than what your customers would otherwise hold back. And the certificate binds the payer, who deducts at the certificate rate once it reaches them.

If you know the older law, this is the provision that sat in section 197 of the Income-tax Act, 1961. The official 1961-to-2025 mapping table links it to section 395 (Certificates) of the 2025 Act. From tax year 2026-27, work from section 395 of the 2025 Act.

What the Finance Act 2026 changed

Section 86 of the Finance Act, 2026 amended section 395 in two ways.

It rewrote clause (c) of sub-section (1), so that a certificate issued under clause (b) "or sub-section (6)" binds the payer in the same way.

It also added sub-section (6). The application under s.395(1)(a) may now also be filed before the "prescribed income-tax authority", subject to prescribed conditions. That authority, on electronic verification of the contents of the application, may either issue the certificate or reject the application. Rejection is allowed on two grounds: the prescribed conditions are not met, or the application is incomplete (s.395(6), Income-tax Act 2025, inserted by section 86, Finance Act 2026).

In plain words, there is now a second, more automatic route alongside the officer's own assessment. The Income-tax Rules, 2026 do not name the authority for this route, so check the current portal screen and notifications before you rely on it. The ordinary route, with the Assessing Officer, stays in place.

Is your company the right applicant?

Check first: is tax really being deducted on your receipts (see Form 26AS or AIS, the annual information statement)? Will your tax for the year be lower than the deduction at standard rates? Are your returns filed and demands paid? The application asks for your unpaid liabilities and for a declaration that returns for the last four tax years are filed (Form 128, Parts C and E, rule 213(1), Income-tax Rules 2026), so clear these first.

The Rules also say a person eligible for a no-deduction certificate under rule 209 (for certain branches in India of banks, insurers and other businesses) need not use the general route (rule 213(2), Income-tax Rules 2026).

The form: Form 128

The application goes in Form No. 128 under rule 213(1), Income-tax Rules 2026. The form is filed electronically. One form covers a certificate for deduction of income-tax at a lower rate or no deduction (s.395(1), Income-tax Act 2025) and for collection of tax at a lower rate (s.395(3), Income-tax Act 2025).

The form has these parts.

Part A: your details. Tax year, name in full, address, status (individual, company, firm and so on), PAN, residential status, e-mail and phone. The form notes that some information will be pre-filled where possible.

Part B: the type of applicant. A company with trading income ticks "person carrying on business or profession".

Part B: the request. You pick what you want. Either the certificate goes to the payers named in Annexure I, or it is issued to you because you do not know the payers (Annexure II), or it asks a seller to collect tax at a lower rate (Annexure III).

Part C: your existing tax liabilities. You list unpaid advance tax or self-assessment tax, unpaid demands under the 2025 Act and the old 1961 Act, and unpaid amounts for which you are the deductor or collector. This is the officer's check on whether you are in default.

Estimated income. You give your estimated total income for the year, with the computation attached. You give the tax, with interest, on that income. You attach a note if you claim any income as exempt. You list prepaid taxes as per AIS: advance tax, TDS and TCS.

Past returns. You list the return details of the four tax years before the current one: acknowledgement number, filing date, taxable income and tax liability. If a return was not filed for any of those years, you attach a computation of income for that year.

Declaration, Part E (persons other than non-profits). You declare that returns for the last four tax years that fell due before the application are filed, and that the income is not includible in anyone else's total income under sections 96 to 99, Income-tax Act 2025.

Verification. A person with authority signs that the information is true and that nothing relevant has been concealed.

Annexure I. This is the heart of the application for a company that knows its customers. For each receipt, you give the section under which tax is deducted, the table serial number, the TAN or PAN of the payer, the estimated amount you will receive during the year, and the rate you request. The form says to write 0 where you ask for nil deduction.

What the Assessing Officer checks

Rule 213(3), Income-tax Rules 2026, lists what the officer takes into account:

• Tax payable on your estimated income for the tax year.
• Tax paid or payable on the returned, assessed or estimated income of the last four tax years.
• Your existing liability under the 2025 Act and under the old 1961 Act.
• Advance tax, TDS and TCS already at your credit on the date of application.

Your request has to fit these four items, so attach a computation that does.

Dividend income has extra conditions. If the certificate is for dividend, the shares must be shares in public companies and they must stand in your name and be beneficially owned by you (rule 213(5), Income-tax Rules 2026).

What the certificate looks like when it arrives

The rules set the shape of the certificate (rule 213(8), Income-tax Rules 2026).

• It is issued in the name of the person responsible for deducting tax, with advice to you.
• It is valid only for a specified payment from the specified deductor, up to the amount stated in it.
• It can be limited to a part of the tax year. It stays valid for the period specified in the certificate, unless the officer cancels it before that period ends (rule 213(7)).

There is one allowance for the case where you have many customers. If the number of payers is likely to exceed one hundred and you do not have their details when you apply, the certificate may be issued in your own name. It then lets you receive the specified payments at the appropriate rate and generate the right certificate for each payer from the Income-tax Department portal (rule 213(9), Income-tax Rules 2026).

The officer may also cancel a certificate after giving you a reasonable opportunity to be heard (s.395(5), Income-tax Act 2025).

The clock: when to apply, and when to renew

Neither section 395 of the Income-tax Act 2025 nor rule 213 of the Income-tax Rules, 2026 gives a last date for the first application. The practical clock is the tax year itself. A certificate is for a period inside one tax year, and the payer deducts at the certificate rate "till its validity" (s.395(1)(c), Income-tax Act 2025). Apply early in the tax year so the certificate is in your customers' hands before they pay.

For renewal, the rules for the no-deduction certificate under rule 209 say a fresh application may be made after the earlier certificate expires, or within three months before it expires (rule 209(3), Income-tax Rules 2026). The rule for non-resident payment certificates says the same (rule 214(5), Income-tax Rules 2026). Rule 213 itself does not repeat this sentence. Read it as a safe habit: apply for the next certificate before the current one runs out, not after.

Step by step

• Pull your numbers. Download AIS and Form 26AS. List each customer that deducts tax, the section, and expected receipts.
• Estimate the year. Prepare a computation of total income and tax on it.
• Check compliance. Four years of returns filed; no pending demand.
• Fill Form 128 on the income-tax portal with Annexure I, the computation and any exemption note.
• Verify and submit. Answer any query quickly; an incomplete application can be rejected under s.395(6), Income-tax Act 2025, if you use the prescribed-authority route.
• Send the certificate to each customer with its validity period and amount cap.
• Watch the cap and validity. Apply for a fresh certificate before either runs out.
• File your return as usual. The certificate does not replace it.

What not to do

• Do not ask for nil when you do not need it. The officer reads your past four years. A request that does not fit them invites rejection or cancellation.
• Do not under-estimate your income. The estimate must be honest. The form's verification says the information is true and that nothing relevant has been concealed.
• Do not apply with unpaid demands or unfiled returns. Part C of Form 128, the four-year return table and the Part E declaration cover exactly these points.
• Do not confuse this with the payer's application. Where a company pays a non-resident, the payer applies in Form 129 to fix the part of the sum that is chargeable to tax (s.395(2), Income-tax Act 2025, and rule 214, Income-tax Rules, 2026). That is a different application with a different purpose.

What to do now

• Next step: List customers deducting TDS from your receipts, estimate the year's total income, and prepare Form 128 with Annexure I (rule 213(1), Income-tax Rules 2026).
• Deadline: No last date is fixed for the first application in section 395 or rule 213. Apply early, because the certificate works only for its stated period and amount (rule 213(7) and (8), Income-tax Rules 2026). For renewals, apply within three months before expiry, as rule 209(3) provides for the related no-deduction certificate (rule 209(3), Income-tax Rules 2026).
• Consequence of not applying: Without a certificate under s.395(1), Income-tax Act 2025, the payer has no certificate rate to apply, so the deduction follows the ordinary rate and any excess has to be claimed through your return.

Have a CA review your facts before you act or file.

FAQs

1. Who issues the certificate?
The Assessing Officer, under s.395(1)(b), Income-tax Act 2025. Section 395(6), inserted by the Finance Act 2026, also lets the application be filed before a prescribed income-tax authority, which may issue the certificate or reject the application after electronic verification of its contents.

2. Can I apply for TCS as well?
Yes, in the same form (s.395(3), Income-tax Act 2025; Form 128, Annexure III).

3. What if I do not know who my payers will be?
Annexure II is for this case, with a note justifying the request. Where the payers may exceed one hundred and their details are not available, the certificate can be issued in your name so that you generate payer-wise certificates from the portal (rule 213(9), Income-tax Rules 2026).

4. Does a certificate cover the whole tax year?
Not automatically. It is valid for the period of the tax year specified in it, and only for the specified payer and amount (rule 213(7) and (8), Income-tax Rules 2026).

5. Can the officer withdraw the certificate?
Yes, after giving reasonable opportunity to the applicant (s.395(5), Income-tax Act 2025).

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See Also

• Finance Act 2026: changes that touch a private company's directors
• Government contract: how GST TDS under section 51 works for your company
• TDS on commission and brokerage paid by a company: when to deduct and what it costs to miss