Lower or Nil Deduction Certificates

TDS rates are set for the typical payee, not for any particular one. A contractor on thin margins, a company with brought-forward losses, a charitable institution, or a retired person with modest interest can find tax deducted far above the tax it will finally owe, and then wait months for the refund. The law offers two ways to prevent this. The payee can apply to the Assessing Officer for a certificate, or, for certain incomes, can file a self-declaration that its tax will be nil. This guide covers both, under the old and new law.

Which Act applies

Up to 31 March 2026, certificates were granted under section 197 of the 1961 Act, applied for in Form 13 (rules 28 and 28AA of the 1962 Rules). Declarations were made under section 197A in Forms 15G and 15H (rule 29C). From 1 April 2026:

Route	1961 Act	2025 Act	Form (2026 Rules)
AO’s certificate, lower or nil TDS	Section 197	Section 395(1)	Form No. 128 (rule 213)
AO’s certificate, lower TCS	Section 206C(9)	Section 395(3)	Form No. 128
Payer’s application, non-resident proportion	Section 195(2)	Section 395(2)	Form No. 129 (rule 214)
Self-declaration of nil tax	Section 197A	Section 393(6) and (7)	Form No. 121 (rule 211), replacing 15G and 15H

Section 536(2)(j) of the 2025 Act keeps an “order” issued under the 1961 Act in force so far as it is consistent with the corresponding provision of the new Act. Whether a particular section 197 certificate covers payments after 1 April 2026 depends on its own terms and the period it states.

Route 1: the Assessing Officer’s certificate in Form No. 128

What the law says. Under section 395(1), the payee may apply, and the Assessing Officer, “on being satisfied that the total income of the payee justifies deduction of income-tax at a lower rate or no deduction”, issues a certificate. The payer then deducts at the certificate rate, or not at all, “till its validity” (section 395(1)©). Section 395(5) allows the Assessing Officer to cancel the certificate after giving the applicant a reasonable opportunity.

What the Assessing Officer weighs. Rule 213(3) lists four factors:

• tax payable on the estimated income for the year;
• tax paid or payable on the income of the last four tax years;
• existing liability under both the 2025 Act and the 1961 Act;
• advance tax, TDS and TCS already credited for the year.

For a specified entity or registered non-profit organisation, rule 213(4) adds that the entity must hold approval on the dates of both the application and the grant, and must have filed returns for the last four tax years. For dividends, the shares must be in public companies and owned by the applicant (rule 213(5)).

What to have ready. The Form No. 128 FAQ lists:

• a computation of estimated total income and tax for the year;
• computations for any of the preceding four tax years for which no return was filed;
• a note on income claimed as exempt;
• the applicant’s PAN, without which the form “cannot be submitted”. Section 397(2)(f)(ii) bars any certificate without a valid PAN.

The applicant also needs the expected payments from each payer and the payers’ TANs, because the certificate is payer-specific.

Portal steps. According to the FAQ, the form is filed only online on TRACES (www.tdscpc.gov.in), through the path “TRACES login → Dashboard → e-file and view → File Forms → Form No. 128”. The applicant fills the form, uploads the documents, then e-verifies and submits it. An acknowledgement receipt number follows. There is no limit on the number of applications in a year, and an application can be withdrawn until it is processed.

Timing. No statutory deadline applies, but the FAQ warns that an application “cannot be processed once the transaction involving TDS/TCS is completed”. The certificate has to be in the payer’s hands before deduction.

The certificate. Rule 213(7) and (8) set three limits:

• it is valid for the period of the tax year it specifies;
• it is issued in the name of the deductor, “under advice to the applicant”;
• it covers only “a specified payment from the specified deductor, to the extent of the amount specified”.

The FAQ says certificates are downloaded from TRACES under “Downloads → Lower/Nil Deduction/Collection Certificates”.

More than a hundred payers. Where the payers are likely to exceed one hundred and are not known in advance, the applicant files Annexure II of Form No. 128. The certificate is then issued in the applicant’s own name, and rule 213(9) authorises the applicant to generate child certificates for each payer from the portal. The FAQ path is “Services → Generate and Download Child Certificate issued u/s 395(1) (Form No. 128 Annexure II)”.

The automated route. The Finance Act, 2026 inserted section 395(6) from 1 April 2026. It allows the application to be filed before a “prescribed income-tax authority” which, “on electronic verification of the contents of the application”, may issue the certificate or reject the application. At the time of writing, the Income-tax Rules, 2026 (as notified on 20 March 2026) contain no provision naming the prescribed income-tax authority or the conditions for section 395(6). Rule 213 deals only with the Assessing Officer’s certificate, and the official Form No. 128 FAQ describes only that route. Until the Rules prescribe the authority and conditions, applications proceed before the Assessing Officer under section 395(1).

On the payer’s side. The deductor quotes the certificate number in the quarterly statement. Under the new Form Nos. 140 and 144 this is the column for the “certificate issued u/s 395(1)” or “u/s 395(1)/395(2)”, per Protean’s RPU note.

Route 2: the self-declaration in Form No. 121

What it replaces. Form No. 121 merges Forms 15G and 15H. The FAQ on the form explains that 15G was for individuals under sixty and others, and 15H for those aged sixty or more.

Who may file, for what. Under section 393(6) a person may declare “that the tax on such person’s estimated total income … shall be nil”. The Table in section 393(6) limits who may declare and for which payments:

• A resident individual, for: the accumulated provident fund balance (section 392(7)); insurance commission; rent paid by a specified person; income from units; interest; life insurance payouts; and dividends.
• Any other person, not a company or firm, for the same list except dividends.

The Note to the Table adds a second condition for everyone except a resident individual aged sixty or more: the aggregate of the covered income must not exceed the maximum amount not chargeable to tax. A senior citizen needs only a nil estimated tax. The same structure was in section 197A(1), (1A), (1B) and (1C) of the 1961 Act.

What to have ready. The FAQ lists a valid and operative PAN, which is mandatory, details of the income and investments, proof of age for senior citizens, and the payer’s TAN. A declaration without a PAN is invalid (section 397(2)(f)(i)), and the payer must then deduct at the higher rate.

Filing. Rule 211(2) allows the declaration to be made electronically, verified through an electronic process, or on paper. It is given separately to each payer, and the FAQ says it is best given at the start of the year, before any credit. From 1 April 2027, section 393(6)(b), inserted by the Finance Act, 2026, will also allow the declaration to be given electronically to a depository for listed securities, units and dividends held with it.

The payer’s duties on a declaration

• Allot a unique identification number to each declaration (rule 211(3)). The FAQ describes the format under Notification No. 01/CPC(TDS)/2026 dated 28 March 2026: the letter D and nine digits, the six-digit tax year, then the payer’s TAN, for example D000000001202627MUMN12345A.
• Deliver the declarations to the prescribed authority by the seventh day of the month following each quarter (section 393(7), as substituted by the Finance Act, 2026). Section 197A(2) had required delivery by the seventh of the following month. The FAQ describes uploading them on the e-filing portal.
• Report them in the quarterly statement, even where no tax was deducted (rule 211(4)).
• Keep them available for seven years from the end of the tax year of receipt (rule 211(5)).

A late delivery attracts Rs 500 a day under section 465(2)(f), capped at the tax deductible (section 465(3)(a)). That penalty is imposed by the Principal Chief Commissioner or Commissioner (section 465(4)©).

A false declaration

The declaration is verified by the declarant. Form No. 121 is not a means of avoiding tax that is actually payable. Where the declared estimate turns out wrong, the income remains taxable in the declarant’s return, together with interest for any shortfall in advance tax.

Summary

1. Decide the route: a Form No. 121 declaration where the payee qualifies under the section 393(6) Table and its tax will be nil; otherwise a Form No. 128 application under section 395(1).
2. For Form No. 128, prepare the estimated computation and the four-year history, file on TRACES with PAN before the payments fall due, and track the ARN.
3. Hand the payer the certificate or the child certificate, which is limited to the payer, the amount and the period.
4. For Form No. 121, give a PAN-bearing declaration to each payer at the start of the year.
5. On the payer’s side, allot the unique identification number, deliver the declarations by the seventh of the month after the quarter, and report them in the statement.

The next guide, Correction Statements and TRACES Defaults, covers what happens when the statements do not match the payments.