Research & Articles

Lower and Nil Deduction Certificates under Section 395: The Eligibility Gate Widened, the Certificate Did Not

Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt, Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London

Published: 19 August 2026 | Last reviewed: 19 August 2026

Scope: this article is written against the Income-tax Act, 2025 and the Income-tax Rules, 2026 as in force on 19 August 2026, and refers to the Income-tax Act, 1961 and the Income-tax Rules, 1962 as they stood before their repeal with effect from 1 April 2026. It addresses Indian law only. It does not address the law of any other jurisdiction, and nothing in it constitutes advice on foreign law.

A lower or nil deduction certificate is now applied for in Form No. 128 under section 395(1) of the Income-tax Act, 2025, read with Rule 213 of the Income-tax Rules, 2026. Section 395(1) applies wherever tax is required to be deducted on any income or sum under the Act’s deduction and collection provisions, replacing the closed list of sections in section 197(1) of the 1961 Act. Rule 213(8) then confines each certificate to a specified deductor and a specified amount.

Index of Topics

What replaced section 197, and what did not change
The scope change: from a closed list to the whole Chapter
What a certificate actually covers: one deductor, one amount
What the Assessing Officer is required to consider
Additional conditions where the certificate concerns dividend income
Where deductors are likely to exceed one hundred
The payer’s separate route for sums paid to a non-resident
Certificates issued under section 197 before 1 April 2026
Validity, cancellation, and what the certificate does not decide
Where applications fail, and how the record decides the outcome

1. What replaced section 197, and what did not change

In short: Section 395(1) of the Income-tax Act, 2025 replaced section 197 of the 1961 Act with effect from 1 April 2026. The application is Form No. 128, which replaced Form No. 13, made under Rule 213 of the Income-tax Rules, 2026, which replaced Rules 28, 28AA, 28AB, 29, 37G and 37H of the 1962 Rules.

The substance survived the renumbering. The payee applies, the Assessing Officer must be satisfied that the total income of the payee justifies deduction at a lower rate or no deduction, and on issue of the certificate the payer is bound to deduct at the certified rate, or not at all, until it expires: clauses (a), (b) and (c) of section 395(1). The application is furnished electronically to the Director General of Income-tax (Systems), through TRACES.

The Department’s note on Form No. 128 records approximately 1.2 lakh original applications filed annually over the preceding five years, by any person, resident or non-resident, in respect of income such as interest, commission, professional fees, contract payments or rent. This is not exclusively a cross-border instrument; it is a general withholding-relief mechanism that also applies to non-residents. It is a general withholding relief mechanism with a non-resident limb.

Old provision to current provision

Position	Income-tax Act, 1961	Income-tax Act, 2025
Payee’s lower or nil deduction certificate	Section 197(1)	Section 395(1)
Lower collection certificate	Section 206C(9)	Section 395(3)
Application form, payee	Form No. 13	Form No. 128
Rules governing the payee’s application	Rules 28, 28AA, 28AB, 29, 37G, 37H	Rule 213
Payer’s determination for sums paid to a non-resident	Sections 195(2) and 195(7)	Sections 395(2) and 400(3)
Application form, payer	Form No. 15E	Form No. 129
Rules governing the payer’s application	Rules 29BA and 37BB	Rules 214 and 220

Source: the Income Tax Department’s published notes on Form No. 128 and Form No. 129.

2. The scope change: from a closed list to the whole Chapter

In short: Section 197(1) of the 1961 Act operated only on an enumerated list of deduction sections. Section 395(1) applies wherever tax is required to be deducted on any income or sum under the Act’s deduction and collection provisions. Rule 213 does not reintroduce a list, so the widening operates.

The old section named its sections: 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA, 194LBB, 194LBC, 194M, 194-O and 195. A payment that attracted deduction under a provision outside that list could not be certified, however far the deduction exceeded the recipient’s liability. The recipient’s only route was to suffer the deduction and claim the excess as a refund.

Section 395(1) removes the list. The trigger is now the deduction obligation itself. This changes the eligibility gateway, not the substantive test for obtaining relief: the Assessing Officer must still be satisfied under clause (b) that the payee’s total income justifies the relief. But where a deduction obligation attaches to a gross receipt and the recipient is carrying losses or thin margins, the door is open where it was shut. Most published commentary still describes the position by reference to the old list.

3. What a certificate actually covers: one deductor, one amount

In short: Rule 213(8) requires the certificate to be issued in the name of the person responsible for deducting or collecting the tax, under advice to the applicant, and makes it valid only in respect of a specified payment from the specified deductor and only to the extent of the amount specified in the certificate.

This is the provision that most often defeats the relief in practice. A lower deduction certificate is not a rate that the payee carries into every transaction. It is a rate attached to a named payer and capped at a stated sum. Three consequences follow. A payer who is not named in the certificate deducts at the ordinary rate. A payment of a character not specified is outside the certificate. And once receipts from the named payer exceed the certified amount, the ordinary rate resumes for the excess.

The deductor bears the consequences of short deduction, so the deductor verifies the certificate before applying the reduced rate. For the applicant, the discipline is to certify against realistic projected receipts rather than conservative ones, and to monitor consumption of the certified amount. Nothing prevents a further application once the ceiling is approached.

4. What the Assessing Officer is required to consider

In short: Rule 213(3) directs the Assessing Officer to consider tax payable on the estimated income for the tax year, tax paid or payable on returned, assessed or estimated income of the last four tax years, existing liability under the 2025 Act and under the repealed 1961 Act, and advance tax and deduction or collection credits standing to the applicant on the date of application.

Each factor is objective and documentary. The third repays attention: Rule 213(3)(c) expressly preserves liability under the Income-tax Act, 1961 as it existed prior to its repeal, so an outstanding demand from an old assessment year remains a live obstacle to a certificate sought for tax year 2026-27.

Rule 213(4) adds conditions for a specified entity referred to in section 263(9)(c) and for a registered non-profit organisation: approval for exemption both on the date of application and on the date of grant, and returns furnished for the last four tax years for which they fell due before the application. Because the Rule states what must be considered, an order that leaves a stated factor out of account is exposed on the record.

5. Additional conditions where the certificate concerns dividend income

In short: Where the certificate is sought in respect of dividend income referred to in section 393(1), Table Sl. No. 7, Rule 213(5) adds conditions. The shares must be shares in public companies, and must stand in the applicant’s name and be beneficially owned by him, or be held by him on behalf of a registered non-profit organisation whose dividends are exempt.

Two limbs deserve notice. Where the shares stand in the applicant’s name and are beneficially owned by him, the dividends must not be includible in the total income of any other person under sections 96 to 99, so clubbing is tested at the certificate stage rather than at assessment. And Rule 213(6) provides that the certificate ceases to operate from the date of notice to the company for transfer of the shares mentioned in it, to the extent of the income corresponding to the shares transferred.

A disposal during the year therefore erodes the certificate without any further order. A holder who transfers part of a certified holding and continues to present the certificate is presenting a document that has already ceased to cover those shares.

6. Where deductors are likely to exceed one hundred

In short: Rule 213(9) applies where the number of persons responsible for deducting tax is likely to exceed one hundred and their details are not available with the applicant when the application is made. The certificate is then issued in the applicant’s own name, authorising him to receive specified payments at the appropriate rate and to generate certificates for individual deductors from the Department’s portal.

Annexure II to Form No. 128 carries this route. It matters for businesses whose receipts come from a long tail of customers deducting on contract or professional payments, where naming every payer in advance is impossible.

The mechanism displaces the naming requirement in Rule 213(8); it does not dispense with the certificate itself. Rule 213(9)(c) requires the individual certificate to be generated from the Department’s portal, and it is that generated certificate on which the deductor acts. A deductor who has not been furnished with one has nothing to rely on and will deduct at the ordinary rate.

7. The payer’s separate route, and where it belongs

In short: Section 395(2) is a separate route and it belongs to the payer, not the payee. A person paying a non-resident a sum mentioned in section 393(2), Table Sl. No. 17, who considers that the whole of that sum would not be chargeable in the recipient’s hands, applies in Form No. 129 under Rule 214 for determination of the appropriate proportion chargeable to tax.

The two routes answer different questions. Section 395(1) asks whether the payee’s total income justifies a lower rate across a stream of receipts. Section 395(2) asks how much of one particular sum is chargeable at all. Under Rule 214(2) the Assessing Officer examines whether the sum is chargeable under the Act read with the relevant Double Taxation Avoidance Agreement, if any, and where only part is chargeable, determines that proportion; section 395(2)(c) then confines deduction to that proportion. The Department’s note records Form No. 129 as corresponding to sections 195(2) and 195(7) of the 1961 Act and to Rules 29BA and 37BB, now Rules 214 and 220.

The payer side turns on treaty entitlement, characterisation and remittance compliance, and is dealt with separately in our work on withholding tax on payments to non-residents. This article stays with the payee’s certificate and the Rule that governs what it covers.

8. Certificates issued under section 197 before 1 April 2026

In short: The Income Tax Department has confirmed that a certificate issued under section 197 of the Income-tax Act, 1961 remains valid for payments or credits made on or after 1 April 2026, provided it was issued for lower or nil deduction in respect of projected receivables for tax year 2026-27.

An existing certificate should be examined rather than discarded. Four things decide whether it still operates: the tax year for which it was issued, the receivables it was issued against, the deductor named in it, and the amount and period it specifies. A certificate issued against receivables of an earlier year does not carry forward.

The transition runs the other way too. Because Rule 213(3)(c) keeps liability under the repealed 1961 Act in the frame, an unresolved demand from an old assessment year can defeat a fresh application for tax year 2026-27.

9. Validity, cancellation, and what the certificate does not decide

In short: Rule 213(7) makes the certificate valid for such period of the tax year as it specifies, unless the Assessing Officer cancels it earlier. Section 395(5) permits cancellation of a certificate granted under section 395(1) or 395(3), but only after giving the applicant a reasonable opportunity.

What the certificate does not do matters as much as what it does. It does not determine liability, does not conclude the chargeability of the underlying receipt, and does not bind the assessment. It calibrates the rate of deduction, nothing further. Tax deducted before it takes effect is not undone by it.

Timing is therefore a commercial decision, not a compliance date. Form No. 128 may be filed at any time during the tax year for which the certificate is sought, so the application should be made early enough for the certificate to issue before the payments it is meant to cover.

10. Where applications fail, and how the record decides the outcome

In short: A refusal, or a certificate at a rate higher than the rate sought, is an order made under section 395(1) read with Rule 213. Because the Rule states the factors the Assessing Officer is to consider, the record built at the application stage determines what can later be argued about that order.

Applications fail on their documents more often than on their law. Form No. 128 calls for the applicant’s permanent account number, payer details including the tax deduction and collection account number for the annexures, the estimated income and tax computation, earlier years’ returns, audit reports or financial statements where required, and the advance tax and deduction credits available. A projection unsupported by those materials gives the Assessing Officer nothing to be satisfied by under section 395(1)(b). Where an existing liability under Rule 213(3)(c) is the real obstacle, the demand is addressed first, through stay, rectification or appeal, which is assessment and appellate work rather than certificate work.

Frequently Asked Questions

What has replaced the section 197 certificate from 1 April 2026?

Section 395(1) of the Income-tax Act, 2025 replaced section 197 of the Income-tax Act, 1961 with effect from 1 April 2026. The application is Form No. 128, which replaced Form No. 13, under Rule 213 of the Income-tax Rules, 2026. Lower collection of tax at source moved from section 206C(9) to section 395(3). The substantive test is unchanged: the Assessing Officer must be satisfied that the payee’s total income justifies a lower rate or no deduction.

Can a non-resident apply for a lower or nil deduction certificate in India?

Yes. The Income Tax Department’s note on Form No. 128 states that any person, resident or non-resident, may apply for a certificate for no deduction, or for deduction or collection at a lower rate, under section 395(1) or 395(3). A non-resident applying under section 395(1) asks the same question a resident does: whether estimated total income justifies the relief. Whether a particular sum paid to a non-resident is chargeable at all is decided under section 395(2).

Is a section 197 certificate still valid after 1 April 2026?

It can be. The Income Tax Department has confirmed that a certificate issued under section 197 of the 1961 Act remains valid for payments or credits made on or after 1 April 2026, provided it was issued for lower or nil deduction in respect of projected receivables for tax year 2026-27. A certificate issued against receivables of an earlier tax year does not continue, and a fresh Form No. 128 is required.

Does a lower deduction certificate apply to every payer?

No. Rule 213(8) of the Income-tax Rules, 2026 requires the certificate to be issued in the name of the person responsible for deducting or collecting the tax, under advice to the applicant, and makes it valid only for a specified payment from that specified deductor and only up to the amount specified. A payer who is not named deducts at the ordinary rate. Where deductors are likely to exceed one hundred, Rule 213(9) allows a certificate in the applicant’s own name from which individual certificates are generated.

What is the difference between Form No. 128 and Form No. 129?

Form No. 128 is the payee’s application under section 395(1) for deduction at a lower rate or no deduction, decided by reference to the payee’s estimated total income. Form No. 129 is the payer’s application under section 395(2), read with section 400(3), for determination of the proportion of a sum paid to a non-resident that is chargeable to tax, examined under Rule 214(2) against the Act read with the applicable tax treaty. Different applicant, different question.

Can a lower deduction certificate reduce tax that has already been deducted?

No. The certificate operates prospectively, for the period it specifies, and binds the deductor only for payments made while it is valid. Tax already deducted is not refunded by it; the excess is recovered by claiming credit in the return of income. This is why Form No. 128, which may be filed at any time during the tax year, is best filed early enough for the certificate to issue before the payments it is intended to cover.

How R & D Law Chambers Works on These Matters

Certificate work is treated here as part of the assessment record rather than as a filing exercise. The application is where the projection, the earlier years’ returns and the position on existing demands are first put before the Assessing Officer, and what is said there constrains what can be argued afterwards. The firm prepares applications under section 395(1) and section 395(2), and deals with the demands and assessments that stand in the way of them.

The practice acts on both sides of the deduction: for payees seeking certificates, and for payers exposed to short deduction where a certificate has been applied beyond the named deductor or the certified amount. That is why the constraint in Rule 213(8) is treated here as the operative provision rather than a formality. The direct tax disputes practice is led from Ahmedabad. For assessment, reassessment and appellate representation, see our page for income tax lawyers in Ahmedabad.

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Disclaimer: this article is provided for general information only. It does not constitute legal advice and does not create a lawyer-client relationship. Positions under the Income-tax Act, 2025 and the Income-tax Rules, 2026 depend on the facts of each case and on the state of the law at the relevant time. References to statutory provisions, rules, forms and departmental material should be verified against the current primary sources before they are acted on. R & D Law Chambers does not guarantee any particular outcome in any matter.