Lower or nil TDS deduction certificate: eligibility and application

TDS rates are designed for an average case. A contractor with a 3% margin still suffers 1–2% TDS on the full bill; an NRI selling a flat with little gain suffers TDS on the whole gain or more. Section 197 of the 1961 Act (Section 395 of the Income-tax Act, 2025) lets the assessing officer issue a certificate for deduction at a lower rate or no deduction.

Who benefits most

How to apply

1. Log in to TRACES (for Form 13) as a taxpayer and fill the application, or use the form prescribed under the 2026 Rules for Tax Year 2026-27.
2. Provide: estimated income and tax for the current year, details of past three years' returns and assessments, TDS already deducted, list of deductors (TAN) and estimated payments from each.
3. Attach: projected profit and loss account, last audited accounts, computation, details of advance tax.
4. Submit with digital signature or EVC.
5. Respond to any queries from the assessing officer.
6. Certificate is issued on TRACES and is visible to the deductors listed.

Budget 2026: applications by small taxpayers can be processed through an automated, rule-based system with issue after e-verification, as reported. Check the portal for eligibility criteria.

What the officer considers

• Existing tax liability and demands outstanding;
• Tax payable on estimated income for the current year;
• Average tax rate in past years;
• Advance tax and TDS already paid;
• Compliance history (returns filed, TDS statements).

Worked example 1: contractor

Example: Bansal Constructions (firm) expects receipts of ₹8 crore from government departments in Tax Year 2026-27, subject to 2% TDS = ₹16,00,000. Its net profit is about 4% (₹32 lakh), with tax at about 31.2% = ₹10 lakh. Advance tax is already planned for ₹2 lakh.

• Without certificate: TDS ₹16 lakh + advance tax ₹2 lakh = ₹18 lakh against ₹10 lakh liability; ₹8 lakh refund awaited for 12–18 months.
• With a certificate at, say, 1%: TDS ₹8 lakh + advance tax ₹2 lakh = ₹10 lakh – matching the liability.

Worked example 2: NRI selling a flat

Example: Mr Arora, an NRI in Canada, sells a flat in Rohini for ₹1.2 crore with indexed cost of ₹95 lakh (gain ₹25 lakh). He will invest ₹25 lakh in a new house under Section 54. Without a certificate, the buyer would deduct TDS on the gain at the rate in force (or on the full value if no computation is accepted), possibly ₹3–6 lakh or more. With a certificate for nil or lower deduction, TDS matches his real liability.

Validity and use

• Valid only for the deductors, amounts and period specified.
• The deductor must verify the certificate on TRACES and quote it in the TDS statement – otherwise a short-deduction default arises.
• If payments exceed the amount in the certificate, normal rates apply on the excess.

Form 15G/15H alternative

For interest, dividends and certain other income, eligible individuals can self-declare in Form 15G/15H instead of applying for a certificate – see tax on FD interest.

Common mistakes

• Applying late in the year – most TDS is already deducted.
• Not listing all deductors and amounts.
• Deductor not quoting the certificate number, leading to defaults.
• Assuming a certificate for one year covers the next.

Key takeaway

If TDS will clearly exceed your tax, apply for a lower or nil deduction certificate early in the year. NRIs selling property and low-margin contractors benefit most. Our TDS team prepares Form 13 applications with projections and follows up with the assessing officer.