Lower or Nil TDS/TCS Under the Income-tax Act, 2025: Section 395 Certificate and Section 393(6) Declaration Explained

Introduction: The Withholding Gap Problem

India's withholding tax framework operates on a fundamental structural tension. Tax is deducted or collected at source on gross payment amounts using prescribed statutory rates, whereas an assessee's actual tax liability is always a net computation — one that accounts for deductions, exemptions, set-offs, and credits — and is finally determined only when the return of income is filed.

For a significant portion of assessees, these two figures are substantially different. When withholding exceeds actual liability, the surplus tax sits with the government until a refund is processed — a cycle that frequently extends across several months, sometimes stretching well into the following financial year. This liquidity drain can have a real and measurable impact, particularly for businesses operating on tight working capital cycles.

The Income-tax Act, 2025 addresses this structural gap through two distinct mechanisms:

  1. A certificate issued by the Assessing Officer permitting deduction or collection at a lower or nil rate — now governed by Section 395
  2. A self-declaration made directly to the payer asserting nil tax on estimated total income — now governed by Section 393(6)

Both mechanisms existed under the Income-tax Act, 1961 in different form numbers and section references. The Income-tax Act, 2025 preserves their substance entirely but assigns new section numbers, new form numbers, and new rule references applicable from Tax Year 2026-27 onwards. Understanding both routes — and the transition rules that bridge the old and new frameworks — is essential for any assessee seeking to manage withholding tax efficiently.

The Certificate Route: Section 395 and Form No. 128

Background and Consolidation

Under the Income-tax Act, 1961, two separate provisions governed lower or nil withholding at the deduction and collection stage:

  • Section 197 — for lower or nil TDS
  • Section 206C(9) — for lower or nil TCS

The application for both was made through Form 13. The Income-tax Act, 2025 consolidates these two routes into a single provision:

  • Section 395(1) — governs lower or nil TDS
  • Section 395(3) — governs lower or nil TCS

The application form is now Form No. 128, prescribed under Rule 213 of the Income-tax Rules, 2026. Rule 213 effectively absorbs the earlier Rules 28, 28AA, 28AB, 29, 37G, and 37H into a single consolidated rule framework.

How the Mechanism Works

The operative logic remains the same as it was under the 1961 Act. The assessee files an application, the Assessing Officer reviews the estimated total income for the relevant Tax Year, and — where the income and tax computation justify it — a certificate is issued specifying:

  • The applicable rate (lower rate or nil rate)
  • The period during which the certificate remains valid

Once a valid certificate is in place, every deductor or collector making payments to that assessee is legally bound to apply the certified rate rather than the standard prescribed rate. The system surfaces the certificate details to deductors through the portal, ensuring the correct rate flows automatically into TDS and TCS statements.

Who Can Apply Under Section 395

One of the most important features of the Section 395 route is its broad eligibility. Any of the following may apply:

  • Resident individuals and HUFs
  • Companies (both domestic and foreign)
  • Firms and Limited Liability Partnerships (LLPs)
  • Non-residents
  • Trusts, associations of persons, and other entities

The types of income for which the certificate is available include, among others:

  • Interest income
  • Commission and brokerage
  • Professional fees
  • Contract payments
  • Rent and lease payments
  • Other specified income subject to TDS or TCS