Section 395 · Collection & recovery
Section 395 of the Income-tax Act, 2025 — Certificate for Lower or Nil Deduction / Collection of TDS & TCS (Form 128)
By CA Rajat Agrawal
Updated 05 Jul 2026
Chapter XIX
📜 What the law says — Section 395, Income-tax Act 2025
395. (1) Where tax is required to be deducted on any income or sum under this
Chapter, then subject to the rules made under this Act,—
(a) the payee may make an application before the Assessing Officer for
deduction of income-tax at a lower rate or no deduction of income-tax,
as the case may be; and
(b) 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
of income-tax, as the case may be, shall issue to him a certificate as
appropriate; and
90
[(c) when a certificate is issued under clause (b) or sub-section (6), as the case
may be, the person responsible for paying the income or sum shall deduct
the tax at the rate specified in such certificate, or deduct no income-tax, as
the case may be, till its validity.]
(2)(a) The person responsible for paying to a non-resident any sum as mentioned in
section 393(2) (Table: Sl. No. 17), may make an application to the Assessing Officer
in such form and manner as may be prescribed, where he considers that the whole
of such sum would not be chargeable in the case of the recipient;
(b) the application under clause (a) shall be for determination of the appropriate
proportion of the sum chargeable to tax, by the Assessing Officer in the manner as
may be prescribed; and
90. Substituted by the Finance Act, 2026, w.e.f. 1-4-2026. Prior to its substitution, clause (c) read
as under :
“(c) when a certificate is issued under clause (b), the person responsible for paying the
income or sum shall deduct the tax at the rate specified in such certificate, or deduct
no income-tax, as the case may be, till its validity.”
(c) when the determination is made by the Assessing Officer as per clause (b), the tax
shall be deducted under section 393(2) (Table: Sl. No. 17) only on that proportion
of sum which is chargeable to tax under the Act.
(3) Where tax is required to be collected on any amount under this Chapter, then
subject to the rules made under this Act,—
(a) the buyer or licensee or lessee may make an application before the
Assessing Officer for collection of tax at a lower rate;
(b) the Assessing Officer on being satisfied that the total income of the buyer
or licensee or lessee justifies collection of tax at a lower rate
In plain language
What Section 395 actually says
Section 395 of the Income-tax Act, 2025 lets a taxpayer get a written certificate from the Income-tax Department instructing a payer to deduct less tax (or no tax) at source than the normal TDS/TCS rate. It is the direct successor to Section 197 and Section 206C(9) of the old Income-tax Act, 1961, and it takes effect from 1 April 2026 (tax year 2026-27 onwards).
- Section 395(1) — covers lower or nil TDS on any income or sum on which tax is deductible under Chapter XIX.
- Section 395(2) — lets the payer making a payment to a non-resident apply to have only the taxable portion determined, so TDS is charged only on that part.
- Section 395(3) — covers lower TCS (tax collection at source) for a buyer/licensee/lessee.
- Section 395(5) — empowers the Assessing Officer to cancel a certificate after giving a reasonable opportunity of being heard.
Why it matters — the problem it solves
TDS/TCS is a flat cut taken upfront. If your actual tax liability is genuinely lower than the tax being deducted, that money gets stuck with the Government until you file your return and claim a refund — hurting cash flow. Section 395 fixes this in advance: instead of over-deducting and refunding later, the payer deducts at the reduced rate the certificate specifies.
Who can apply
- Any person whose estimated total income justifies a lower/nil deduction — individuals, HUFs, firms, companies, NRIs.
- Loss-making or low-margin businesses where TDS on gross receipts far exceeds real tax.
- Non-profit / charitable organisations with exempt income.
- Non-residents, who now clearly fall within the scheme (payer can invoke 395(2)).
The big change from Section 197
Under the 1961 Act, lower-TDS certificates were tied to a specific list of sections (192, 193, 194, 194A, 194C, 194J, etc.). Section 395(1) instead refers broadly to "any income or sum under this Chapter (Chapter XIX)". This is a more uniform, streamlined design — the eligibility is driven by whether your total income justifies relief, not by whether your payment type made it onto a hand-picked list.
How you apply — Form 128
- The application is made in Form No. 128 (the replacement for the old Form 13), under Rule 213 of the Income-tax Rules, 2026.
- It is filed online on the TRACES portal (www.tdscpc.gov.in), before the payment/transaction.
- The Assessing Officer verifies your estimated income, past returns, and outstanding demands, then issues a certificate stating the exact rate (which may be nil).
- From April 2026 the law also enables an electronic route before a prescribed income-tax authority, which can issue or reject the certificate after digital verification.
Key conditions and practical points
- The certificate names a rate and a validity period (usually within a tax year). The deductor must apply that rate for the whole validity window.
- Where a taxpayer has 100+ payers, the Department can issue a master certificate plus per-payer Child Certificates (Annexure II).
- Applying is optional — you can always let normal TDS/TCS happen and claim the excess as a refund in your ITR instead.
- The certificate is prospective: it applies to payments made after issue, not retrospectively.
- The AO can cancel the certificate under 395(5) if the facts change.
How it interacts with other provisions
Section 395 works alongside Section 393(6) (self-declarations in Form 15G/15H — the successor to old Section 197A), the general TDS machinery in Chapter XIX, and TCS under Section 393(2)/394. Where a small taxpayer can simply file 15G/15H, a certificate under 395 is not needed; 395 is the route when a formal, verified certificate is required (e.g., larger sums, businesses, NRIs).
💡 Example
Example 1 — Contractor with thin margins. Ravi runs a labour-supply firm invoicing ₹1 crore a year. TDS under the contractor provisions is 2% on gross, so ₹2,00,000 is deducted at source. But his net profit is only ₹6,00,000 and his actual income-tax works out to roughly ₹40,000. Without relief, ₹1,60,000 is locked up until refund. Ravi files Form 128 on TRACES; the AO, satisfied that his real tax is far lower, issues a certificate for 0.5% TDS. His clients now deduct only about ₹50,000 across the year — freeing up working capital.
Example 2 — NRI selling a flat. Meera, an NRI, sells a Mumbai flat for ₹80,00,000 that she bought for ₹70,00,000. Normal TDS on an NRI's sale can be deducted on the full sale value, which would be a huge over-deduction versus her small ₹10,00,000 gain. Using Section 395, the buyer/Meera obtains a lower-deduction certificate so tax is deducted only on the actual capital gain, not the entire ₹80 lakh. This is exactly the mischief 395(1)/(2) is designed to prevent.
A short story. Anjali, a freelance designer, was frustrated every year: 10% TDS on her professional fees always left her waiting nine months for a fat refund. Her CA told her about Form 128. She applied once at the start of the year, got a certificate for 2% TDS based on her estimated income, and for the first time her bank balance matched her actual earnings through the year — no more interest-free loan to the Government.
| Aspect | Old law (Act, 1961) | New law — Section 395 (Act, 2025) |
|---|
| Lower/Nil TDS certificate | Section 197 | Section 395(1) |
| Non-resident — taxable portion only | Section 195(2)/(3) | Section 395(2) |
| Lower TCS certificate | Section 206C(9) | Section 395(3) |
| Self-declaration (Form 15G/15H) | Section 197A | Section 393(6) |
| Application form | Form 13 | Form 128 |
| Filing platform | TRACES | TRACES (plus electronic route from Apr 2026) |
| Scope of payments | Specific listed sections | Any income/sum under Chapter XIX |
| Effective from | — | 1 April 2026 (TY 2026-27) |
Related sections
Section 393 — TDS/TCS machinery and Form 15G/15H self-declarations Section 394 — Tax collection at source (TCS) Section 397 — Consequences of failure to deduct or pay TDS Section 392 — Certificate of TDS furnished to the deductee Section 396 — Credit for tax deducted or collected at source Section 263 — Return of income and specified entities
Forms under this section
Income-tax forms (2025) prescribed under Section 395:
Frequently asked questions
What is Section 395 of the Income-tax Act, 2025?
It is the provision that lets a taxpayer obtain a certificate from the Assessing Officer for lower or nil deduction of TDS (395(1)) or lower collection of TCS (395(3)). It replaces Section 197 and Section 206C(9) of the 1961 Act and applies from 1 April 2026.
Which form do I use to apply for a lower TDS certificate now?
You apply in Form No. 128 (the successor to the old Form 13), filed online on the TRACES portal, under Rule 213 of the Income-tax Rules, 2026. It should be filed before the payment is made.
Who can apply under Section 395?
Any person whose estimated total income justifies a lower or nil deduction — including individuals, businesses with thin margins, non-profit organisations, and non-residents. It is optional; you may instead claim the excess as a refund in your ITR.
How is Section 395 different from Section 197 of the old Act?
Section 197 was tied to a specific list of TDS sections, whereas Section 395(1) applies broadly to any income or sum on which tax is deductible under Chapter XIX. This creates a more uniform, streamlined framework.
Can a non-resident get relief from over-deduction on a property sale?
Yes. Section 395(2) allows the payer to have the taxable portion determined so tax is deducted only on the actual gain, not the full sale value, preventing large over-deductions that would otherwise be refunded later.
How long is the certificate valid and can it be cancelled?
The certificate specifies a rate and a validity period, usually within the tax year, and the deductor must apply that rate for the whole period. Under Section 395(5), the Assessing Officer can cancel it after giving the taxpayer a reasonable opportunity of being heard.
Do I still need Form 128 if I can file Form 15G or 15H?
No. Small taxpayers who qualify can simply file a self-declaration (Form 15G/15H under Section 393(6)). Form 128 under Section 395 is for cases needing a formal, verified certificate, such as larger sums, businesses or non-residents.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 05 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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