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The 2-Minute Summary
TDS is deducted at standard rates: 10% on professional fees, 2% on rent, 30% on lottery winnings, and so on. But these standard rates may be higher than your actual final tax rate after all deductions and exemptions. You end up having more tax deducted than you owe, and then wait months for a refund.
Section 395 (old Section 197) solves this. If you can demonstrate to the Assessing Officer that your actual tax liability justifies a lower rate, or no deduction at all, they issue a certificate specifying the lower rate. Every payer who receives this certificate must deduct TDS at the specified rate instead of the standard rate.
Example: Ananya is a professional earning fees from 15 different clients. Each deducts 10% TDS under Sl. 6(iii). After all her deductions, her actual effective tax rate is about 5%. She applies under Section 395(1). The AO issues a certificate specifying 5%. All 15 clients now deduct at 5%, and her refund at filing is minimal.
Example: A non-resident company has a DTAA exemption on certain Indian-sourced income. It applies under Section 395(1) for a nil deduction certificate. Indian payers then remit the full amount without any deduction.
Under Income Tax Act 1961: Section 197 of the Income Tax Act 1961. Now Section 395 of the Income Tax Act 2025. Section 395(6) is a new insertion by Finance Act 2026 (Act No. 4 of 2026, w.e.f. 1 April 2026) adding the electronic application route.
At a Glance
| Item | Details |
| New Act Reference | Section 395 of Income Tax Act 2025 |
| Old Act Reference | Section 197 of Income Tax Act 1961 |
| Who Can Apply | Any person entitled to receive income on which TDS is deductible |
| Basis for Grant | AO satisfied that total income of payee justifies lower rate or nil deduction |
| Types of Certificate | (a) Lower rate TDS; (b) Nil TDS |
| Validity | Till the date specified in the certificate |
| Annual Renewal | Certificate valid for one Tax Year; must be renewed annually |
| Effect on Deductor | Must apply the rate in the certificate until it expires (Section 395(1)(c)) |
| Cancellation | AO can cancel after giving reasonable opportunity (Section 395(5)) |
| Electronic Route | Section 395(6): application filed before prescribed income-tax authority; certificate issued on electronic verification |
Section 395(1): Application to the Assessing Officer
Under Section 395(1)(a), the payee files an application before the Assessing Officer. The AO examines the estimated income, deductions, and tax liability for the year. If satisfied, the AO issues a certificate under Section 395(1)(b) specifying the lower or nil rate.
Section 395(1)(c) states that once a certificate is issued, the person responsible for paying the income must deduct tax at the rate specified in the certificate or deduct no income tax, as the case may be, until the certificate’s validity expires.
The application is typically filed in Form 13 at the start of the Tax Year. Once obtained, the payee distributes copies to all expected deductors.
Section 395(6): The New Electronic Route
Section 395(6) was inserted by Finance Act 2026 (Act No. 4 of 2026), effective from 1 April 2026. Under this sub-section, the applicant may file the application before the prescribed income-tax authority through an electronic portal.
This authority, on electronic verification of the contents of the application, may:
- Issue a certificate for lower rate or nil deduction of income tax, or
- Reject the application if prescribed conditions are not fulfilled or if the application is incomplete.
Section 395(1)(c) was also substituted by Finance Act 2026 to refer to both certificates under Section 395(1)(b) and Section 395(6). So a certificate issued through either route has the same legal effect on deductors.
The electronic route is faster and more suitable for straightforward cases. Applications involving complex income structures, large non-resident payments, or business loss situations continue to go through the AO route under Section 395(1).
Section 395(2): Determination of Taxable Proportion for Non-Residents
Section 395(2) is a separate and specific route for payers remitting amounts to non-residents under Section 393(2) Sl. No. 17. Where the payer believes the whole of the sum payable is not chargeable to tax in India, they apply to the AO for determination of the taxable proportion.
Under Section 395(2)(b), the AO determines the appropriate proportion chargeable to tax. Under Section 395(2)(c), TDS under Sl. No. 17 is then deducted only on that determined proportion.
Example: An Indian company buys back shares from a Mauritius entity for Rs. 50 crore. Part represents original investment capital and part represents gains. The Indian company applies under Section 395(2). The AO determines that Rs. 12 crore represents taxable gains. TDS is deducted only on Rs. 12 crore.
Section 395(3): Lower TCS Certificate
Section 395(3) extends the same concept to Tax Collection at Source under Section 394. A buyer, licensee, or lessee who believes their total income justifies a lower TCS collection rate can apply to the AO under Section 395(3)(a). The AO issues a lower TCS certificate under Section 395(3)(b), and the seller or collector must apply that rate under Section 395(3)(c).
Section 395(4): Obligation to Issue TDS Certificates
Section 395(4)(a) requires every person who deducts or collects TDS/TCS to issue a certificate to the deductee or collectee specifying the amount of tax deducted or collected, the rate at which it was deducted or collected, and any other prescribed particulars.
These are the standard TDS certificates: Form 16 for salary, Form 16A for non-salary payments, Form 16B for property purchase, Form 16C for rent paid by individual/HUF, and Form 16D for payments under Sl. 6(ii).
Section 395(4)(b) specifically covers the employer paying tax on perquisites under Section 392(2)(a). The employer must issue a certificate to the employee confirming the tax has been paid, along with the amount and rate.
Section 395(5): Cancellation of Certificate
The AO may cancel a certificate granted under Section 395(1) or (3) after giving the applicant a reasonable opportunity. This can happen where the applicant’s income situation changes materially, the original application contained misrepresentations, or the estimates of income and deductions were significantly off.
Once cancelled, the certificate is no longer valid. Any deductor who was applying the lower rate must revert to the standard rate from the date the certificate is cancelled.
Who Should Apply for a Lower TDS Certificate
- Professionals and consultants whose effective tax rate after deductions is well below the standard 10% TDS rate.
- Senior citizens with limited income after Rs. 50,000 savings interest deduction and other exemptions.
- Businesses carrying forward large losses resulting in nil or minimal tax liability for the year.
- Non-resident companies benefiting from DTAA exemptions who want to avoid over-withholding.
- E-commerce sellers with high turnover but very thin margins where 0.1% TDS exceeds their actual tax.
- Any taxpayer receiving income from multiple sources where aggregate TDS deductions significantly exceed the expected total tax liability.
Practical Compliance Checklist
- Apply early: file Form 13 or use the Section 395(6) electronic route in April or May before significant TDS deductions begin. A certificate obtained mid-year only helps for future payments.
- Distribute to all deductors: once the certificate is issued, send a copy to every person expected to deduct TDS from your income, including all clients, banks, and mutual fund companies.
- Renew every year: the certificate is valid only for the Tax Year specified. Apply fresh at the start of each Tax Year.
- Provide accurate income estimates: the AO or prescribed authority evaluates the application based on estimated income and deductions. Understating income to obtain a nil certificate is a compliance risk and can result in cancellation and demand.
- For non-resident applications under Section 395(2): the Indian payer typically initiates this application since they are the ones responsible for TDS deduction.
A lower TDS certificate is not a tax benefit. It is a cash flow tool. Your total tax liability by the end of the year remains the same. The difference is that instead of having large amounts deducted at source and then waiting months for a refund, you pay the right amount throughout the year. For professionals with multiple clients all deducting 10% TDS, this certificate can unlock significant working capital over a 12-month period.
