How to Obtain a Lower Deduction Certificate for TDS

Under the Income Tax Act, 2025

Quick Answer: If TDS is being deducted on your income at a rate higher than your actual tax liability, you can apply for a Lower Deduction Certificate (LDC) under Section 395 of the Income Tax Act, 2025. This certificate lets payers deduct at a reduced (or nil) rate, improving your cash flow without waiting for a year-end refund.

If you're a taxpayer whose income attracts TDS at rates higher than your actual tax liability, you don't have to wait until the end of the year to claim a refund. The Income Tax Act, 2025 (in force from 1 April 2026) provides a mechanism to fix this in advance — the Lower Deduction Certificate (LDC).

This guide covers what an LDC is, who needs one, the legal framework under the current Act, how to obtain one, and the practical pros and cons.

What Is a Lower Deduction Certificate?

Under the standard TDS regime, payers deduct tax at prescribed rates on payments like salary, interest, rent, professional fees, contractor payments, or payments to non-residents. These rates are often flat and don't account for the payee's actual tax situation — deductions, exemptions, losses, or a lower effective tax slab.

An LDC is a certificate issued by the Assessing Officer (AO) — typically the TDS/International Taxation jurisdictional officer — authorizing the payer to deduct tax at a lower rate (or NIL rate, in qualifying cases) than the standard TDS rate. It aligns the tax deducted at source with the taxpayer's real tax liability, avoiding excess deduction and the resulting refund-and-wait cycle.

Legal Framework Under the Income Tax Act, 2025

The Overall TDS Structure

The Income Tax Act, 2025 organizes TDS provisions into a compact, table-driven structure:

Section	Covers
Section 392	TDS on salary payments
Section 393	TDS on all other (non-salary) payments — interest, dividends, contractor payments, rent, professional and technical fees, commission, payments to non-residents, and more — organized as line items (Serial Numbers) within a single schedule/table
Section 394	TCS (Tax Collected at Source) provisions
Section 397	TAN obligations and the higher TDS rate for deductees who fail to furnish PAN

Section 395 — Lower or Nil Deduction Certificate

The certificate mechanism is housed in Section 395. A taxpayer who expects their actual tax liability to be lower than the otherwise applicable TDS rate can apply to the AO. If the AO is satisfied — after examining the applicant's estimated total income and tax liability — that a lower or nil rate is justified, a certificate is issued specifying:

The applicable reduced rate (or nil, where warranted)
The specific payer(s)/deductor(s) it applies to
The validity period
The maximum payment amount covered

The certificate is binding on the deductor for its entire validity period — the deductor must apply the specified rate rather than the standard rate for that payment category.

For non-resident payments: Section 395(2) specifically allows a payer to apply for a determination of the chargeable proportion of a sum being paid to a non-resident — meaning TDS is restricted to only the portion of the payment actually chargeable to tax in India. This is particularly relevant where DTAA (Double Taxation Avoidance Agreement) benefits reduce the non-resident's effective India tax liability below the standard withholding rate.

Self-Declaration for Nil Deduction

Separately from the AO-certificate route, resident individuals below the taxable threshold and qualifying senior citizens can furnish a self-declaration directly to the deductor requesting nil deduction, without approaching the AO. This route is simpler but available only for specific categories of income and only where the declarant's estimated total income is genuinely below the basic exemption limit. For several income categories, only the Section 395 certificate route is permitted — it's worth confirming which route applies to your specific income type before proceeding.

Application Form

The application is made in Form No. 128, filed electronically through:

TRACES portal — for resident applicants
International Taxation e-filing utility — for non-resident applicants

Who Should Apply for an LDC?

An LDC is particularly useful for:

Businesses or professionals with losses or low margins, where standard TDS rates exceed actual tax liability
NBFCs and financial institutions receiving interest income taxed at rates lower than the deduction rate
Real estate and infrastructure companies with high turnover but thin margins, especially where contract payments attract TDS under Section 393
Non-resident entities with treaty benefits (DTAA) that reduce their India tax liability below the domestic withholding rate
Mutual funds, FIIs, and trusts with special tax regimes
Any taxpayer who consistently ends up with large refunds because standard TDS rates over-deduct relative to actual liability

Step-by-Step Process to Obtain an LDC

Step 1: Determine Eligibility and Estimate Income

Before applying, estimate your total income and tax liability for the relevant tax year, factoring in:

Historical assessed income from prior years
Expected deductions and exemptions
Carried-forward losses, if any

Step 2: File Form 128

File electronically via TRACES (residents) or the International Taxation e-filing utility (non-residents), along with:

Estimated computation of total income for the year
Details of TDS already deducted so far in the year
Copies of income tax returns and assessment orders for the last 2–3 years
Projected financial statements (for businesses)
Details of each deductor — name, TAN, the relevant Section 393 Serial Number for the nature of payment, and the estimated payment amount
Justification for the lower rate requested

Step 3: AO's Evaluation

The AO evaluates the application by estimating:

Tax payable on the estimated total income of the current tax year
Tax payable on the assessed or returned income of the preceding years
Existing liabilities under the Act (advance tax, self-assessment tax, etc.)

The lower TDS rate is essentially computed as a ratio of estimated tax liability to estimated income subject to TDS.

Step 4: Certificate Issuance

If satisfied, the AO issues the certificate specifying:

Certificate Component	What It Covers
Rate of deduction	Reduced percentage, or NIL
Deductor(s) covered	Specific named parties
Validity period	Usually the relevant tax year, or a shorter window
Maximum amount covered	Payment threshold after which normal TDS resumes

Step 5: Share the Certificate with Deductors

The certificate (with a unique number generated via TRACES) must be provided to each specified deductor, who then deducts tax at the reduced rate for payments made to you during the certificate's validity.

Step 6: Monitor and Track Utilization

The certificate specifies a threshold amount. Once payments reach this limit, TDS reverts to the normal rate unless a fresh application is made. Regular monitoring is essential, especially for entities with multiple deductors.

Timeline and Validity

Apply early: The certificate is not retrospective — it applies only from the date of issue (or a date specified by the AO) onward. Filing at the start of the tax year maximizes the benefit period.
Processing time: Typically a few weeks, though this varies by jurisdiction and case complexity.
Annual renewal: The certificate is valid only for the specific tax year mentioned. It must be renewed each year.

Pros and Cons at a Glance

Advantages

Benefit	Why It Matters
Improved cash flow	Avoids locking up funds in excess TDS pending a refund that arrives months later
Reduced working capital strain	Particularly valuable for businesses with thin margins or high turnover
Avoids refund delays	Refunds, while eligible for statutory interest, can still take time and occasionally attract scrutiny
Treaty alignment for non-residents	Withholding aligns with actual DTAA-based liability rather than the higher domestic rate
Fewer reconciliation mismatches	Less excess TDS means fewer discrepancies to track in Form 26AS/AIS-equivalent statements

Challenges

Challenge	What to Watch For
Administrative burden	Requires detailed income estimation, past assessment data, and coordination with each deductor
Estimation risk	If actual income exceeds the estimate, there may be a shortfall in advance tax, potentially attracting interest
Deductor-specific	Details must be provided per deductor — cumbersome if payments come from numerous parties
Subject to AO discretion	Approval isn't guaranteed; the AO may grant a different rate or reject the application
Annual renewal required	Adds a recurring compliance task each year
Threshold caps	Once the covered payment limit is exceeded, normal TDS rates resume mid-year
Processing delays	Late applications reduce the effective benefit period for the year
Not a substitute for advance tax planning	Overall advance tax adequacy must still be ensured independently

Practical Tips

Apply early: File as close to the start of the tax year as possible to maximize the benefit period.
Maintain realistic estimates: Ensure income estimates in Form 128 are consistent with historical trends — aggressive under-estimation can invite scrutiny.
Track threshold utilization: Set up internal tracking to monitor payments against the certificate's specified limit, especially where multiple deductors are involved.
Coordinate with deductors early: Share the certificate promptly so deductors can update their systems before processing payments.
Keep documentation organized: Past ITRs, assessment orders, and financial projections should be ready in advance to avoid delays in AO evaluation.
Consider the self-declaration route first: If you qualify for nil deduction and your income is genuinely below the taxable threshold, confirm whether the self-declaration route is available for your specific income category before going through the full AO process.
Reference the correct Section 393 Serial Number: When identifying the nature of payment in your application, cite the relevant Section 393 Serial Number rather than any legacy identifiers, as jurisdictional systems now match transactions against these table entries.

Get Help with Your LDC Application

Applying for a Lower Deduction Certificate involves accurate income estimation, correct form preparation, deductor coordination, and timely follow-up with the AO. An error in estimation or a missed deadline can reduce the benefit — or worse, create an advance tax shortfall.

Namratha & Co. can help you move quickly:

Review your eligibility and estimate the appropriate rate
Prepare and file Form 128 accurately via TRACES or the International Taxation utility
Liaise with the AO for timely certificate issuance
Coordinate with your deductors to ensure the certificate is implemented correctly
Set up annual tracking so renewals don't slip through the cracks

Get in touch with Namratha & Co. →

Conclusion

The Lower Deduction Certificate under Section 395 of the Income Tax Act, 2025 is a valuable but underused tool for taxpayers whose actual tax liability doesn't match the standard TDS rates applied to their income. It requires meaningful upfront compliance effort — estimating income accurately, filing Form 128, and coordinating with deductors — but the payoff in improved cash flow and reduced refund dependency can be significant, particularly for businesses with thin margins, non-residents relying on treaty benefits, or entities receiving TDS from multiple sources.

The key is realistic estimation and disciplined tracking through the year. And if you'd rather focus on running your business while a professional handles the paperwork, Namratha & Co. is here to help.

This article is for general informational purposes and does not constitute tax or legal advice. Please consult a qualified chartered accountant or tax professional for guidance specific to your situation.