Form 128 Lower/Nil TDS Certificate TY 2026-27: Section 395, Eligibility, Process & Old Section 197 Transition
Answer first: From Tax Year 2026-27, the application for a lower or nil TDS certificate is made under section 395(1) of the Income Tax Act, 2025 using Form 128 prescribed by rule 213 of the Income Tax Rules, 2026. The payee applies electronically and the Assessing Officer may issue a certificate specifying the lower/nil rate and its validity period if the estimated total income justifies it. A valid old section 197 certificate can continue after 1 April 2026 where it was issued for projected receivables of TY 2026-27, subject to its terms.
What changed from old section 197?
| Issue | Up to 31 March 2026 | From 1 April 2026 |
|---|---|---|
| Legal provision | Section 197, Income-tax Act, 1961 | Section 395(1), Income Tax Act, 2025 |
| Application | Old lower/nil deduction application process | Form 128 under rule 213 |
| Authority | Assessing Officer | Assessing Officer |
| Core test | Estimated total income justifies lower/nil deduction | Substantively the same principle |
| Portal | TRACES/e-filing workflow | Department states the process will continue through TRACES or e-filing in a similar manner |
What is Form 128?
Form 128 is the new statutory application form for a person seeking a certificate for no deduction or deduction of income-tax at a lower rate under section 395(1). The notified form also covers lower collection of tax under section 395(3), so the applicant must choose the relevant request carefully.
The form is electronic and asks for applicant details, tax year, status, PAN, residential status, contact details and the nature of the request. It also requires financial and tax information sufficient for the Assessing Officer to evaluate whether the expected total income supports a lower or nil rate.
Who should consider applying?
| Situation | Why Form 128 may be relevant |
|---|---|
| Low-margin contractor with large gross receipts | Normal TDS on gross billing may materially exceed expected final tax liability |
| Company with carried-forward losses | Projected taxable income may be much lower than receipts subject to withholding |
| Entity with significant depreciation or eligible deductions | Normal withholding may create recurring refund positions |
| Non-resident receiving covered Indian income | A lower-rate certificate may be relevant where statutory withholding exceeds expected liability, subject to treaty/domestic-law analysis |
| Service provider with strong refund history | Repeated excess withholding can support the practical case, though approval is never automatic |
A lower/nil certificate is not an exemption that a taxpayer can self-declare merely because cash flow is tight. The Assessing Officer must be satisfied on the basis of the applicant's facts, estimated income and supporting records.
What should be prepared before filing?
- Latest filed income-tax returns and computation of income.
- Current-year estimated profit and loss account and tax computation.
- Details of projected receipts from deductors/customers.
- Details of existing lower/nil certificates, if any.
- Tax payment, TDS/TCS credit and refund history.
- Carried-forward losses, unabsorbed depreciation and material deductions where relevant.
- Contracts, invoices or customer projections supporting the expected receivables.
- Reconciliation between turnover, projected taxable income and requested certificate rate.
How the application process works
- Estimate TY 2026-27 income: prepare a realistic projection rather than merely reverse-engineering a desired rate.
- Identify covered receipts: map expected deductors, payment categories and amounts.
- Prepare Form 128: complete the electronic form using the current TRACES/e-filing workflow once available for the relevant request.
- Upload/support: retain all financial statements, computations and explanations requested by the portal or Assessing Officer.
- Respond to queries: the Assessing Officer may seek clarification or supporting information.
- Verify the certificate: check rate, payee, payment category, validity dates, deductor coverage and monetary limits.
- Share only the valid certificate: communicate it to deductors and retain evidence of delivery.
Old section 197 certificate after 1 April 2026
The Income Tax Department has specifically clarified that a certificate issued under old section 197 can remain valid for payments or credits made on or after 1 April 2026 where it was issued in respect of projected receivables for TY 2026-27. This transition relief is important for certificates obtained before the new Act became operational.
Worked examples
Example 1: Contractor with low margin
A contractor expects ₹12 crore of gross billing but only ₹35 lakh of taxable income after genuine expenses and depreciation. Normal withholding on gross receipts may create a substantial excess credit. The contractor can evaluate Form 128 and support the requested rate with current-year projections and prior-year records.
Example 2: Loss-making company
A company has carried-forward business losses and expects another low-profit year. It cannot simply instruct customers not to deduct TDS. It must obtain a valid lower/nil certificate before customers can lawfully apply the certificate rate.
Example 3: Old certificate covering TY 2026-27
A section 197 certificate was issued in March 2026 specifically against projected receivables of TY 2026-27. Subject to the certificate's terms, the Department's transition guidance permits continued use after 1 April 2026.
Example 4: Certificate limit exhausted
A certificate permits 1% deduction up to a specified receivable limit. Once that authorised amount is exhausted, the deductor should not continue the 1% rate automatically. The normal withholding position must be reassessed unless a fresh/modified certificate applies.
ERP and accounts-payable controls for deductors
| Control | Evidence |
|---|---|
| Verify PAN/legal name | Vendor master + certificate |
| Map section/payment category | Invoice/contract + certificate scope |
| Track validity | Start/end dates in certificate master |
| Track monetary limit | Utilisation ledger by certificate |
| Prevent use after exhaustion/expiry | ERP block or manual control |
| Retain verification evidence | Portal/TRACES confirmation + certificate PDF |
Month-end and year-end checklist
- Reconcile certificate utilisation with vendor/customer ledgers.
- Check whether reduced-rate payments exceed the authorised limit.
- Review certificate expiry before processing month-end payments.
- Confirm TDS return section/table coding is aligned with the new Act.
- Retain the certificate and verification trail with tax audit/withholding files.
- For new-year rollover, do not copy prior-year certificate rates without checking validity.
Common mistakes
| Mistake | Risk |
|---|---|
| Applying for nil deduction only because cash flow is tight | Weak factual basis and likely rejection/query |
| Using an old certificate for a different tax year | Short deduction exposure for the deductor |
| Ignoring the monetary limit | Reduced rate used beyond authorised scope |
| Applying one certificate across multiple legal entities | Certificate may not cover the actual payee |
| Not reconciling projected receipts | Mismatch with Form 128 basis and customer ledgers |
| Confusing Form 128 with Form 15G/15H declarations | Different legal mechanism and eligibility |
Frequently asked questions
What is Form 128?
Form 128 is the application prescribed under rule 213 for a lower/nil deduction certificate under section 395(1), and also covers lower collection requests under section 395(3).
Which section replaces old section 197?
The corresponding lower/nil deduction provision is section 395(1) of the Income Tax Act, 2025.
From when does Form 128 apply?
It is the prescribed form for the new Act framework applicable from Tax Year 2026-27.
Who files Form 128?
The person/payee seeking a certificate for lower or nil deduction files the application electronically.
Can the deductor apply instead of the payee?
The statutory application is made by the person seeking the certificate. The deductor applies the certificate only after verifying its terms.
Does Form 128 guarantee a nil-rate certificate?
No. The Assessing Officer must be satisfied that the applicant's estimated total income justifies the requested treatment.
Where will Form 128 be filed?
The Income Tax Department states that the application process will be available through TRACES or the e-filing portal, similar to the existing process.
Can an old section 197 certificate continue after 1 April 2026?
Yes, where it was issued for projected receivables of TY 2026-27, subject to the certificate's actual terms.
Is every section 197 certificate automatically valid in 2026-27?
No. Check the tax year/receivable coverage, validity, payment category, payee and limit.
Can a certificate specify a lower rate instead of nil?
Yes. The certificate may specify a lower rate or nil rate depending on the Assessing Officer's determination.
Can a certificate have a monetary limit?
Yes. Deductors should track the authorised amount and stop using the reduced rate beyond the certificate's scope.
Can one certificate be used for all customers?
Only to the extent the certificate's terms cover the relevant deductors/payments. Do not assume universal coverage.
Is Form 128 the same as Form 15G or 15H?
No. Forms 15G/15H are self-declarations for specified eligible cases; Form 128 is an application to the Assessing Officer for a lower/nil certificate.
What should be included in income projections?
Use a supportable estimate of receipts, expenses, taxable income, losses, deductions and tax liability for the tax year.
Can a loss-making company request nil deduction?
It may apply, but the certificate depends on the facts and the Assessing Officer's satisfaction; losses do not create automatic nil withholding.
What should a deductor verify before applying the certificate rate?
Verify legal name/PAN, payment category, validity period, rate, amount limit and any deductor-specific conditions.
What happens if the certificate expires?
The deductor should revert to the normal applicable withholding analysis unless a new valid certificate applies.
What records should be retained?
Keep the application basis, projections, certificate, portal verification, customer/deductor communication and utilisation reconciliation.
Official references
- Income Tax Department — Income Tax Forms / lower-nil withholding transition FAQs
- Income Tax Rules, 2026 — Form 128 and rule 213
Last reviewed: 27 August 2026. This guide explains the general statutory process; the live portal, certificate and current Income Tax Department instructions control the actual filing and withholding treatment.
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