Form 128 Lower/Nil TDS Certificate TY 2026-27: Section 395 Guide

                                                                
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?

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?

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

1. Estimate TY 2026-27 income: prepare a realistic projection rather than merely reverse-engineering a desired rate.
2. Identify covered receipts: map expected deductors, payment categories and amounts.
3. Prepare Form 128: complete the electronic form using the current TRACES/e-filing workflow once available for the relevant request.
4. Upload/support: retain all financial statements, computations and explanations requested by the portal or Assessing Officer.
5. Respond to queries: the Assessing Officer may seek clarification or supporting information.
6. Verify the certificate: check rate, payee, payment category, validity dates, deductor coverage and monetary limits.
7. 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

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

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.

Frequently Asked Questions