What Is a Nil or Lower Withholding Certificate?
A nil or lower withholding certificate is an order from the Indian income tax department that overrides the standard rate of tax deduction at source (TDS) on a payment, letting the payer deduct tax at a reduced rate — or not deduct at all — because the payee's actual tax liability on that income is lower than the standard rate would produce. The certificate sits in section 395 of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961, for the payee's own certificate), and it exists to stop a taxpayer's cash being locked up in an Indian TDS refund claim for a year or more while the actual liability is far smaller.
Section 395 is not one rule carried over from a single 1961-Act section. It consolidates the payee's lower/nil-deduction certificate (old section 197), the payer's route for splitting a composite payment to a non-resident into taxable and non-taxable portions (old section 195(2) and (3)), and the buyer's or licensee's lower-rate TCS certificate (old section 206C(9)) into one section of six sub-sections. The Finance Act, 2026 then added a new route: an electronically verified application that need not go through the payee's jurisdictional Assessing Officer.
Legal Basis
Section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961)
This is the core certificate provision. Where tax is required to be deducted on any income or sum, the Act allows the payee to apply before the Assessing Officer (AO) for deduction of income-tax at a lower rate, or no deduction at all; the AO, on being satisfied that the total income of the payee justifies it, to issue a certificate to that effect; and, once a certificate is issued, the payer to deduct tax only at the rate stated in the certificate, or not at all, for as long as the certificate remains valid.
A numbering collision to watch: from 1 April 2026, a bare “section 197” in current-tense writing about the Income-tax Act, 2025 does not mean this certificate — the new Act reuses the number 197 for long-term capital gains on assets other than listed shares (the provision that was section 112 of the 1961 Act). The lower or nil-deduction certificate is section 395(1) under the new Act; “section 197” on its own is correct only when the sentence is explicitly about the 1961 Act or a tax year that Act still governs.
Section 395(2) of the Income-tax Act, 2025 (section 195(2) and (3) of the Income-tax Act, 1961)
This is a separate route used by the payer, not the payee. Where a person is responsible for paying a non-resident a sum covered by section 393(2) (Table, Sl. No. 17) and considers that the whole of that sum would not be chargeable to tax in the recipient's hands, the payer can apply to the AO for a determination of the proportion of the payment that is actually chargeable. Once the AO determines that proportion, tax under section 393(2) is deducted only on the chargeable part, not on the gross payment — the tool for composite payments that mix a taxable component (a royalty, say) with a non-taxable one (a cost reimbursement at par).
Section 395(3) of the Income-tax Act, 2025 (section 206C(9) of the Income-tax Act, 1961)
The same logic applies on the collection side. Where tax is required to be collected at source (TCS), a buyer, licensee, or lessee can apply to the AO for collection at a lower rate; once the AO is satisfied that the applicant's total income justifies it, a certificate issues and the seller, licensor, or lessor collects tax only at the certified rate for its validity period.
Section 395(4) and (5) — Certificates and Cancellation
Section 395(4) requires every person deducting or collecting tax to issue a certificate to the deductee or collectee stating the amount and rate of tax deducted or collected. Section 395(5) lets the AO cancel a certificate issued under sub-section (1) or (3), but only after giving the applicant a reasonable opportunity to be heard.
The New E-Verified Route — Section 395(6)
Section 395(6) was inserted by the Finance Act, 2026, with effect from 1 April 2026. It lets the payee's application under section 395(1)(a) also be filed before a “prescribed income-tax authority” — not necessarily the payee's jurisdictional AO — subject to conditions to be prescribed. That authority, on electronic verification of the contents of the application, can either issue a certificate for a lower rate or nil deduction, or reject the application for non-fulfilment of the prescribed conditions or because it is incomplete. A related change to section 395(1)(c), made by the same Finance Act, 2026, confirms that once a certificate is issued under this new route, the payer deducts tax exactly as if the certificate had come from the AO under sub-section (1)(b): at the specified rate, or not at all, until the certificate's validity expires.
The detailed conditions, form, and eligible categories of applicant for this e-verified route are left to rules still to be prescribed. Treat section 395(6) as a route the Act has introduced, with the operating detail to follow in the Income-tax Rules, 2026 and CBDT notifications.
How to Apply
The payee's application under section 395(1)(a) is made in the form prescribed by the Income-tax Rules, 2026; under the 1961 Act the equivalent application was made in Form 13. Applicants include non-resident recipients of interest, royalty, fees for technical services, or capital gains who expect their actual Indian tax liability to be lower than the standard TDS rate — commonly because of carried-forward losses, deductions, or a treaty rate the payer is unwilling to apply without an AO's confirmation. Under section 395(1)(c), the payer deducts at the rate the certificate specifies, or does not deduct at all, only for as long as the certificate remains valid; the certificate states its own validity, and the conditions attached to it are set by the Income-tax Rules, 2026.
Typical situations where an applicant seeks a section 395(1) certificate:
- The recipient has carried-forward business losses or unabsorbed depreciation that will offset most or all of the income, so deduction at the default rate would produce a large refund claim.
- The recipient qualifies for a lower DTAA rate but the payer wants an AO-issued certificate before applying it, rather than relying only on the recipient's own Tax Residency Certificate and self-declaration.
- The payment mixes taxable and non-taxable elements and the recipient — rather than the payer — wants the AO to fix the taxable proportion.
Why This Certificate Matters for Foreign Companies and Investors
Without a section 395 certificate, the payer must deduct TDS at the standard domestic rate (or, if properly documented, the treaty rate) on the gross payment under section 393(2). If the recipient's real liability is lower, the excess sits with the tax department until the recipient files an Indian return and claims a refund. A certificate under section 395(1) fixes the deduction rate in advance, so the payer does not over-deduct in the first place, and cash is not tied up waiting for a refund.
The certificate also interacts with the foreign-remittance reporting regime. Under Forms 145 and 146 (formerly Forms 15CA and 15CB), a remittance exceeding INR 5 lakh normally needs a chartered accountant's certificate in Form 146 before Part C of Form 145 can be filed. Where the payer already holds an order or certificate under section 395(1) or section 395(2), the remittance instead goes through Part B of Form 145 — no Form 146 is required. A section 395 certificate therefore removes a compliance step, not just a tax cost.
Worked Example
A UK-resident individual sells unlisted shares in an Indian company and expects a capital loss on other Indian holdings to substantially offset the gain on this sale. Left alone, the Indian buyer would have to deduct TDS under section 393(2), computed with reference to the long-term capital gains provision at section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), on the sum the buyer treats as chargeable — leaving the seller to claim a refund of the excess only after filing an Indian tax return. Instead, the seller applies under section 395(1)(a), in the prescribed form, before the sale completes, disclosing the offsetting loss. If the AO is satisfied, it issues a certificate directing the buyer to deduct tax only on the net chargeable amount. The buyer deducts accordingly, and, because a section 395(1) certificate now exists, the remittance can go through Part B of Form 145 rather than needing a separate Form 146.
Frequently Asked Questions
Who can apply for a certificate under section 395(1)?
The payee — the person who will receive income or a sum on which tax would otherwise be deducted — applies. This includes non-resident recipients of interest, royalty, fees for technical services, or capital gains, and resident payees in appropriate cases. The application goes before the payee's Assessing Officer, or, from 1 April 2026, before the prescribed income-tax authority under the new section 395(6) route.
How is a section 395(1) certificate different from simply claiming a DTAA rate?
A DTAA treaty rate is self-applied by the payer once the recipient furnishes a Tax Residency Certificate, Form 41, and a beneficial-ownership declaration — no AO involvement is required. A section 395(1) certificate is instead an AO order fixing an exact rate, which can be lower than even the treaty rate if the recipient's actual liability justifies it, and it gives the payer certainty that the lower deduction will not later be challenged as under-deduction.
Does section 395(2) let the recipient of a payment apply as well?
No. Section 395(2) is exercised by the person responsible for paying a non-resident, not by the recipient. It is used where the payer — not the payee — considers that only part of a payment is chargeable to tax and wants the AO to fix the taxable proportion before deducting under section 393(2).
Does a section 395 certificate remove the need for TDS altogether?
Only if the certificate specifies nil deduction. Section 395(1)(b) lets the AO certify either a lower rate or no deduction at all, depending on what the payee's total income justifies; the payer follows whatever the certificate actually states, for as long as it remains valid.
What changed with section 395(6)?
The Finance Act, 2026 inserted section 395(6), letting a payee file the section 395(1)(a) application before a prescribed income-tax authority, in addition to the AO, for electronic verification, rather than requiring the AO route in every case. The operating rules for this route are still to be prescribed.
See also: Section 393(2) — TDS on Payments to Non-Residents, Withholding Tax, and Tax Deduction at Source.
Need a nil or lower withholding certificate for a payment out of India? Beacon Filing helps foreign investors prepare and file section 395 applications and the accompanying remittance forms.