Lower Withholding Certificate Under Section 395 of the Income Tax Act 2025: Reduce or Eliminate TDS on India Income
A Lower Withholding Certificate under Section 395 of the Income Tax Act 2025 is a formal certificate issued by the Assessing Officer authorising the Indian payer to deduct TDS at a lower rate — or make no deduction at all — on income paid to a non-resident or NRI. It replaces the mechanism under Section 197 of the Income Tax Act 1961. The certificate is applied for in Form 128 (replacing old Form 13) on the Income Tax portal. Without this certificate, TDS is deducted at the standard prescribed rate on the gross amount — which is frequently higher than the actual tax liability. For NRIs selling property in India, the standard TDS rate is 20% on long-term gains and 30% on short-term gains on the full sale consideration — often resulting in hundreds of thousands of rupees being deducted before the NRI receives any payment. A Section 395 certificate aligns the TDS with the actual capital gains tax liability, dramatically reducing the amount locked up in TDS refunds. Sorting Tax assists NRIs, non-resident companies and foreign entities in applying for Lower Withholding Certificates under Section 395.
| Income / Transaction Type | TDS Without Section 395 Certificate | TDS With Section 395 Certificate | Benefit |
|---|---|---|---|
| NRI Property Sale — Long-Term Capital Gains | 20% + surcharge + cess on full sale consideration | TDS on actual LTCG after deductions (can be nil or much lower) | Save lakhs in excess TDS |
| NRI Property Sale — Short-Term Capital Gains | 30% + surcharge + cess on full sale consideration | TDS at applicable slab rate on actual gains | Save on excess TDS |
| NRI Rental Income | 30% + surcharge on gross rent | Lower rate on net income after deductions | Avoid over-deduction |
| FTS / Royalty (non-resident company) | 20–25% + surcharge (domestic rate) | Lower rate under DTAA or justified by income | Save 5–15%+ |
| Interest on NRO Accounts / Bonds | 30% + surcharge on gross interest | Lower rate based on actual tax liability | Reduce monthly TDS |
Rates are illustrative. Actual rates depend on income type, applicable DTAA, holding period and individual tax position. Verify with your tax advisor. Section 395 applies from Tax Year 2026-27 under the Income Tax Act 2025.
What is a Lower Withholding Certificate Under Section 395?
A Lower Withholding Certificate — formally called a Certificate for Deduction of Tax at a Lower Rate or Nil Rate — is an authorisation issued by the Assessing Officer (AO) under Section 395 of the Income Tax Act 2025. Once issued, the Indian payer is legally required to deduct TDS at the rate specified in the certificate (or make no deduction at all) for the validity period of the certificate.
Section 395 of the Income Tax Act 2025 replaces Section 197 of the Income Tax Act 1961, which was the longstanding provision for lower/nil TDS certificates. The substantive purpose is identical — the mechanism gives the payee (the person receiving the income) the ability to apply to the AO to calibrate TDS to their actual tax liability rather than having TDS deducted at the prescribed gross rate.
A significant improvement under Section 395(1) of the new Act: the option to apply for a lower/nil certificate is now extended to ALL TDS provisions — not just the specified provisions as under Section 197(1) of the old Act. This means more income types and more situations now qualify for this relief.
The application is made in Form 128 (replacing old Form 13), filed electronically on the Income Tax portal. PAN is mandatory — a certificate under Section 395 will not be granted without a valid PAN.
Key facts:
- Section: 395(1) of the Income Tax Act 2025
- Replaces: Section 197 of the Income Tax Act 1961
- Application form: Form 128 (replaces Form 13)
- Filed on: Income Tax portal / TRACES
- PAN: Mandatory
- Applies from: Tax Year 2026-27 (1 April 2026 onwards)
- Volume: Approximately 1.2 lakh Form 13 applications per year under old Act
Who Needs a Lower Withholding Certificate and Why?
The core problem that Section 395 solves is this: TDS under Section 393 of the Income Tax Act 2025 is deducted at the prescribed rate on the gross payment — but the payee’s actual tax liability may be significantly lower, for a variety of reasons:
Reason 1 — Deductions and Exemptions Reduce Actual Liability:
On a property sale, TDS is deducted on the full sale consideration at 20% or 30%. But the actual capital gains tax may be a fraction of that amount once the cost of acquisition, improvement costs, indexation benefit and exemptions (such as reinvestment in another property or bonds) are applied. A Section 395 certificate aligns TDS with the net tax liability.
Reason 2 — DTAA Benefit Reduces the Rate:
A non-resident foreign company receiving FTS or royalties from India is subject to domestic TDS at 20–25%. But under the applicable DTAA, the rate may be 10–15%. While Form 41 and a TRC enable the payer to apply the lower DTAA rate, a Section 395 certificate provides a formal AO-approved authorisation — offering stronger certainty and avoiding disputes.
Reason 3 — No or Minimal Tax Liability Overall:
Some NRIs have total India income that falls below the taxable threshold after deductions — yet TDS is deducted at the full prescribed rate. A Section 395 certificate can authorise nil deduction.
Reason 4 — Cash Flow:
Without a certificate, excess TDS is locked in the Indian tax system until a refund is processed — which typically takes 12 to 24 months. A Section 395 certificate prevents the over-deduction from occurring in the first place.
Who should apply:
- NRIs selling residential or commercial property in India
- NRIs with rental income from Indian property
- NRIs receiving interest on NRO accounts,bondsor other instruments
- Non-resident foreign companies receiving large FTS,royaltyor interest payments from India
- Any non-resident whose actual India tax liability is demonstrably lower than the TDS that would otherwise be deducted
Documents Required to Apply for a Section 395 Lower Withholding Certificate
The following documents are generally required when filing Form 128 for a Lower Withholding Certificate under Section 395:
For All Applicants:
- PAN — mandatory. A certificate under Section 395 will not be issued without a valid PAN.
- Income Tax Returns filed for the last 2 to 3 years (as available)
- Details of estimated India income for the current Tax Year — specifying the nature of income and the payer
- Computation of estimated total income and tax liability for the Tax Year
- Details of TDS already deducted or likely to be deducted in the current Tax Year
For NRIs Selling Property:
- Property sale agreement or registered sale deed
- Original purchase deed and supporting documents showing cost of acquisition
- Documents supporting cost of improvement (if any)
- Computation of capital gains — specifying holding period, indexed cost, deductions claimed
- Details of exemption claimed (e.g.Section 84 / Section 86 of the new Act — equivalent to Sections 54 and 54EC of the old Act) with supporting documentation
- Bank account details for refund if applicable
For NRIs with Rental Income:
- Rental agreement / lease deed
- Evidence of property tax and maintenance expenses
- Computation of net rental income after standard deduction and other allowable deductions
For Non-Resident Companies (FTS / Royalty / Interest):
- Agreement or contract specifying the nature of service / royalty / interest
- TRC and Form 41 (establishing DTAA eligibility)
- Computation showing DTAA rate is lower than domestic rate
- Details of Indian payer and expected payments
Note: The AO may request additional documents. Complete and consistent documentation accelerates the AO’s satisfaction and reduces the risk of rejection.
NRI Property Sale — Why a Section 395 Certificate is Critical
This is the single most important use case for a Section 395 Lower Withholding Certificate. Consider the following scenario:
An NRI sells a property in India for ₹1 crore. The indexed cost of acquisition is ₹70 lakh. The actual long-term capital gains are ₹30 lakh. But under Section 393 of the Income Tax Act 2025, the buyer is required to deduct TDS at 20% plus surcharge on the full sale consideration of ₹1 crore — meaning approximately ₹20 lakh to ₹21 lakh in TDS is deducted before the NRI receives the balance.
The actual capital gains tax on ₹30 lakh LTCG, after applicable deductions, may be ₹6 lakh or less. Without a Section 395 certificate, the NRI overpays approximately ₹14 to ₹15 lakh in TDS and must wait 12 to 24 months to claim a refund from the Income Tax Department.
With a Section 395 certificate, the AO can authorise TDS at a rate calibrated to the actual capital gains — for example, 6% or 7% on the sale consideration, or on the net gain amount — dramatically reducing the cash flow burden.
Common situations where NRIs apply for a Section 395 certificate on property sale:
- Property held for more than 2 years — eligible for LTCG rate with indexation benefit
- Property reinvestment planned — exemption under equivalent of Section 54 of old Act expected to reduce oreliminatetax liability
- Investment in capital gains bonds planned — exemption under equivalent of Section 54EC of old Act
- Purchaseprice and improvement costs are substantial — actual gains are low relative to sale value
Timing is critical: A Section 395 certificate application should be filed well before the property sale is executed — ideally 4 to 8 weeks in advance. The AO takes time to process the application and the certificate must be in hand before the buyer deducts TDS.
Non-Resident Companies — Section 395 Certificate for FTS, Royalties and Interest
For non-resident companies receiving Fee for Technical Services (FTS), royalties, interest or other income from India, a Section 395 Lower Withholding Certificate offers an alternative — and sometimes more robust — path to reducing TDS compared to relying solely on Form 41 and a TRC.
While Form 41 + TRC enables the Indian payer to apply the DTAA rate directly, a Section 395 certificate from the AO provides a formal authorisation that eliminates any risk of the payer applying the wrong rate or being challenged by the Tax Department. When a Section 395 certificate is in hand, the Indian payer files Form 145 Part B (not Part C with Form 146) — saving both time and the cost of the CA certificate.
Situations where a Section 395 certificate is particularly useful for non-resident companies:
- Large recurring payments — where a full-year AO certificate avoids the need for a Form 146 CA certificate on each payment exceeding ₹5 lakh
- Situations where the applicable DTAA rate isnilor very low — where a formal AO certificate provides more certainty than a self-declared treaty claim
- Payments where the payer’s accounts team or bank has historically been conservative and insisted on formal AO certificates
- NRO account repatriation — where the interest or incomecomponentrequires formal TDS documentation
Connection to Form 145:
When a Section 395 certificate is obtained, the Indian payer uses Form 145 Part B for the remittance — instead of Part C with Form 146. This means Sorting Tax’s assistance with Section 395 directly reduces the compliance cost for both the non-resident and their Indian customers.
How to Apply for a Lower Withholding Certificate — Form 128 Step by Step
Step 1 — Obtain PAN (if not already held):
PAN is mandatory for a Section 395 certificate. If you do not have an Indian PAN, obtain one before applying. Sorting Tax can assist NRIs and non-resident companies with PAN procurement.
Step 2 — Prepare the Computation of Tax Liability:
Prepare a computation showing your estimated India income for the Tax Year, the applicable deductions and exemptions, and your estimated total tax liability. This computation forms the basis of the AO’s satisfaction that a lower rate is justified.
Step 3 — Gather Supporting Documents:
Compile all supporting documents — sale agreement, purchase documents, rental agreement, contract, ITRs, TRC, Form 41 as applicable. The stronger the documentation, the faster the AO’s processing.
Step 4 — File Form 128 Electronically:
Log in to the TRACES portal (tdscpc.gov.in) or the Income Tax e-filing portal (incometax.gov.in). Navigate to File Forms and select Form 128. Form 128 can be filed anytime during the Tax Year for which the
certificate is required. Complete the form with applicant details, income details, payer details, computation summary and upload supporting documents.
Step 5 — E-Verify and Submit:
Verify using DSC or EVC. Submit. Download the acknowledgement.
Step 6 — AO Processing:
The Assessing Officer reviews the application. The process may be automated for straightforward applications with predefined eligibility rules. For complex cases, the AO may issue a notice seeking clarification or additional documents. Respond promptly to any AO communication to avoid delay.
Step 7 — Certificate Issued:
On being satisfied, the AO issues the Lower Withholding Certificate specifying the rate (or nil rate) at which TDS is to be deducted and the validity period of the certificate.
Step 8 — Share Certificate with Indian Payer:
Provide the certificate to your Indian payer (buyer, tenant, company etc.) before the payment is made. The payer is then legally required to deduct TDS at the certified rate. For remittances, the payer files Form 145 Part B using the AO certificate reference.
Timing: Apply well in advance — ideally 4 to 8 weeks before the payment is due. Processing time depends on the AO’s office and the complexity of the application.
Legal Framework — Section 395 and Form 128 Under the Income Tax Act 2025
Section 395(1) — Lower or Nil TDS Certificate (Payee Application):
Where tax is required to be deducted on any income or sum under the TDS chapter of the Income Tax Act 2025, the payee may apply to the AO for deduction at a lower rate or no deduction. The AO, on being satisfied that the total income of the payee justifies the lower rate, shall issue the certificate. Once issued, the payer must deduct at the certified rate until the certificate’s validity expires.
Key enhancement over old Section 197: Section 395(1) now applies to ALL TDS provisions — under the old Act, Section 197(1) applied only to specified provisions. This expansion means more income types and more categories of payees can now apply for a lower/nil certificate.
Section 395(2) — Payer’s Application for Determination of Appropriate Rate:
The Indian payer making a payment to a non-resident under Section 393(2) (Table: Sl. No. 8 — payments to non-residents) may also apply to the AO for determination of the appropriate TDS rate. This provision allows the payer (not just the payee) to seek AO guidance on the correct rate. A certificate issued under Section 395(2) also enables Part B filing of Form 145.
Section 395(3) — Lower TCS Certificate (Buyer Application):
A buyer, licensee or lessee may apply for a lower Tax Collection at Source (TCS) certificate. This is the TCS equivalent of Section 395(1).
Form 128 — Application Form:
Form 128 replaces Form 13 under the Income Tax Act 1961. Filed electronically on TRACES or the Income Tax portal. Mandatory PAN required.
Transitional Provision:
Certificates issued under Section 197 of the Income Tax Act 1961 remain valid for payments/credits made on or after 1 April 2026, provided they were issued for projected receivables for Tax Year 2026-27. After the validity period expires, a fresh Form 128 application under Section 395 must be filed.
Real-World Examples: How a Section 395 Certificate Reduced TDS
Example 1 — NRI Property Sale, Mumbai (Tax Year 2026-27):
Mr. A, a UAE-based NRI, sold a residential flat in Mumbai for ₹2.5 crore. The property was purchased in 2012 for ₹80 lakh. Without a Section 395 certificate, the buyer would have deducted TDS of approximately ₹52 lakh (20% + surcharge on ₹2.5 crore). Sorting Tax filed Form 128 for Mr. A. The AO computed the actual LTCG as approximately ₹60 lakh after indexation, and the tax liability as approximately ₹12 lakh. The AO issued a certificate authorising TDS at a rate calibrated to ₹12 lakh — saving Mr. A approximately ₹40 lakh in excess TDS and a 2-year wait for a refund.
Example 2 — Non-Resident Company, Recurring FTS (Tax Year 2026-27):
XYZ Inc., a US company, receives FTS from Indian clients totalling ₹3 crore per year. Without a certificate, Indian clients deduct TDS at 25% (domestic rate) — ₹75 lakh. XYZ Inc. holds a US TRC and had filed Form 41 for a lower DTAA rate. Sorting Tax also filed Form 128 for XYZ Inc. under Section 395. The AO issued a certificate authorising deduction at the India-US DTAA rate. Indian clients now file Form 145 Part B — no Form 146 CA certificate needed for each remittance — simplifying compliance significantly.
Example 3 — NRI Rental Income (Tax Year 2026-27):
Ms. B, a UK-based NRI, receives monthly rent of ₹1.5 lakh from a commercial property in Bengaluru. The tenant was deducting TDS at 30% each month — approximately ₹45,000 per month. Sorting Tax filed Form 128 for Ms. B computing her actual net rental income after standard deduction and property tax — resulting in a lower effective rate. The AO issued a certificate reducing the TDS rate significantly, improving Ms. B’s monthly cash flow by approximately ₹20,000.
Conclusion
A Lower Withholding Certificate under Section 395 of the Income Tax Act 2025 is one of the most impactful tax planning tools available to NRIs and non-residents with India income. It directly addresses the most common complaint in NRI taxation — the mismatch between the TDS deducted on the gross transaction and the actual tax liability on the net income.
For NRIs selling property, the certificate can save tens of lakhs of rupees in excess TDS and eliminate the need for a lengthy refund process. For non-resident companies receiving recurring FTS or royalties, the certificate simplifies the entire compliance chain — enabling Form 145 Part B filing and removing the need for a CA Form 146 certificate on every large remittance.
The transition from Section 197 and Form 13 to Section 395 and Form 128 under the Income Tax Act 2025 is effective from Tax Year 2026-27. The substantive process is the same, but the form number and legal references have changed. Old Section 197 certificates remain valid where they were issued for Tax Year 2026-27 receivables.
Sorting Tax handles the complete Section 395 application process — from eligibility assessment and computation preparation to Form 128 filing, AO correspondence and certificate delivery. Contact us today or click the WhatsApp button to speak to our team.
FAQ — Lower Withholding Certificate Section 395 Income Tax Act 2025
1. What is a Lower Withholding Certificate under Section 395?
A Lower Withholding Certificate under Section 395 of the Income Tax Act 2025 is an authorisation issued by the Assessing Officer permitting the Indian payer to deduct TDS at a lower rate — or nil — on income paid to a non-resident or NRI. It replaces the mechanism under Section 197 of the Income Tax Act 1961. The application is made in Form 128 (replacing Form 13). A key improvement: Section 395(1) now covers ALL TDS provisions, not just specified ones as under the old Section 197(1).
2. Who can apply for a Lower Withholding Certificate under Section 395?
Any person — resident or non-resident — who is subject to TDS on income from India and whose actual tax liability is lower than the TDS that would otherwise be deducted can apply. Common applicants include: NRIs selling property in India, NRIs with rental income, NRIs earning interest on NRO accounts, and non-resident companies receiving FTS, royalties or interest from India.
3. What is Form 128 and what does it replace?
Form 128 is the application form under the Income Tax Act 2025 for a Lower Withholding Certificate. It replaces Form 13 under the Income Tax Act 1961. It is filed electronically on the TRACES portal or the Income Tax e-filing portal. PAN is mandatory — a certificate under Section 395 will not be issued without a valid PAN.
4. Is PAN mandatory for a Section 395 certificate?
Yes. PAN is mandatory. A certificate under Section 395(1) will not be issued without a valid PAN. If you do not have an Indian PAN, you must obtain one before applying. Sorting Tax can assist NRIs and non-resident companies with PAN procurement.
5. Why does an NRI selling property in India need a Section 395 certificate?
Without a Section 395 certificate, the buyer must deduct TDS at 20% plus surcharge on long-term capital gains (or 30% for short-term) on the FULL sale consideration — regardless of the actual capital gains amount. Since TDS is calculated on gross sale value, it frequently far exceeds the actual tax liability once the cost of acquisition, indexation, and exemptions are applied. A Section 395 certificate aligns TDS with the actual tax liability, potentially saving lakhs of rupees in excess TDS and eliminating the need for a lengthy refund process.
6. When should I apply for a Section 395 certificate before selling property?
Apply well in advance — ideally 4 to 8 weeks before the property sale is executed. The AO needs time to review the application and issue the certificate. The certificate must be in the buyer’s hands before TDS is deducted. Filing after the sale has already been executed and TDS deducted is too late — you would then need to claim a refund through the return process.
7. What is the difference between Section 395 and using Form 41 + TRC for DTAA benefit?
Form 41 and a TRC are self-declared documents provided by the non-resident to the Indian payer — enabling the payer to apply the DTAA rate directly. A Section 395 certificate is an AO-issued authorisation — more formal and authoritative. Both approaches can reduce TDS, but a Section 395 certificate also allows Form 145 Part B filing (eliminating the need for CA Form 146) and provides stronger protection against TDS disputes. For large recurring payments, a Section 395 certificate combined with Form 41 offers the most complete protection.
8. How does a Section 395 certificate affect Form 145 filing?
When a Section 395 certificate is held, the Indian payer files Form 145 Part B (instead of Part C with Form 146). This means the CA certificate in Form 146 is NOT required — saving the cost and time of obtaining a CA certificate for each remittance exceeding ₹5 lakh. This is a significant practical benefit for Indian companies making recurring large payments to the same non-resident.
9. How long does it take to get a Section 395 certificate?
Processing time depends on the AO’s office and the complexity of the application. For straightforward applications with complete documentation, the certificate may be issued within 2 to 4 weeks. For complex cases or where the AO raises queries, it may take 6 to 8 weeks. Sorting Tax monitors the application and responds to AO queries promptly to minimise delays.
10. How long is a Section 395 certificate valid?
The certificate is valid for the period specified by the AO, typically for the full Tax Year for which it is issued (i.e. until 31 March of that year). The AO may also issue a certificate for a specific transaction or a shorter period. The payer must apply the certified rate only during the validity period — after expiry, the standard TDS rate resumes unless a fresh certificate is obtained.
11. Will my old Section 197 certificate remain valid after 1 April 2026?
Yes. A certificate issued under Section 197 of the Income Tax Act 1961 remains valid for payments and credits made on or after 1 April 2026, provided it was issued for projected receivables for Tax Year 2026-27. After the validity period of the old certificate expires, a fresh Form 128 application under Section 395 must be filed for subsequent Tax Years.
12. What income types can benefit from a Section 395 certificate?
Under the expanded Section 395(1) of the Income Tax Act 2025, ALL income types subject to TDS can potentially benefit — this is a significant widening from old Section 197(1) which covered only specified TDS provisions. Common income types include: NRI property sale capital gains, rental income, interest income (NRO account, bonds, loans), FTS and royalties (for non-resident companies), dividends and business income (where TDS applies).
13. Can a non-resident company apply for a Section 395 certificate?
Yes. Both residents and non-residents can apply under Section 395. Non-resident companies receiving FTS, royalties or interest from India regularly use Section 395 certificates — particularly where they want a formal AO authorisation rather than relying solely on self-declared DTAA benefit through Form 41 and TRC, or where the convenience of Form 145 Part B filing (no Form 146 needed) is valued.
14. Can Sorting Tax help apply for a Section 395 Lower Withholding Certificate?
Yes. Sorting Tax handles the complete Section 395 application process — eligibility assessment, tax computation, Form 128 preparation, document compilation, TRACES/portal filing, AO correspondence and certificate delivery. We also assist with PAN procurement for NRIs who do not yet have an Indian PAN. Contact us before your property sale, remittance deadline or payment date to ensure the certificate is in place on time.
