Form 128 for Lower or Nil TDS: Eligibility, Application Logic and Practical Checklist

A lower or nil withholding certificate is useful when the tax that would ordinarily be deducted from receipts is materially higher than the taxpayer's expected final tax liability. Instead of suffering excess TDS and waiting for a refund, an eligible payee can apply for a certificate authorising deduction at a lower rate or, where justified, at nil rate.

For Tax Year 2026-27, the Income Tax Department's official transition FAQ on income-tax forms explains that the corresponding provision is section 395(1) of the Income-tax Act, 2025 and that the payee applies in Form 128. The Assessing Officer may issue a certificate after being satisfied that the taxpayer's estimated total income justifies lower or nil deduction.

What Form 128 is used for

Form 128 is the application prescribed under the Income-tax Rules, 2026 for a certificate for lower or nil deduction under section 395(1), and also for lower collection under section 395(3). The Department's official forms guidance index maps Form 128 to old Form 13, making the transition easier for professionals familiar with the earlier section 197 process.

The notified Income-tax Rules, 2026 reproduce Form 128 and state that it is to be filed electronically by the person seeking a certificate for no deduction, lower deduction or lower collection, as applicable.

Lower or nil certificate versus a self-declaration

A lower or nil certificate should not be confused with a self-declaration such as Form 121, which replaced the earlier Form 15G/15H framework for Tax Year 2026-27. Form 121 is a declaration by an eligible recipient that the tax on estimated total income is nil for specified receipts. Form 128 is an application to the tax authority, and the Assessing Officer decides whether a certificate should be issued and at what rate.

This distinction matters when a taxpayer expects a low effective tax rate but does not satisfy the conditions for a self-declaration. A Form 128 application may still be relevant if the estimated total-income position supports a lower withholding rate.

Who should consider applying?

The practical candidates are taxpayers whose gross receipts attract withholding at a rate that is disproportionate to their expected taxable income or final tax liability. Examples can include businesses with thin taxable margins, taxpayers with substantial carried-forward or current-year adjustments that legitimately reduce taxable income, and recipients whose transaction profile causes significant excess withholding.

The certificate is not automatic. The taxpayer must support the projected income and tax position sufficiently for the Assessing Officer to be satisfied that lower or nil deduction is justified.

What information does Form 128 ask for?

The notified form begins with the tax year and applicant details such as name, address, status, PAN, residential status, email and contact information. It also identifies the applicant category and the nature of the request. The application is designed around the taxpayer's projected receipts and tax position, so the supporting working should be prepared before filing rather than reconstructed only after a query is raised.

A strong application file should normally reconcile projected revenue or receipts, estimated taxable income, taxes already deducted or collected, advance tax or other tax payments where relevant, and the withholding expected on the remaining receipts.

Worked example

Assume a professional services company expects gross customer receipts of ₹2 crore during the tax year. Customers will deduct tax at the applicable statutory rates, but after employee costs, rent, technology expenses, depreciation and other allowable items, the company's estimated taxable income is much lower than the gross receipts suggest. If ordinary withholding would create a large excess tax credit and refund position, the company can evaluate a Form 128 application supported by a defensible projected tax computation.

The right approach is not to ask for nil deduction merely to improve cash flow. The requested rate should follow from the estimated total-income and tax working. If the facts support only a lower rate rather than nil deduction, the application should reflect that reality.

How the process works

1. Estimate the full-year tax position: prepare a realistic projection of receipts, income, deductions and tax rather than looking at one invoice in isolation.
2. Quantify expected withholding: identify customers or payers, payment categories and the tax likely to be deducted without a certificate.
3. Prepare Form 128: use the prescribed electronic application for the relevant tax year.
4. Support the application: keep financial statements, current-year projections, tax computations, prior-year returns and other evidence consistent with the figures stated.
5. Respond to tax-authority queries: explain unusual margin movements, losses, deductions or changes in business conditions with documentary support.
6. Use the certificate exactly as issued: once granted, communicate the applicable certificate details and rate to the relevant payer and monitor deductions against its validity.

What happens to certificates issued under the old Act?

The Department's transition FAQ specifically states that a lower or nil withholding certificate issued under section 197 of the Income-tax Act, 1961 can remain valid for payments or credits made on or after 1 April 2026 if it was issued in respect of projected receivables for Tax Year 2026-27. Businesses should therefore check the certificate's tax-year scope and validity rather than assuming that every old-section certificate became unusable on 1 April 2026.

Controls after the certificate is received

• Check the validity period and rate: do not apply the certificate beyond what the order permits.
• Match payer details where relevant: ensure the certificate is being used for the receipts and parties it covers.
• Reconcile actual TDS: compare customer deductions with the certificate and tax-credit data during the year.
• Reforecast if the business changes materially: a certificate based on one projected income profile should not become an excuse to ignore a major improvement in profitability or a change in receipts.
• Preserve the approval trail: keep the application, supporting workings, queries, responses and final certificate together for audit and tax-computation purposes.

Common mistakes to avoid

• Applying only because a refund arose in the previous year without preparing a current-year projection.
• Requesting nil deduction when the estimated tax position supports only a reduced rate.
• Confusing Form 128 with the self-declaration route under Form 121.
• Giving customers an expired or inapplicable certificate.
• Failing to reconcile deductions after the certificate is issued.
• Using unsupported revenue, margin or deduction assumptions in the projected tax computation.

Practical takeaway

Form 128 is a cash-flow and withholding-alignment mechanism, not a tax exemption. For Tax Year 2026-27, a payee whose estimated total income justifies lower or nil deduction can apply under section 395(1), with the Assessing Officer deciding the rate and validity of the certificate. The strongest application starts with a credible full-year tax projection, quantifies the excess withholding problem, supports the assumptions with records and then monitors actual deductions after the certificate is issued.