Lower TDS Certificate: How Form 128 (Section 395) Stops Excess TDS Before It Starts

A contractor bills ₹10 lakh for a project. At the normal 2% TDS rate for a resident contractor, the client would deduct ₹20,000. But if the contractor’s total income for the year is below the taxable limit, that ₹20,000 is not tax at all — it is an interest-free loan to the government until the return is processed. Form 128 exists to stop that.

What Form 128 does

Form 128 is the application for a certificate under section 395 for deduction of tax at a lower rate. The taxpayer applies to the Assessing Officer through TRACES, showing estimated total income, tax payable, and the income on which lower deduction is sought. If the officer is satisfied, a certificate is issued specifying the rate — which can be nil — and the period and the payer it covers.

The certificate does not change the tax liability. It only changes when the tax is collected: at the lower rate now, instead of the full rate now and a refund later.

Who should apply

• Taxpayers whose total income is below the basic exemption limit but who receive income subject to TDS.
• Businesses and professionals with thin margins, where TDS at the standard rate exceeds the actual liability.
• Senior citizens and others with large deductions that bring taxable income down sharply.
• Anyone whose income is exempt or taxed at a lower rate under a specific provision.

A worked example

Take the contractor above. Suppose her estimated total income for the year is ₹4,80,000, after deductions under sections 80C and 80D. Her tax payable is nil. Without a certificate, the client deducts ₹20,000 on the ₹10 lakh bill. With a nil-rate certificate under Form 128, the client deducts nothing. The contractor keeps ₹20,000 in working capital instead of waiting until July of the next year for a refund — and the same logic applies to interest, commission, professional fees and rent, at their respective rates.

Contrast that with a consultant who estimates tax payable of ₹1,20,000 on total income of ₹14,00,000, and expects gross receipts of ₹20 lakh subject to 10% TDS (₹2,00,000). A certificate at 6% would align deduction (₹1,20,000) with liability, instead of over-collecting ₹80,000.

How to apply on TRACES

1. Log in to TRACES and select the Form 128 application for lower deduction.
2. Enter the estimated total income, deductions claimed, and tax payable for the year.
3. Specify the nature of income, the payer’s TAN, and the expected amount.
4. Submit and track the application. The officer may ask for supporting documents.
5. On issue, download the certificate and give a copy to the payer before the payment is made.

Apply early in the year, or at least before the first payment in the series. A certificate does not apply retrospectively to TDS already deducted.

Documents to keep ready

• Computation of estimated total income and tax for the year.
• Returns of the last two years, if available.
• Details of income already received and TDS already deducted.
• Books or statements supporting the estimate.

Certificate ≠ Form 15G/15H

Forms 15G and 15H are self-declarations for nil TDS in specific cases (mainly interest, where conditions are met). Form 128 is wider: it is officer-issued, can specify any lower rate (not only nil), and covers all types of income subject to TDS. If you do not qualify for 15G/15H, Form 128 may still help.

Mistakes that get applications rejected

• Applying after the payment is already made.
• Estimates that do not match the returns of previous years, with no explanation.
• Asking for nil when some tax is clearly payable.
• Forgetting to give the certificate to the payer — the payer must deduct at the standard rate without it.

Form 128 is not a licence to deduct at the lower rate for everyone. It is payee-specific, payer-specific, and transaction-specific. A certificate from the Mumbai officer cannot be used in Delhi. Give the certificate to the right payer before the first payment is credited, and retain a copy for your records.

FAQs

Is Form 13 still valid, or is it Form 128 now?
Under the Income-tax Act, 2025, the application is Form 128. Older references to Form 13 under the 1961 Act are superseded for new applications.

Can I apply mid-year?
Yes, but the certificate covers only payments made after it is issued.

Does the certificate cover all my payers?
No. Each payer and each stream of income needs to be covered by the certificate.

What if my income turns out higher than estimated?
The shortfall is collected through advance tax and self-assessment tax, with interest if applicable. Estimate honestly.

Sources

Section 395, Income-tax Act, 2025; Rule 28AB and Form 128; Notification No. S.O. 4023(E) dated 1 October 2025 (TRACES procedure); CBDT Circular on lower deduction certificates, FY 2025–26.