Which Types of Income Qualify for Lower or Nil TDS?
- Adv. Siddharth Sachan
- Apr 7
- 9 min read
Updated: Apr 7
In India, Tax Deducted at Source (TDS) is a key mechanism for ensuring tax compliance. However, not all types of income are subject to the standard TDS rates. Certain incomes, such as interest, dividends, and professional fees, may qualify for lower or nil TDS deductions based on the recipient's total income or estimated tax liability. This is particularly beneficial for individuals whose income is below the exemption limit or those who can demonstrate lower tax liabilities. Understanding how to qualify for lower or nil TDS can help taxpayers reduce their tax burden and ensure compliance with tax laws.
Table of Contents
What Is the Core Principle – When Can TDS Be Lower or Nil?
Tax Deducted at Source (TDS) is typically deducted at the prescribed rates on various types of payments made to individuals. However, certain incomes qualify for lower or even nil TDS under specific circumstances. This can occur when the recipient’s total taxable income is below the basic exemption limit or when their estimated tax liability, after applying deductions, is lower than the standard TDS rate.
To obtain such relief, taxpayers can either request a lower TDS rate by applying for a Section 197 certificate or submit a self-declaration (Form 15G or 15H) to the deductor. Forms 15G and 15H are typically used for incomes such as interest or dividends when the total income of the recipient is below the basic exemption threshold.
Income Types That Can Qualify for Lower or Nil TDS
Various income types in India qualify for lower or nil TDS deductions under certain conditions, which can significantly reduce the tax burden for individuals and entities. Here's how it works for different income types:
Salary: If a person's total income is below the basic exemption limit (₹2.5 lakh for individuals below 60 years, ₹3 lakh for senior citizens, and ₹5 lakh for super senior citizens), no TDS is deducted. The individual can submit Form 12BB to the employer to claim a reduction in TDS, ensuring that the employer doesn’t deduct any tax at source.
Interest on Securities: Interest earned from securities, such as bonds or debentures, is subject to TDS under Section 193. However, if the total interest income is below the exemption threshold (₹10,000 for regular taxpayers), no TDS is applicable. To prevent TDS, taxpayers can submit Form 15G or 15H (for senior citizens) to the deductor if their total income is below the taxable limit. This allows them to avoid TDS on interest income from securities.
Dividends: Dividends paid by companies are subject to a 10% TDS under Section 194, but if the recipient’s total income is below the exemption limit, they can submit Form 15G or 15H to avoid TDS. For individuals whose income exceeds the exemption threshold, TDS at the standard rate will be applicable, unless they provide a Section 197 certificate for a lower rate.
Rent: TDS is applicable on rent payments under Section 194I, at a rate of 10% for land and building rent. However, if the recipient’s total income is low and below the exemption limit, they can apply for a Section 197 certificate to reduce the TDS rate. If their income is sufficiently low, Form 15G/15H can be submitted to avoid TDS.
Professional Fees: TDS on professional or technical fees is deducted under Section 194J at a rate of 10%. If the recipient’s tax liability is low, they can apply for a Section 197 certificate, allowing them to get a lower TDS rate. For instance, freelancers or consultants who have significant deductions may not need to pay the full TDS rate if their effective tax liability is lower.
In all these cases, either submitting a Section 197 certificate or filing Form 15G/15H allows taxpayers to reduce or eliminate TDS deductions, ensuring they are taxed according to their actual liability rather than the standard rates. This helps minimise upfront tax deductions and improves cash flow, especially for those with lower or no taxable income.
How to Obtain a Lower/Nil TDS Certificate (Section 197)
Section 197 of the Income Tax Act provides a mechanism for taxpayers to apply for a lower or nil TDS deduction on certain types of income, such as salary, interest, rent, professional fees, and dividends, if their total tax liability is lower than the prescribed TDS rate. This process allows taxpayers to avoid over-deduction of TDS and ensure that only the correct amount of tax is paid.
To obtain a lower or nil TDS certificate under Section 197, the taxpayer must initiate the process by filling out Form 13, which is available on the TRACES (TDS Reconciliation Analysis and Correction Enabling System) website. This form requires the taxpayer to provide key details about their expected income for the year, including the type of income, estimated tax deductions, and other exemptions they plan to claim (such as deductions under Section 80C or 80D).
Along with Form 13, the taxpayer must submit the necessary documents to support their application. This includes details of income from the previous year, the proposed income for the current year, and a calculation of the estimated tax payable after applying relevant deductions. If applicable, the taxpayer should also provide copies of tax exemption certificates, such as those under Section 10 or Section 11, if any, to further substantiate their claim for a reduced TDS rate.
Once the application is submitted, the Assessing Officer (AO) at the Income Tax Department reviews the details provided. The AO examines the income projections, tax calculations, and supporting documents to ensure that the taxpayer qualifies for a lower or nil TDS rate. After verification, the AO issues the Section 197 certificate, which specifies the reduced TDS rate. This certificate is then shared with the deductor (the entity making the payment), who will use it to apply the lower TDS rate on the taxpayer's income.
The Section 197 certificate is valid for the entire financial year or until it is revoked by the Income Tax Department. It allows the taxpayer to pay taxes in a manner that aligns with their actual tax liability, rather than having excess TDS deducted. It is important to note that the certificate must be applied for before any TDS is deducted, as the deduction at a lower rate will only be effective if the deductor is informed in advance.
In summary, obtaining a Section 197 certificate involves completing Form 13, submitting supporting documentation, undergoing verification by the Assessing Officer, and receiving the certificate, which ensures that the correct amount of TDS is deducted. This process is essential for taxpayers who want to prevent overpayment of taxes and ensure compliance with the Income Tax Act.
Recent Updates (Budget 2026 & FY 2025-26)
The Union Budget 2026 introduced several updates that impact TDS and the threshold for various income types:
New Tax Regime Default: From FY 2025-26, the new tax regime with a ₹4 lakh exemption limit for individual taxpayers has been made the default.
Raised Thresholds for TDS: The thresholds for various TDS-deductible incomes, such as interest on securities, rent, and professional fees, have been raised.
New TDS Section 194T: A new TDS section for payments to partners was introduced with a 10% rate and a threshold of ₹20,000.
TDS on Online Gaming Winnings: Online gaming winnings are still taxed at a flat 30% rate with no lower TDS option.
These changes provide more opportunities for taxpayers to apply for lower or nil TDS, especially when their total income is below the exemption limit.
Practical Checklist for Taxpayers
Taxpayers looking to ensure they are eligible for lower or nil TDS can follow this checklist:
Estimate Total Income: Calculate your total income for the financial year, including salary, interest, rent, and dividends.
Apply Deductions: Ensure all eligible deductions under Sections 80C, 80D, and others are applied to reduce taxable income.
Submit Form 15G/15H: If your income is below the exemption limit, submit Form 15G or 15H to the relevant deductor.
Apply for Section 197 Certificate: For incomes such as rent, professional fees, and capital gains, apply for a Section 197 certificate via Form 13.
Verify TDS Deduction: Check your Form 26AS regularly to ensure the TDS is being deducted at the correct rate.
Following these steps will ensure that taxpayers are not overcharged and can reduce unnecessary TDS deductions.
Where to Find the Latest, Authoritative Information
For up-to-date and authoritative information on TDS rates, the following resources are recommended:
Income Tax Department: The official portal provides the most current TDS rates and any legal changes.
Tax Filing Platforms: Websites like TaxBuddy and ClearTax offer detailed breakdowns of TDS rates and how to apply for lower or nil TDS.
TRACES Website: The official website for TDS-related requests and certificates under Section 197.
These sources will keep taxpayers informed about the latest rules, forms, and guidelines to manage TDS effectively.
Conclusion
Managing TDS effectively is crucial to avoiding overpayments. Taxpayers can reduce TDS deductions by understanding when they qualify for lower or nil TDS and by using the correct forms and applications. Applying for a Section 197 certificate or submitting Form 15G/15H ensures that taxpayers are not overburdened with tax deductions that do not align with their income.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. What is the difference between lower TDS and nil TDS?
Lower TDS refers to TDS being deducted at a reduced rate, while nil TDS means no TDS is deducted. Both are applicable under specific conditions, such as when the taxpayer's income is below the exemption limit or their total tax liability is less than the standard TDS deduction.
Q2. How can I apply for lower TDS?
To apply for lower TDS, you can request a Section 197 certificate from the Income Tax Department using Form 13. This certificate allows the deductor to apply a lower TDS rate based on your estimated income and tax liability.
Q3. What income qualifies for nil TDS under Form 15G/15H?
Form 15G is applicable for individuals under 60 years of age, and Form 15H is for senior citizens above 60 years. Both forms are used when the taxpayer’s total income is below the exemption limit, and no tax is payable. These forms can be submitted to the deductor to prevent TDS on income like interest, dividends, and pension.
Q4. Can I use Form 15G for rent income?
No, Form 15G cannot be used for rent income. Rent payments are subject to TDS under Section 194I, and you must apply for a Section 197 certificate for a lower TDS rate if your tax liability is lower than the standard TDS rate.
Q5. How do I apply for Form 15G or Form 15H?
Form 15G or Form 15H should be submitted to the deductor before the first interest payment or dividend credit. These forms declare that your total income is below the exemption limit, so no TDS should be deducted.
Q6. What happens if I forget to submit Form 15G/15H, and TDS is deducted?
If TDS is deducted, you can claim a refund while filing your income tax return. Ensure that the TDS is reflected in Form 26AS and submit the correct details while filing the return to claim the refund.
Q7. What is the role of a Section 197 certificate in reducing TDS?
A Section 197 certificate is issued by the Assessing Officer after reviewing your income and tax liability. This certificate allows the deductor to apply a reduced or nil TDS rate for specific income types such as rent, professional fees, or capital gains.
Q8. Can I apply for a lower TDS rate if I am an NRI?
Yes, NRIs can apply for a lower TDS rate by submitting a Section 197 certificate. NRIs can also claim benefits under the Double Taxation Avoidance Agreement (DTAA) if applicable, allowing for reduced TDS on income sourced from India.
Q9. What is the TDS rate for interest on bank deposits, and can it be reduced?
The standard TDS rate on interest from bank deposits is 10%. However, if your total income is below the exemption limit, you can submit Form 15G/15H to avoid TDS. If you are a senior citizen, the limit for no TDS is higher (₹1 lakh).
Q10. Can I get nil TDS on dividends?
Yes, if your total income is below the exemption limit, you can submit Form 15G/15H to avoid TDS on dividends. If not, a Section 197 certificate will be required for a reduced TDS rate.
Q11. What is the TDS rate on capital gains, and can it be reduced?
TDS on capital gains is generally 1% for long-term capital gains on the sale of immovable property. A Section 197 certificate can be obtained if the seller’s tax liability is lower due to exemptions like Section 54 or indexation.
Q12. What should I do if I want to reduce TDS on a payment from a contractor?
For payments to contractors, TDS is deducted under Section 194C at 1% for individuals/HUF and 2% for others. If your tax liability is lower, you can apply for a Section 197 certificate to request a reduced rate of TDS.
Comments