All about document required for lower deduction certificate

All about the documents required for a lower deduction certificate

A lower deduction certificate is an order issued by the assessing officer under Section 197 of the Income‑Tax Act, allowing the payer (buyer) to deduct Tax Deducted at Source at a lower rate or NIL rate than normally prescribed. Common Uses of a lower deduction certificate, like the sale of property by NRI, Capital gains lower than standard Tax Deducted at Source, and available exemptions/deductions (indexation, reinvestment, etc.)

Document required for a lower deduction certificate

Applied via filling Income tax Form 13 / Income tax Form 128 (online on the income tax portal)

• Why the Department asks for these details: The AO must verify Tax residential status, nature of income, actual capital gains, past compliance, and risk of revenue loss. Hence, the detailed questionnaire. explanation of EACH POINT in your document.
• NRI proof : To confirm residential status (non‑resident), passport (entry/exit pages), visa/OCI, travel history, and tax residency proof (if any). Important because Tax Deducted at Source shifts from 194‑IA to 195.
• Brief note of your application & nature of receipts: A covering note explaining the sale of immovable property in India, receipt type: long‑term / short‑term capital gains, and reason for seeking lower / NIL Tax Deducted at Source.
• Business / income-generating activities in India : To check if any other income is taxable in India and if a PE / business connection exists, usually answered as no business activity in India except sale of property.
• Computation of capital gains : Proper working is mandatory for sale consideration, indexed cost, brokerage, stamp duty, legal expenses, and exemptions (if any). This is the foundation for the lower deduction certificate rate.
• Conveyance / Sale deed / Builder‑Buyer Agreement: to verify ownership and date of acquisition. Consideration and property details.
• Allotment letter: Establishes Date of acquisition, original cost (especially builder properties),
• Agreement to sell w.r.t. property being sold Confirms sale terms, consideration split, and payment schedule.
• Proof of payments at purchase: Bank statements / receipts to validate Actual cost and Capital gains correctness
• Circle rate certificate (FY 20X2‑X3) : To ensure Sale consideration ≥ Stamp duty value and No understatement u/s 50C
• Computation of value as per Circle Rate: Working comparing Actual sale price, Stamp duty valuation and Higher value considered for tax.
• Details of properties held on 31.03.20X0 / 20X1 / 20X2: To assess Asset profile, Frequency of sales and Possible business nature
• Whether any property sold in last 2 FYs & FY 20X2‑X3 : Past sale history influences Tax compliance behavior and Risk assessment
• ITR copies for immediate previous 2 years: To verify Filing compliance, declared incomes, and carry-forward losses, if any
• If claiming TDS already deducted (Income tax Form 13 / Income tax New Form 128) : If any advance Tax Deducted at source has already paid, provide challan and Avoid double deduction

After analysing these documents, AO will determine actual tax payable, decide TDS rate (e.g. 1%, 5%, 10%, or NIL), and issue a lower deduction certificate mentioning the certificate number & validity. The buyer deducts Tax Deducted at Source only at the approved rate.

Key Aspects of Updated Income tax Form 13 / Income tax Form 128 – New Process (Applicable from AY 2026‑27 onwards)

Access & portal applications for a lower/nil deduction certificate u/s 197 are now routed through the TRACES–Income Tax integrated workflow. And Navigation (as displayed to users with updated access): TRACES → Statements / Forms → Request for Income tax Form 13 / Income tax Form 128 (New Process). Backend processing and AO control remain with the income tax department, even though the entry point reflects TRACES branding.

Application Type : Select “Online” application for faster processing and digital workflow. Then offline applications are discouraged and may not be accepted except in exceptional cases. Following Documentation Readiness: Before initiating Form 13 / Form 128, keep the following ready in PDF format

• Estimated income for the current financial year
• Estimated tax liability computation
• Income tax Returns for the last 4 assessment years
• Capital gains computation / business projections (as applicable)
• Supporting agreements, contracts, or sale deeds
• Proof of taxes already paid or Tax Deducted at Source already deducted (if any)

Submission & Verification : The application must be verified using a Digital Signature Certificate (preferred for non‑resident and corporate cases) or an Electronic Verification Code where permitted.

Validity of Certificate : If approved, the Lower / Nil Deduction Certificate. Is valid only for the specified financial year, mentioning the approved TDS rate, nature of payment, and Deductor TAN(s), if specified. Taxpayer required Fresh application is required every year.

Step‑by‑Step Online Procedure for lower deduction certificate (AY 2026‑27)

Steps to Apply Online (2026-27 or onward procedure): Log in to TRACES with your credentials. Choose “Request for Income tax Form 13/Income tax  Form 128 under the “Statements/Forms” tab. ). Enter applicant PAN, deductor TAN, and residential status. Then the taxpayer selects the nature of payment (salary, professional fees, contract, commission, interest, property sale, etc.) and the requested tax deduction at source / NIL rate. Fill in the applicant details, PAN, and TAN of the deductor. Specify the nature of payment (e.g., salary, professional fees) and the requested Tax Deducted at Source rate. Then upload necessary supporting documents, such as income projections and financial statements. Upload all supporting documents (income estimates, computations, financials). Submit the application using DSC, or EVC. Track application status online until clarification is issued (if any) orTax Deducted at Source the certificate is generated by the AO. Submit using a digital signature certificate and track the application on TRACES until the certificate is generated, usually within 30 days. For the tax year 2026-27, ensure compliance with the new Income Tax Rules 2026 for all submissions. Indicative processing time: 2–4 weeks, depending on AO workload and complexity.

Important Technical Corrections to Note on Income tax Form 128 New Process

1. Form 13 vs Form 128
   • Form 13 → Application for lower/nil Tax Deducted at Source (main form).
   • Income tax Form 128 → System‑generated certificate issued after AO approval (not applied separately).
2. Portal Naming
   • Practically, users see TRACES navigation; legally, authority rests with the assessing officer (income‑tax department).
   • “Income‑Tax Rules 2026”: The correct reference is the Income‑Tax Act, 1961, and the Income‑Tax Rules, 1962 (as amended up to FY 20X1‑X2). There is no standalone “Income Tax Rules 2026.”
   • Tracking & Compliance: The certificate must be shared with the deductor, and the deductor must quote certificate number while filing Tax Deducted at Source returns
3. Common Reasons for Delay or Rejection
   • Incomplete documentation
   • Absence of capital gain computation
   • Mismatch in transaction details
   • Non‑submission of Tax Residency Certificate / Form 10F where a Double Taxation Avoidance Agreement is claimed
   • Incorrect Income tax Form 13 data entry

   Careful preparation significantly improves approval timelines.

Typical lower deduction certificate Rates in property sales

Situation	TDS Without lower deduction certificate	With lower deduction certificate
NRI – LTCG	20% + SC + Cess	As per actual gains
No capital gains	20%	NIL
Reinvestment eligible	20%	Reduced rate

Conclusion 

This relief is especially relevant for income such as capital gains on sale of property, rental income, and interest, where standard Tax Deducted at Source rates for NRIs are significantly higher than the final tax payable. In many cases:

• Capital gains may be low or result in a capital loss
• Indexation benefits substantially reduce tax liability
•  Double Taxation Avoidance Agreement benefits may apply
• No tax may ultimately be payable

In such situations, excess TDS causes cash‑flow blockage and forces the NRI to wait for refunds after filing the income‑tax return. A certificate under Section 197 prevents this hardship. Eligibility Criteria for NRIs. An NRI may apply for a lower / nil deduction certificate if they can demonstrate that their estimated total tax liability for the year is lower than the applicable TDS rate. Eligibility is established through:

• Capital gains computation
• Estimated income statement
• Prior years’ income tax Returns (if available)
• DTAA eligibility, where applicable
• Proof of non‑resident status

Even though excess Tax Deducted at Source can be claimed as a refund through ITR, for NRIs this often involves long processing times, additional compliance, exchange loss, and blocked funds. Hence, Section 197 relief is preventive and commercially prudent.

NRIs selling property or earning taxable income in India should proactively evaluate the applicability of a lower / nil deduction certificate under Section 197. Where tax liability is nil or minimal, this certificate is often the most efficient and legally sound solution to avoid unnecessary tax deductions.