Budget 2026: Electronic System for Lower or Nil TDS Certificates – Opportunity, Responsibility and Implications
In the Union Budget 2026, an important reform has been announced with the objective of making tax administration more digital, transparent and system-driven. Under Section 395 of the Income-tax Act, the certificate for deduction of tax at source (TDS) at a lower rate or at nil rate, which was earlier issued by the Assessing Officer through a manual process, is now proposed to be made completely electronic. This amendment will come into effect from 1 April 2026. Though the change appears procedural at first glance, its practical impact will be significant, particularly for small taxpayers, professionals and micro, small and medium enterprises (MSMEs).
Mismatch Between TDS and Actual Tax Liability
Under the existing system, where a taxpayer’s total income is below the taxable limit or where the actual tax liability is lower than the TDS deducted, the taxpayer was required to apply in physical form before the Assessing Officer to obtain a certificate for lower or nil deduction of tax. The process involved submission of documents, personal visits, explanations and often considerable delay. As a result, funds would remain blocked with the Government for several months, and the taxpayer would later have to claim a refund.
As per Notification No. 375(E) dated 22 May 2019, where the final tax liability becomes nil due to rebate under Section 87A, taxpayers are permitted to submit Form 15G or Form 15H to avoid TDS up to the eligible limit. At present, due to the rebate provisions, tax liability may become nil up to approximately ₹12 lakh of taxable income. However, if income exceeds this limit or if some tax remains payable, Forms 15G/15H cannot be used. In such cases, a lower or nil deduction certificate becomes necessary.
Further, the deductor – such as a bank, company or client – is legally required to deduct TDS at prescribed rates. The deductor does not evaluate the overall annual tax position of the recipient. Therefore, even if the taxpayer’s final tax liability is lower, or becomes nil after deductions, TDS may still be deducted at the standard rate.
For example, if a contractor has an annual turnover of ₹20 lakh, TDS at 2% would amount to ₹40,000. However, after accounting for expenses and eligible deductions, the actual tax liability may be only ₹22,000. The excess amount of ₹18,000 remains blocked with the Government until a refund is processed after filing the return. If this amount had remained with the taxpayer, it could have been used as working capital for business purposes.
The New Facility
Under the amendment proposed in Budget 2026, the application for a lower or nil TDS certificate can now be made electronically before the prescribed authority. The system will verify the application on the basis of data already available on the income-tax portal, such as previously filed returns, Annual Information Statement (AIS), Taxpayer Information Summary (TIS), and Form 26AS.
If the prescribed conditions are satisfied, the lower or nil deduction certificate will be issued electronically. If discrepancies are found, the application may be rejected. This change eliminates the need for physical documentation, repeated visits and manual explanations. The process is expected to become paperless, faster and more transparent.
Who Will Benefit the Most?
This facility will be particularly beneficial to taxpayers whose gross receipts are high but whose net profit margins are low. TDS is deducted on gross payments and not on net profit. As a result, tax deducted at source may exceed the actual tax liability.
Businesses with seasonal income will also benefit. In certain trades, substantial billing may occur in the early part of the financial year, while expenses are incurred later. High TDS deduction at the beginning of the year can strain working capital. A lower deduction certificate can help maintain balanced cash flow.
Senior citizens with substantial interest income are another important category. For example, a senior citizen earning ₹15 lakh as interest income may have an actual tax liability of only ₹30,000 after considering deductions and rebate. However, banks may deduct TDS at 10%, amounting to ₹1.5 lakh. Approximately ₹1.2 lakh would remain blocked until refund. In such cases, a lower deduction certificate is highly beneficial.
Taxpayers who consistently receive refunds year after year should also consider applying for such a certificate. Repeated refunds indicate that TDS deduction is higher than actual liability.
Startups and MSMEs will especially benefit, as liquidity and working capital are critical for their sustainability.
Difference Between Forms 15G/15H and Lower/Nil Deduction Certificate
Forms 15G and 15H are self-declaration forms submitted by the taxpayer, whereas a lower or nil deduction certificate is an official certificate issued by the Income-tax Authority after due verification.
Forms 15G/15H can be submitted only where total income is below the taxable threshold (approximately ₹12 lakh under current rebate provisions). In contrast, a lower deduction certificate can be obtained even where income is taxable, provided the actual tax liability is lower than the prescribed TDS rate.
Forms 15G/15H are generally used for interest income, whereas a lower deduction certificate may apply to professional fees, contractual payments, commission, rent and other categories of income.
Forms 15G/15H are submitted directly to the deductor, while a lower deduction certificate involves an online application, verification by the authority and issuance of a formal certificate.
Advantages of the Scheme
The principal advantage is improvement in cash flow. For instance, if a small professional earning ₹6 lakh annually has minimal tax liability but faces 10% TDS on professional receipts, funds remain blocked until refund. With a lower deduction certificate, such funds remain available for business use, reducing dependence on bank borrowings.
Though the term “small taxpayer” has no precise statutory definition, it generally includes individuals and businesses with annual income around or slightly above ₹12 lakh, senior citizens, small professionals, salaried individuals with limited tax liability, and MSMEs. These categories are likely to benefit most from the new electronic system.
Possible Challenges
Since the system will be entirely data-driven, any mismatch between the application and the data reflected in AIS, TIS, Form 26AS or previously filed returns may lead to rejection of the application. Therefore, timely and accurate filing of returns is essential.
Digital literacy may become a concern for some taxpayers. The final eligibility conditions will be prescribed through future rules, and there is a possibility that criteria may be strict.
However, the reform shifts the process from discretionary decision-making to rule-based compliance. Direct interaction between taxpayers and officers will reduce, enhancing transparency and reducing the scope for disputes and grievances.
Consequences of Incorrect or False Certification
The issue of incorrect or false information is critical. If a taxpayer deliberately furnishes incorrect details to obtain a lower or nil deduction certificate, strict consequences may follow. The tax not deducted will be recovered along with interest. Penalty proceedings may be initiated. Depending on the extent of misreporting, penalties may be substantial, and in serious cases, prosecution cannot be ruled out.
Since the verification is digital and data-based, all information remains recorded within the system, making accountability easier to establish. Therefore, while the scheme offers convenience, it also imposes a legal responsibility of honesty and accuracy on the taxpayer.
Conclusion
Overall, the electronic system for issuance of lower or nil TDS certificates introduced in Budget 2026 represents a significant step towards modernization of tax administration. For small taxpayers, it can save time, reduce compliance costs and improve cash flow. At the same time, it emphasizes the importance of data accuracy, digital awareness and truthful disclosure.
Both Forms 15G/15H and the electronic lower deduction certificate aim to prevent unnecessary blockage of taxpayers’ funds. However, their legal framework and applicability differ. Taxpayers must carefully evaluate their income structure and tax liability before choosing the appropriate option. An incorrect choice may result in tax, interest and penalties.
Balancing convenience with responsibility is the hallmark of sound tax planning.
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