Lower or Nil TDS Certificate Guide: Section 197, Form 13 & TRACES Portal Steps

For businesses operating on thin profit margins, early-stage startups with operational losses, and independent agencies with heavy sub-contractor overhead, the statutory Tax Deducted at Source (TDS) regime can strangle cash flow.

When domestic corporate clients deduct 10% TDS under Section 194J or 2% under Section 194C from every gross invoice, the business may end up with TDS credits vastly exceeding its ultimate annual income tax liability. While excess TDS is eventually refunded after filing an ITR, waiting 12 to 18 months for a tax refund traps precious working capital.

[!NOTE] Statutory Period Applicability (September 2026 Context):

• AY 2026-27 (FY 2025-26): Lower or Nil deduction applications for contracts and revenues earned during the financial year ending March 31, 2026 are governed by Section 197 of the Income-tax Act, 1961.
• Income Tax Act, 2025 Transition: For current and future withholding on or after April 1, 2026, lower deduction certificates transition to the withholding provisions under the Income Tax Act, 2025. Electronic submission continues through Form 13 on the TRACES portal.

To solve this liquidity bottleneck, the Income Tax Act, 1961 provides a statutory relief mechanism under Section 197: the Lower or Nil TDS Deduction Certificate.

By submitting Form 13 electronically on the TRACES portal, an eligible taxpayer can legally instruct clients to deduct tax at a reduced percentage (e.g., 1%, 0.5%) or at 0% (Nil).

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What is Section 197 and How Does It Function?

Section 197(1) empowers an Assessing Officer (AO) to issue a formal, digitally signed certificate directing payers (deductors) to deduct income tax at lower rates or zero rate, if the AO is satisfied that the total income of the recipient justifies such relief.

1. Business Submits Form 13 & Financial Projections on TRACES
2. Automated Scrutiny & Referral to Jurisdictional Assessing Officer
3. AO Verifies Past 3 Years ITR, Audit Reports & Estimated Profit Rate
4. AO Issues Digitally Signed Certificate with Specific Rate & Limit
5. Business Quotes Certificate Number on Invoices -> Client Deducts at Lower Rate

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Sections Covered Under Section 197 Lower Deduction

Section 197 applies across a wide spectrum of commercial transactions:

Section	Nature of Payment	Standard Statutory Rate	Potential Section 197 Benefit
Section 194C	Payments to Contractors / Subcontractors	1% (Indiv/HUF) or 2% (Others)	Can be reduced to 0.5% or 0%
Section 194J	Professional Fees / Technical Services	10% (Professional) / 2% (Technical)	Can be reduced to 1% or 0%
Section 194-I	Rent on Land, Building or Furniture	10%	Can be reduced to 1% to 2%
Section 194H	Commission or Brokerage	2% (w.e.f. 01.10.2024; was 5%)	Can be reduced to 1% or 0%
Section 194-O	E-Commerce Operator Payments to Sellers	1%	Can be reduced to 0.1% or 0%
Section 192	Salary Income (Specific conditions)	Slab rates	Adjusted based on relief

Note: Section 197 does NOT apply to certain non-specified sections, such as Section 194DA (life insurance payouts), Section 194B (lottery winnings), or Section 194E.

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Mandatory Pre-Requisites Before Filing Form 13

Before initiating your online application on TRACES, ensure the applicant meets the following statutory criteria:

1. Active PAN: Clean PAN status with Aadhaar linkage (where applicable).
2. Past 3 Years ITRs: Acknowledgment copies and computation of income for the preceding three assessment years.
3. Audit Reports & Balance Sheets: Form 3CA/3CB and audited financials for the past three years (if subject to audit).
4. Current Year Financial Projections: Estimated Profit & Loss statement and computation of total taxable income for the current financial year.
5. Deductor Details (TAN List): The list of specific corporate clients, their 10-digit Tax Deduction and Collection Account Numbers (TAN), and the estimated gross invoice value expected from each payer.

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Step-by-Step Online Filing Procedure on the TRACES Portal

All Form 13 applications are processed through the official TRACES platform:

1. Log into TRACES as Taxpayer

Navigate to https://www.tdscpc.gov.in/ and log in under the “Taxpayer” portal using your PAN and password.

2. Initiate Form 13

Click on “Statements / Forms” > “Request for Form 13”. Select the Financial Year for which the certificate is sought (e.g., FY 2025-26).

3. Enter Basic & Financial Data

• Nature of Income: Select the applicable sections (e.g., 194J for consulting, 194C for contracts).
• Projected Revenue: Enter estimated gross receipts for the current financial year.
• Estimated Net Tax Liability: Input anticipated tax payable after computing allowable business expenses.
• Requested Rate: Specify the requested rate of deduction (e.g., 0.00% or 1.50%).

4. Upload Deductor Details (Annexures)

Enter the TAN of each deductor, their registered entity name, and the estimated payment amount for the financial year. The certificate will only protect payments from the specific TANs declared in this schedule.

5. Attach Mandatory Financial Exhibits

Upload clean PDF files of:

• Past 3 years’ filed ITR acknowledgments.
• Audited balance sheets and P&L sheets.
• Form 26AS for the previous financial year.
• Provisional P&L and balance sheet for the expired portion of the current year.

6. Digital Signature Verification

Sign the application electronically using a valid Class 3 Digital Signature Certificate (DSC) of the authorized director, partner, or individual. An automated Acknowledgment Number is generated for status tracking.

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Financial Documents and Projections Required by the Assessing Officer

The Assessing Officer evaluates the application using the Estimated Average Tax Rate Formula:

$\text{Estimated Rate of Tax} = \frac{\text{Total Estimated Tax Liability}}{\text{Total Estimated Gross Receipts}} \times 100$

• If your estimated turnover is ₹2,00,00,000 and your projected net profit is ₹10,00,000, your corporate tax liability (at 22% plus cess) is approximately ₹2,28,800.
• Your effective tax rate on gross receipts is 1.14% ($\frac{2,28,800}{2,00,00,000} \times 100$).
• Deducting standard 10% TDS (₹20,00,000) creates a working capital blockage of over ₹17,70,000.
• Demonstrating this math in your Form 13 projection sheet provides objective statutory justification for the AO to grant a 1% or 1.5% certificate.

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Validity Period and How Deductors Verify the Certificate

1. Duration: The certificate is valid from the date of issuance until March 31 of the relevant financial year (or until the approved monetary threshold is exhausted, whichever occurs earlier). It cannot be applied retrospectively to invoices already deducted.
2. Unique Certificate Reference: Once approved, the certificate carries a unique Certificate Number (e.g., CERTXXXXX).
3. Verification by Deductors: When you invoice a client:
   • State on your invoice: “TDS to be deducted at 1% pursuant to Section 197 Certificate No. CERTXXXXX valid for FY 2025-26”.
   • The deductor logs into TRACES under their deductor account, navigates to “Validate Lower Deduction Certificate”, verifies the certificate validity, and deducts the lower rate without regulatory risk.

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Common Reasons for Rejection and How to Prevent Them

1. Unreconciled Outstanding Tax Demands: If your PAN shows outstanding tax demands from prior assessment years on the portal, the AO will withhold issuance until the demand is paid or rectified.
2. Unrealistic Expense Projections: Projecting sudden 95% operating overhead without operational explanation triggers suspicion.
3. Late Application Submission: Applying in February or March leaves little operational runway; the best time to apply for Form 13 is between March and May before the start of the financial year.

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Frequently Asked Questions

Can a startup with carried-forward business losses apply for a Nil TDS certificate?

Yes. In fact, startups with substantial brought-forward tax losses or initial operating deficits are prime candidates for Form 13. By demonstrating that net taxable income will be negative, they can obtain a 0% (Nil) deduction certificate, preventing capital lockup.

What is the difference between Section 197 and Form 15G/15H?

Form 15G/15H is a self-declaration submitted directly to deductors (banks/firms) only by individuals for specific income (interest, dividend) if total income is below basic exemption. Section 197 requires formal government evaluation and an official certificate issued by the Assessing Officer for commercial and business contracts.

How long does it take to obtain a Section 197 certificate on TRACES?

The Citizen’s Charter prescribes a target timeline of 30 days from the date of a complete application. If financial projections, past ITRs, and TAN lists are clear, Assessing Officers typically issue the digitally signed certificate within 3 to 4 weeks.

Does the client need to verify the certificate before deducting lower tax?

Yes. When invoicing your client, provide the unique Certificate Number. The client’s finance team verifies the certificate on the TRACES portal before processing payments to ensure the lower rate and monetary limit remain valid.

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Official References

• TRACES Portal (TDS CPC) — Income Tax Department, Government of India
• Section 197 of the Income Tax Act, 1961 — Central Board of Direct Taxes (CBDT)
• CBDT Guidelines on Form 13 Processing — Ministry of Finance