Lower TDS Certificate Is Now Section 395 and Form 128, Not Section 197

"Section 197 certificate" is now a wrong citation. The lower or nil TDS certificate is section 395, the form is Form 128, and section 197 means tax on long-term capital gains.

Last verified: 5 September 2026 · Applies to: Tax Year 2026-27 onward (deductions on or after 1 April 2026)

Contents

• The trap, stated plainly
• Section 395(1): the applicant route
• Section 395(2): the payer route
• Form 128 and Rule 213
• Do existing section 197 certificates still work?
• The case this matters most in: an NRI selling property
• What the deductor has to get right
• Automated certificates are coming under section 395(6)
• How to run the application
• Frequently asked questions
• How BVACA can help

The trap, stated plainly

Under the Income-tax Act, 1961, section 197 was the provision under which a taxpayer applied for a certificate authorising deduction at a lower rate, or no deduction at all. Every practitioner in India calls it a "197 certificate". Banks ask for it by that name. Sale deeds recite it by that name.

Under the Income-tax Act, 2025, in force from 1 April 2026:

That last row is the trap. Section 197 of the 2025 Act is a charging provision on long-term capital gains. It is the section under which LTCG on immovable property is taxed at 12.5% plus surcharge and 4% cess, and it is the section that contains the narrow residual indexation relief at section 197(3).

So on an NRI property sale you will now, quite correctly, cite section 197 twice in the same file for two completely different things: section 197 as the charge on the gain, and section 395 as the certificate that stops TDS being deducted on the whole consideration. If your template says "certificate under section 197", it is now describing the wrong thing entirely. The wider list of these collisions is in the full old-to-new section mapping.

Section 395(1): the applicant route

This is the route the recipient of income takes. The person whose income is being subjected to TDS applies for a certificate authorising the deductor to deduct at a lower rate or not at all, on the basis that the deduction otherwise required exceeds the tax that will actually be payable.

It is the same idea that section 197 of the 1961 Act carried, and the same idea that Form 13 served. The number and the form are what changed.

Typical applicants:

• an NRI selling immovable property in India, where deduction would otherwise be on the full sale consideration
• a non-resident receiving payments where the treaty rate or the actual chargeable proportion is well below the domestic withholding rate
• a business in a loss position or carrying large brought-forward losses, where full-rate deduction on gross receipts would create a refund position for the whole year
• a contractor or professional whose margin is a small fraction of gross billing

Section 395(2): the payer route

Less well known, and useful. Section 395(2) lets the payer apply to the Assessing Officer for a determination of the appropriate proportion of a sum that is chargeable to tax, so that deduction is made only on that proportion.

This is the successor to sections 195(2) and 195(3) of the 1961 Act. It matters where the payer is the one carrying the risk of under-deduction and the payee will not, or cannot, make an application of their own. A common case: an Indian company paying an overseas entity a composite sum, part of which is not chargeable in India at all, where the payee has no incentive to run an Indian application process.

An order obtained under this route is also what supports Part B of Form 145 in the foreign remittance workflow, as an alternative to a Chartered Accountant's Form 146. That mechanism is set out in our piece on Form 145 and Form 146 for foreign remittances.

Form 128 and Rule 213

The application is made in Form 128, prescribed under Rule 213 of the Income-tax Rules, 2026.

Rule 213 is a consolidation, and this is worth understanding rather than just noting. Six rules of the 1962 Rules were folded into it: Rules 28, 28AA, 28AB, 29, 37G and 37H. Those rules separately governed the application form, the manner of determining the appropriate rate, certificates for particular categories, the certificate itself, and the parallel provisions on the collection side.

The practical consequence: if your internal checklist cites "Rule 28AA" for the rate-determination methodology, there is no one-to-one replacement rule to update it to. The reference becomes simply Rule 213.

Filing is through TRACES, as before, with the certificate issued to the deductor against the deductor's TAN. The structural point that has not changed is that a certificate is deductor-specific. A certificate naming one buyer does not authorise a different buyer to deduct at the lower rate. On a property sale with two joint buyers, that detail decides whether the certificate works at all.

The TRACES utility now displays s.393 table item codes on the Form 128 dropdowns; a legacy screen that still shows old s.194-IA / s.195 codes has not been fully migrated and should be flagged to the AO before filing. Check the version of the utility rendered for your login before you rely on the codes shown.

Do existing section 197 certificates still work?

Yes. Certificates issued under section 197 of the 1961 Act remain valid for Tax Year 2026-27 without reissue. You do not need to reapply under section 395 for a certificate that is still within its validity period and still covers the deductor and the income in question.

CBDT confirmed via its transition FAQ dated 12 April 2026 that lower-TDS certificates issued under s.197 of the 1961 Act remain valid for Tax Year 2026-27 without reissue, provided they are within their stated validity period and cover the same deductor and income stream. Fresh applications from 1 April 2026 are made under s.395.

Three practical riders:

• Validity period still governs. A certificate that expired on 31 March 2026 has expired. Continuity of the certificate regime does not extend the life of an individual certificate.
• Scope still governs. A certificate covering a specified deductor, a specified rate and a specified income does not stretch to a new transaction just because the law changed underneath it.
• Fresh applications use the new number. Any application made now is under section 395(1) in Form 128, whatever the old certificate said.

The case this matters most in: an NRI selling property

This is where the certificate does the most work, and where getting the section wrong has the largest cash consequence.

When an NRI sells immovable property in India, the buyer must deduct under section 393(2), Table Sl. No. 17 at "rates in force". Two features make this painful:

There is no monetary threshold. The ₹50 lakh threshold that applies to a resident seller under section 393(1), Table Sl. No. 3(i) does not apply. Every rupee of consideration to a non-resident seller is within the deduction obligation.

Deduction is on the full consideration, not the gain. In practice TDS is deducted on the entire sale price unless the seller obtains a certificate under section 395. That is the whole point of the certificate.

The rates in play, on the long-term footing:

The composite figures are effective rates including surcharge and cess, and they illustrate what the arithmetic comes to at different surcharge levels. They are not a table indexed by sale value. The statute states 12.5% as the base LTCG rate under section 197(1)(b). Surcharge is set by the seller's total income for the year rather than by the sale consideration, and is capped at 15% where it applies to capital gains, with 4% cess on tax plus surcharge. Holding period above 24 months is long-term under section 2(101).

What the sale consideration drives is the base rather than the rate: without a certificate under section 395 the deductor applies the rate to the full sale price and not to the gain within it, which is the whole reason the cash gets trapped.

And note the asymmetry that catches NRI sellers hardest: indexation is not available to a non-resident at all. Section 197(3), which gives the lower of 12.5% without indexation or 20% with indexation for land or building acquired before 23 July 2024, is expressly limited to "an individual or a Hindu undivided family, being a resident".

Illustrative example. An NRI sells a Mohali flat for ₹2 crore (₹2,00,00,000), bought in 2016 for ₹80 lakh (₹80,00,000). The gain is ₹1.2 crore, and tax on it at the long-term rate plus surcharge and cess is a fraction of the consideration. Without a certificate, the buyer must deduct at the effective rate on the full ₹2 crore, roughly ₹29.9 lakh at the 14.95% composite. With a certificate under section 395(1) obtained on Form 128, deduction is restricted to the tax actually expected on the ₹1.2 crore gain. The difference is not a tax saving; it is a cash-flow difference of the order of a year, because the excess would otherwise sit with the department until the return is processed and the refund issued.

That cash-flow gap is the reason the certificate is worth applying for even when the transaction is straightforward. The full NRI position, including repatriation, is in TDS when an NRI sells property in India, and we support the transaction end to end through NRI property sale support.

What the deductor has to get right

The buyer or payer carries the default risk, not the seller, so three points sit on the deductor's side of the table.

Quote the section 393 table item, not the old section code. Deduction from a payment to a non-resident is under section 393(2), Table Sl. No. 17. Deduction on purchase of property from a resident is under section 393(1), Table Sl. No. 3(i). "Section 195" and "section 194-IA" are 1961 Act codes; for deductions on or after 1 April 2026 they describe nothing in the current statute, and section 195 of the 2025 Act is unexplained income.

Check the certificate names you. Certificates are issued against a deductor's TAN. Joint buyers each need to be covered.

Watch the TAN position on 1 October 2026. Buyers currently need a TAN to deposit TDS on a purchase from a non-resident. From 1 October 2026, a resident individual or HUF buying from a non-resident may deposit through their PAN-based challan instead of a TAN, under section 397(1)(c)(iii) inserted by the Finance Act, 2026. Companies, LLPs and firms still need a TAN. For an individual buyer with a completion date near that boundary, the sequencing is worth a conversation before the sale deed is dated.

Report in the right quarterly return. Deductions on payments to non-residents go into Form 144 (the old Form 27Q), due 31 July, 31 October, 31 January and 31 May, with deposit by the 7th of the following month and 30 April for March.

Automated certificates are coming under section 395(6)

The Finance Act, 2026 introduced automated, rule-based lower and nil TDS certificates under section 395(6). The direction of travel is that qualifying applications should be capable of being processed without officer discretion.

Two comments from the practitioner's chair. First, an automated route rewards a clean file: consistent returns, no outstanding demands, arithmetic that reconciles. Applications that would previously have been rescued by an explanation to an officer will simply fail a rule. Second, until the mechanism is operating, plan on the ordinary application timeline. Do not build a transaction schedule around an automated certificate that has not yet issued to anyone you know of.

How to run the application

The sequence that works, in the order it should happen:

1. Start before the transaction is dated. The commonest reason a certificate does not help is that it was applied for after the buyer had already deducted.
2. Fix the computation first. Cost of acquisition with evidence, improvement costs with evidence, holding period, and any exemption being claimed under sections 82 to 88 (the old 54-series). The application stands or falls on this working.
3. Clear the housekeeping. PAN active and linked, no outstanding demands, prior returns filed. An open demand is the most common reason an application stalls.
4. Identify every deductor. Each buyer's TAN, or, from 1 October 2026, the PAN-based route for an eligible resident individual or HUF buyer.
5. File Form 128 on TRACES under section 395(1), with the computation and supporting documents.
6. Track it and answer queries quickly. Officer queries on cost of acquisition are routine, and a slow response is what turns a three-week matter into a three-month one.
7. Give the certificate to the deductor before payment, and check the deduction actually made matches the certificate rate.

If the transaction is already in motion, our lower deduction certificate applications and TDS advisory team can work the computation and the application in parallel with the sale documentation.

Frequently asked questions

Is the section 197 certificate still valid?

Certificates already issued under section 197 of the Income-tax Act, 1961 remain valid for Tax Year 2026-27 without reissue, subject to their own validity period and scope. But new applications are made under section 395(1) of the Income-tax Act, 2025 in Form 128. Section 197 of the 2025 Act is now the charge on long-term capital gains, not the certificate provision.

What replaced Form 13 for lower TDS?

Form 128, prescribed under Rule 213 of the Income-tax Rules, 2026. Rule 213 consolidated six earlier rules: Rules 28, 28AA, 28AB, 29, 37G and 37H of the 1962 Rules. The application is still filed through TRACES and the certificate is still issued against the deductor's TAN.

Can an NRI get a nil TDS certificate on a property sale?

An NRI can apply under section 395(1) on Form 128 for deduction at a lower rate reflecting the tax actually payable on the gain rather than on the full consideration. A nil certificate is possible where no tax is expected to be payable, for example where the gain is fully covered by an exemption. Without a certificate, deduction is on the entire sale consideration, with no monetary threshold.

Who applies, the buyer or the seller?

Normally the seller, under section 395(1), because it is the seller's income being deducted from. The buyer or payer has a separate route under section 395(2) to have the Assessing Officer determine the proportion of a sum that is chargeable to tax, which is the successor to sections 195(2) and 195(3) of the old Act.

What section should a buyer quote when depositing TDS on an NRI property purchase?

Section 393(2), Table Sl. No. 17 of the Income-tax Act, 2025, for deductions on or after 1 April 2026. This replaced section 195 of the 1961 Act. Purchases from a resident seller fall under section 393(1), Table Sl. No. 3(i), the successor to section 194-IA, with its ₹50 lakh threshold.

Do I still need a TAN to buy property from an NRI?

Until 30 September 2026, yes. From 1 October 2026, a resident individual or HUF buying from a non-resident may deposit through a PAN-based challan instead of a TAN, under section 397(1)(c)(iii) inserted by the Finance Act, 2026. Companies, LLPs and firms continue to require a TAN.

How BVACA can help

Bachhal Vijender & Associates prepares and files section 395(1) applications on Form 128, including the capital gains computation that the application depends on, and handles officer queries through to issue of the certificate. On NRI property sales we work the whole chain: the computation, the certificate, the buyer's deduction and challan under the correct section 393 table item, the quarterly Form 144 reporting, and the repatriation paperwork afterwards. Where a transaction is already dated and TDS has been deducted on the full consideration, we deal with it through the return and refund route instead, which is slower and worth avoiding by starting early.

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Author box: CA Vijender Singh Bachhal, Managing Partner, Bachhal Vijender & Associates (FRN 028355N), Panchkula. About the firm

Disclaimer: This article is general information current as at 5 September 2026, not advice for a specific situation. Tax and corporate law in India changed materially on 1 April 2026; verify the position before acting. Illustrative examples are not client matters.