Clause 74 of the Finance Bill, 2026 proposes a procedural reform to section 395 of the Income-tax Act, 2025, which governs the issuance of certificates for deduction of tax at source (TDS) at nil or lower rates. The amendment introduces an electronic filing and verification mechanism, allowing eligible taxpayers to obtain such certificates without necessarily approaching the Assessing Officer.
The change is intended to reduce compliance burden, improve processing efficiency, and support the Government’s objective of a faceless, technology-driven tax administration.
Existing Legal Framework under Section 395
Section 395 deals with certificates permitting deduction or collection of tax at nil or lower rates where the taxpayer’s estimated total income justifies such relief.
Position before the Amendment
- Under section 395(1), a payee may apply for a certificate authorising:
- Deduction of tax at a lower rate, or
- No deduction of tax, as the case may be.
- The application is presently required to be made before the Assessing Officer.
- Upon verification, the Assessing Officer may issue the certificate if satisfied that:
- The total income of the applicant warrants lower or nil deduction.
This process, while substantive in nature, involves manual scrutiny and officer-level intervention, often resulting in delays, particularly for routine or small-value cases.
What Clause 74 Changes
Clause 74 inserts a new sub-section (6) in section 395, enabling an additional electronic route for filing and processing applications.
Key Features of Proposed Section 395(6)
- The application referred to in section 395(1) may also be filed:
- Electronically, and
- Before a prescribed income-tax authority (as may be notified by rules).
- The prescribed authority may, on electronic verification of the application:
- Issue a certificate for lower or nil deduction, or
- Reject the application if:
- Prescribed conditions are not fulfilled, or
- The application is incomplete.
The detailed conditions, authority, manner of filing, and verification process will be specified through rules.
Importantly, the amendment does not remove or replace the existing role of the Assessing Officer, but adds an alternative, simplified mechanism.
Effective Date
- The amendment will come into force from 1 April 2026
- It will apply from tax year 2026-27 onwards
Practical Implications for Taxpayers
1. Simplified Access to Lower/ Nil TDS Relief
Eligible taxpayers can seek relief through a digitised process, reducing dependency on jurisdictional officers for routine matters.
2. Faster Processing and Reduced Delays
Electronic verification is expected to:
- Speed up approvals
- Reduce pendency of applications
- Improve predictability in TDS compliance
3. Relief for Small and Regular Income Recipients
Taxpayers earning interest, commission, rent, or contractual income, where TDS often exceeds final tax liability, will particularly benefit from:
- Lower procedural friction
- Easier access to justified TDS relief
4. Administrative Efficiency
The amendment allows the tax administration to:
- Standardise certificate issuance
- Reduce officer workload for routine applications
- Focus enforcement resources on higher-risk cases
Policy Rationale
Clause 74 aligns with the Government’s broader tax policy objectives of:
- Ease of doing business
- Faceless and paperless tax processes
- Reduction in compliance cost for taxpayers
- Greater use of rule-based and system-driven decision-making
Conclusion
The amendment proposed in Clause 74 of the Finance Bill, 2026 modernises the framework for obtaining nil or lower TDS certificates under section 395. By enabling electronic filing, verification, and issuance, the provision strikes a balance between taxpayer convenience and administrative control.
Once operationalised through rules, this change is expected to significantly improve the efficiency, transparency, and accessibility of TDS relief mechanisms, particularly for small and compliant taxpayers.
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