Income Tax Department Plans Online Route For Lower TDS: What Taxpayers Need To Know

Taxpayers who find that the tax deducted from their income is likely to be higher than their actual tax liability may soon have an easier way to seek relief. The Income Tax Department is preparing rules that will allow eligible taxpayers to apply electronically for certificates permitting tax deduction at source (TDS) at a lower rate or at nil rate.

The proposed system is part of a 2026-27 Budget provision aimed at easing compliance for small taxpayers. The development was confirmed by Minister of State for Finance Pankaj Chaudhary in a written reply in the Lok Sabha on Monday.

The rules are currently being prepared and will be notified in due course, Chaudhary said, reported PTI.

Why A Lower Or Nil TDS Certificate Matters

TDS is generally deducted when certain types of income are paid. However, there can be situations where the amount deducted is higher than the taxpayer's eventual tax liability.

In such cases, a taxpayer can seek a lower or nil TDS certificate so that excessive tax is not deducted in the first place. This can also reduce the need to wait for a refund after filing the income tax return.

Under the new provision, taxpayers will be able to submit their applications electronically instead of relying on a physical process.

The move is aimed at making the process easier for taxpayers whose actual tax liability is expected to be lower than the amount that would otherwise be deducted.

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What The New Online Process Could Look Like

The proposed electronic system will rely on information that is already available with the Income Tax Department.

Applications for lower or nil TDS certificates are expected to be processed using data available on the income-tax portal, including previously filed income tax returns, the Annual Information Statement (AIS), Taxpayer Information Summary (TIS) and Form 26AS.

If the taxpayer meets the prescribed conditions, the certificate will be issued electronically. Applications where discrepancies are identified may be rejected.

The exact conditions and procedure, however, will be set out in the rules that are currently being prepared by the department.

What The Government Has Changed

Chaudhary said Section 395(1) of the Income-tax Act, 2025 provides for certificates allowing TDS to be deducted at nil or lower rates.

The Finance Act, 2026 has introduced the electronic application option as part of efforts to reduce the compliance burden on small taxpayers. Under the provision, a payee can electronically apply to the tax authority for a certificate permitting lower or nil deduction of income tax.

The certificate can subsequently be issued or the application rejected, subject to conditions that will be prescribed through the rules.

The proposed framework is expected to remove the need for physical documentation and repeated visits to tax offices, while making the process paperless and more transparent.

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Income Tax Department Steps Up Faceless Processing

The Finance Ministry's response also provided an update on the department's wider use of faceless tax administration.

According to Chaudhary, the Income Tax Department disposed of 2.24 lakh appeals during 2025-26, compared with 1.11 lakh appeals in 2023-24.

At the same time, the department completed 2.13 lakh faceless assessments in FY26, compared with 2.73 lakh in FY24.

The minister was responding to a question in the Lok Sabha regarding the number of faceless assessments conducted and appeals disposed of by the Income Tax Department over the last three years.