Skip to content

Direct and Indirect Taxation · Tax Deducted at Source and Tax Collected at Source

Lower or Nil Deduction, Non-Deduction and Higher Rate of TDS

Updated 10 October 2026 · Fact-checked

Under the Income-tax Act, 2025, a payee can apply for a certificate so that tax is deducted at a lower rate or not at all (section 395). If the payee does not furnish a valid PAN, tax is deducted at the higher of the specified rate, the rate in force, or 5% or 20% (section 397(2)).

Understand Lower or Nil Deduction, Non-Deduction and Higher Rate

TDS normally applies at the rate fixed for each payment in the table in section 393. But the rate can change in three ways: it can fall, it can be nil, or it can rise. This topic is about those three situations.

Lower or nil deduction. A payee whose real tax liability is small should not have cash blocked by TDS. Under section 395(1), the payee applies to the Assessing Officer. If the officer is satisfied that the payee's total income justifies it, a certificate is issued. The payer must then deduct at the rate in the certificate, or deduct nothing, till the certificate's validity ends. From 1-4-2026, the application can also be filed before a prescribed income-tax authority. On electronic verification, that authority can either issue the certificate or reject the application if conditions are not met or the application is incomplete (section 395(6)).

Non-resident payments. Under section 395(2), a person paying a non-resident a sum covered by section 393(2) (Table: Sl. No. 17) can apply if he thinks the whole sum is not chargeable to tax. The Assessing Officer determines the proportion that is chargeable. Tax is then deducted only on that proportion.

Higher rate for no PAN. Under section 397(2)(a), the person who receives a payment on which tax is deductible must give a valid PAN to the deductor. If he does not, section 397(2)(b)(i) says tax is deducted at the highest of: the rate in the relevant provision, the rate or rates in force, and 5% (where the deduction falls under section 393(1) Table Sl. No. 8(ii) or 8(v)) or 20% in any other case.

TCS has a parallel rule. For a PAN default, tax is collected at the higher of twice the specified rate or 5%, but not exceeding 20% (section 397(2)(b)(ii)).

A PAN default also has knock-on effects. A declaration under section 393(6) or 394(2) without a valid PAN becomes invalid, and the deductor or collector then applies the higher rate. An application under section 395(1) or (3) without a valid PAN gets no certificate (section 397(2)(f) and (g)). The text supplied does not cover the higher rate for non-filers of returns, so do not quote a section number for it from this page.

Key rules to remember

Lower or nil certificate (payee in India)
Certificate issued under section 395(1)(b) or (6) → deduct at certificate rate, or nil, till validity
The payer must follow the certificate. Without a certificate, the normal rate applies.
Non-resident sum (section 395(2))
Tax deducted = rate × only the proportion of the sum chargeable to tax, as determined by the Assessing Officer
Applies to the sum under section 393(2) (Table: Sl. No. 17).
TDS rate when PAN not furnished
Rate = highest of (specified rate; rate or rates in force; 5% or 20%)
Use 5% only for section 393(1) Sl. No. 8(ii) or 8(v). Use 20% in all other cases.
TCS rate when PAN not furnished
Rate = higher of (2 × specified rate; 5%), capped at 20%
Section 397(2)(b)(ii). Not applicable to a non-resident without a permanent establishment in India.
Rent cap on higher TDS
Higher TDS on rent under Sl. No. 2(i) ≤ rent payable for the last month of the tax year or of the tenancy
Section 397(2)(e).
Invalid declaration
No valid PAN in declaration under section 393(6) or 394(2) → declaration invalid → higher rate applies
Section 397(2)(f)(i) and (g).

How to solve Lower or Nil Deduction, Non-Deduction and Higher Rate questions

Use this order for any question on a changed rate of TDS or TCS.

  1. 1Identify the payment and its normal rate from the section 393 table given in the question.
  2. 2Check whether the payee has a certificate under section 395. If valid, use the certificate rate or nil for the period of validity.
  3. 3If the payee is a non-resident and the whole sum is not chargeable, check for a determination under section 395(2). Deduct only on the chargeable proportion.
  4. 4Check whether a valid PAN has been furnished. If not, compute the rate as the highest of the specified rate, the rate in force, and 5% or 20%.
  5. 5Check any exceptions: non-resident (not a company or foreign company) cases in section 397(2)(c), and the rent cap in section 397(2)(e).
  6. 6Compute tax on the correct base and state the rate used.
  7. 7Write one line of reasoning naming the section so the examiner sees the basis.

Quickest way: Rate-ladder check

When to use it: Use in MCQs and short numericals where the rate must be chosen quickly.

  1. Ask: is there a certificate? Yes means use its rate, finish.
  2. Ask: is a valid PAN given? Yes means use the normal rate, finish.
  3. If no PAN, pick the largest of the normal rate and 20% (or 5% for Sl. No. 8(ii) or 8(v)).
  4. For TCS with no PAN, double the rate, compare with 5%, and cap at 20%.
  5. Apply the rate to the base and round only at the end.

Common mistakes in Lower or Nil Deduction, Non-Deduction and Higher Rate

  • Applying 20% every time PAN is missing.

    Students remember 20% as the standard no-PAN rate.

    Fix: Take the highest of the specified rate, the rate in force and 5% or 20%. If the normal rate is above 20%, that higher rate applies. Use 5% only for Sl. No. 8(ii) or 8(v).

  • Deducting at the normal rate even though the payee holds a valid certificate.

    The certificate is mentioned in the facts but ignored.

    Fix: Under section 395(1)(c), deduct at the certificate rate, or nil, till its validity.

  • Using the certificate after it has expired.

    Students forget that the certificate is valid only for a period.

    Fix: Check dates. Outside the validity period, the normal rate applies. The Assessing Officer may also cancel a certificate after giving a reasonable opportunity (section 395(5)).

  • Treating a declaration as valid when the PAN is missing from it.

    Students think a declaration alone prevents deduction.

    Fix: A declaration under section 393(6) or 394(2) without a valid PAN is invalid. The higher rate then applies.

  • Doubling the rate for TDS in a no-PAN case.

    The doubling rule belongs to TCS and gets mixed up.

    Fix: For TDS use the highest-of-three rule. For TCS use twice the rate or 5%, whichever is higher, capped at 20%.

  • Deducting tax on the whole sum paid to a non-resident despite a determination.

    The determination under section 395(2) is overlooked.

    Fix: Deduct only on the proportion the Assessing Officer has determined as chargeable.

Worked examples

Example 1

Rahul Traders pays ₹8,00,000 to Meera Enterprises, a resident contractor. The normal TDS rate on this payment is 2%. Meera has not furnished a valid PAN. Compute the TDS. Assume the rate in force is also 2% and the payment is not under Sl. No. 8(ii) or 8(v) of section 393(1).

Show the solution
  1. No valid PAN, so section 397(2)(b)(i) applies.
  2. The three rates to compare are: specified rate 2%, rate in force 2%, and 20% (any other case).
  3. The highest is 20%.
  4. TDS = 20% × ₹8,00,000 = ₹1,60,000.

Answer: TDS of ₹1,60,000 is deducted at 20%.

Example 2

Sunita Pvt Ltd pays ₹5,00,000 to Anil, a resident with a valid certificate under section 395 that allows deduction at 1% for the tax year. The normal rate is 10%. The certificate is valid on the date of payment. Compute the TDS and state what changes if Anil had no certificate and no valid PAN, with the rate in force also 10% and the payment not under Sl. No. 8(ii) or 8(v).

Show the solution
  1. A valid certificate exists, so under section 395(1)(c) the payer deducts at the certificate rate.
  2. TDS = 1% × ₹5,00,000 = ₹5,000.
  3. Without a certificate and without a valid PAN, section 397(2)(b)(i) applies.
  4. Compare 10% (specified), 10% (in force) and 20%. The highest is 20%.
  5. TDS = 20% × ₹5,00,000 = ₹1,00,000.

Answer: With the certificate, TDS is ₹5,000. With no certificate and no valid PAN, TDS would be ₹1,00,000 at 20%.

Exam tips

  • In MCQs, the trap is usually a missing PAN. Read the facts for any hint that PAN was not furnished.
  • Write the section number next to the rate in written answers. Step marks often depend on it.
  • Note the validity period of a certificate in the question and compare it with the payment date.
  • Remember the difference between TDS (highest of three rates) and TCS (twice the rate or 5%, capped at 20%).
  • If a question mentions a non-resident and a determination by the Assessing Officer, deduct only on the chargeable proportion.

Practice questions from Tax Deducted at Source and Tax Collected at Source

Lower or Nil Deduction, Non-Deduction and Higher Rate: frequently asked questions

How does a payee get a lower or nil TDS certificate?

The payee applies under section 395(1). The Assessing Officer must be satisfied that the payee's total income justifies a lower rate or no deduction. From 1-4-2026 the application can also be filed before a prescribed income-tax authority, who may issue the certificate or reject an incomplete application.

What is the TDS rate if PAN is not furnished?

Tax is deducted at the highest of the specified rate, the rate or rates in force, and 5% (for section 393(1) Sl. No. 8(ii) or 8(v)) or 20% in any other case. This is in section 397(2)(b)(i).

Does a self-declaration stop TDS if PAN is missing?

No. A declaration under section 393(6) or 394(2) that does not contain a valid PAN becomes invalid. The deductor or collector must then apply the higher rate.

Is there a limit on higher TDS on rent?

Yes. For rent under section 393(1) Sl. No. 2(i), if the higher rate applies, the deduction cannot exceed the rent payable for the last month of the tax year or the last month of the tenancy.