Lower / Nil TDS Certificate for NRI Payments: Form 128, Form 129, PAN Requirement, Procedure and Benefits

Introduction

Payments to a Non-Resident Indian or any other non-resident require special care under the Income-tax law. The most common mistake made by payers is either deducting tax on the entire gross payment without considering actual taxability, or making payment without proper TDS compliance. Both situations can create practical and legal problems.

Where the actual tax liability of the NRI is lower than the TDS otherwise deductible, the NRI may apply for a lower or nil TDS certificate. This certificate authorises the payer to deduct tax at the lower rate mentioned in the certificate, or not deduct tax at all, as the case may be.

Under the earlier Income-tax Act, 1961, this mechanism was generally available under section 197 through Form 13. For payments/credits governed by the Income-tax Act, 2025, the corresponding mechanism is Form No. 128 under section 395(1). Similarly, where the payer wants the Assessing Officer to determine the taxable portion of the payment to a non-resident, the payer-side route is Form No. 129, corresponding broadly to the earlier section 195(2) mechanism.

The central principle remains the same: before making payment or credit to an NRI, the chargeability of the amount in India must be examined and, wherever appropriate, a lower/nil deduction certificate should be obtained in advance.

1. Legal background: TDS before payment or credit

Under section 195 of the Income-tax Act, 1961, any person responsible for paying to a non-resident any interest or any other sum chargeable to tax in India, other than salary, is required to deduct tax at source at the time of credit or payment, whichever is earlier.

Therefore, in the case of payment to an NRI, the TDS obligation can arise even before actual remittance, if the amount has already been credited in the books of account. For this reason, the lower/nil TDS certificate should ideally be obtained before:

1. crediting the amount in the books;
2. making payment to the NRI;
3. remitting the amount outside India; or
4. deducting TDS at the normal rate.

If the payment or credit has already taken place and the TDS event is complete, a lower/nil certificate may not practically help for that completed transaction.

2. Correct route: Form 128, Form 129 or Form 15CA/15CB

The correct route depends on who wants the certificate and what issue is involved.

It is important not to confuse Form 15CB with a lower/nil TDS certificate. Form 15CB is only a Chartered Accountant’s certificate regarding chargeability, applicable rate, TDS deduction and nature of remittance. The legal authority for lower or nil deduction comes from the certificate issued by the Assessing Officer.

3. When should an NRI apply for lower/nil TDS certificate?

The NRI should apply when TDS at the normal rate would be higher than the actual tax liability in India.

Common situations include the following:

The most common practical case is sale of immovable property by an NRI, where the buyer may otherwise deduct TDS on the gross sale consideration. A lower TDS certificate helps align the TDS with the actual capital gain tax liability.

4. How the NRI/assessee gets benefit from lower deduction

The main benefit of a lower/nil TDS certificate is that the NRI does not have to suffer excessive tax deduction and then wait for refund after filing the income-tax return. The certificate ensures that TDS is deducted only to the extent of actual estimated tax liability.

In many NRI cases, the normal TDS is applied on the gross payment amount, while actual taxable income may be much lower after considering cost, indexation, exemptions, deductions or DTAA benefit. Therefore, without a lower/nil certificate, excess money may get blocked as TDS.

Example 1: Sale of property by NRI

Suppose an NRI sells a property for ₹1,00,00,000.

In this case, if the NRI obtains a lower TDS certificate, the buyer may deduct TDS only around the actual tax liability as specified in the certificate, instead of deducting tax on the entire gross sale value. This improves cash flow and avoids unnecessary refund blockage.

Example 2: Property sale with exemption claim

Suppose an NRI sells property and the capital gain is ₹25,00,000. The NRI proposes to invest the capital gain in eligible bonds under section 54EC or in a residential house under section 54/54F, as applicable.

If the exemption claim is properly supported, the taxable capital gain may become nil or substantially lower. In such a case, the NRI can apply for nil or lower TDS certificate so that the buyer does not deduct excessive TDS on the gross sale consideration.

Example 3: Rental income of NRI

Suppose an NRI receives annual rent of ₹12,00,000. After municipal taxes, standard deduction and housing loan interest, the taxable income may be much lower, say ₹2,00,000. If tax is deducted on gross rent at a higher rate, excess TDS may arise. By obtaining a lower deduction certificate, the NRI can align TDS with actual tax liability.

Thus, the practical benefit is not tax evasion or avoidance. It is only correct deduction of tax based on actual chargeable income.

5. When should the payer apply instead?

Generally, Form 128 is applied by the NRI/payee because the payee wants lower or nil TDS based on his actual tax liability. However, in some situations the better route is for the payer/remitter to apply in Form 129.

The payer should consider applying where the payer is not merely asking for a lower rate for the NRI, but wants the Assessing Officer to determine how much of the payment is actually chargeable to tax in India. This is important where the payment is composite, partly taxable, factually complex, or where the payer wants statutory protection before making payment or remittance.

A. Composite payment cases

Where one contract contains more than one element, the full payment may not represent taxable income in India.

For example, an Indian company pays ₹50,00,000 to a foreign party under a contract covering:

In such a case, the payer may believe that only the technical service portion is taxable in India and the entire ₹50,00,000 should not suffer TDS. Instead of deducting tax on the full payment or taking a risky self-view, the payer may apply in Form 129 and request the Assessing Officer to determine the taxable portion.

B. Reimbursement plus service fee

Sometimes an invoice contains both reimbursement and professional/service fee.

For example, a foreign consultant raises an invoice of ₹15,00,000, out of which ₹10,00,000 is professional fee and ₹5,00,000 is actual reimbursement of hotel, travel and government fee incurred on behalf of the Indian payer.

If the reimbursement is pure reimbursement without income element and supported by documents, the payer may apply for AO determination so that TDS is not unnecessarily deducted on the reimbursement portion.

C. Payment to foreign company where taxability depends on DTAA

In some cases, taxability depends on whether the foreign company has a Permanent Establishment in India, whether services are covered by FTS clause, whether make available condition is satisfied, whether the income is royalty, or whether the service was rendered and utilised in a manner taxable in India.

For example, an Indian company pays ₹25,00,000 to a foreign company for online consultancy or technical support. The payer may be unsure whether the payment is taxable as FTS/royalty or not taxable as business income in the absence of PE. In such cases, payer-side Form 129 route is useful to avoid later allegation of short deduction or non-deduction.

D. Capital receipt or mixed receipt

Where payment contains both capital and revenue elements, payer-side determination may be safer.

For example, a payment is made to a non-resident under a settlement agreement. One part relates to compensation for termination of rights and another part relates to service fee or interest. Since the entire payment may not have the same tax character, the payer may approach the AO for determination of the amount chargeable to tax.

E. Payer wants protection from assessee-in-default exposure

If the payer deducts nil or lower TDS based only on internal opinion and the Department later holds that tax should have been deducted, the payer may face consequences as an assessee-in-default, along with interest and other proceedings.

Therefore, where the transaction is high-value, debatable or involves foreign remittance, Form 129 gives the payer a more defensible position because the payer has approached the Assessing Officer before making payment/remittance.

Practical distinction

In simple NRI property sale cases, Form 128 is normally the better route. In complex remittance or composite-payment cases, Form 129 may be more appropriate.

6. Procedure to apply for lower/nil TDS certificate

For NRI payments, there can be two broad procedures:

1. Form 128 — where the NRI/payee wants lower or nil TDS certificate.
2. Form 129 — where the payer/remitter wants AO determination of taxable amount before remittance.

For most NRI property sale, rent, interest and capital gain cases, the practical form is generally Form 128, because the relief is sought by the NRI recipient.

A. Procedure for Form 128 — application by NRI/payee

Form 128 is used by the taxpayer to apply for a certificate authorising the payer to deduct or collect tax at a lower or nil rate under section 395(1) / 395(3) of the Income-tax Act, 2025. It corresponds to the earlier Form 13 / section 197 mechanism.

The broad procedure is as follows:

1. Confirm applicability: First determine whether the NRI’s actual Indian tax liability is lower than the normal TDS otherwise deductible.
2. Ensure PAN availability: PAN is mandatory for Form 128. A non-PAN NRI/non-resident cannot submit Form 128. If PAN is not available, PAN should be obtained first.
3. Prepare computation: Prepare estimated income and tax computation for the relevant tax year, including capital gain, exemption, DTAA claim or other income computation, as applicable.
4. Keep payer details ready: Correct payer name, PAN/TAN, address, payment amount, nature of payment and expected payment date should be available.
5. Login and file electronically: The form is to be filed electronically through TRACES by selecting Form No. 128 from the relevant form filing menu.
6. Upload supporting documents: Upload necessary computation and transaction documents, such as agreement, sale deed, rent agreement, interest certificate, DTAA documents or exemption proof, depending on the nature of payment.
7. Preview and verify: Before submission, verify PAN, payer PAN/TAN, amount, nature of income, applicable rate and computation.
8. Submit and e-verify: Submit the form using the applicable verification method, such as DSC, EVC, Aadhaar-based verification or OTP, as applicable.
9. Track status and reply to clarification: If the Assessing Officer raises any clarification, reply promptly with revised computation, supporting documents and legal explanation, wherever required.
10. Download certificate: After approval, download the lower/nil deduction certificate from TRACES and verify payer details, amount, rate, validity period and nature of payment.
11. Provide certificate to payer before payment: The payer should deduct TDS strictly as per the certificate and only up to the amount and period covered therein.

B. Procedure for Form 129 — application by payer/remitter

Form 129 is used where the payer wants the Assessing Officer to determine the amount of tax chargeable on payment to a non-resident or foreign company and issue a certificate authorising lower or nil deduction.

The broad procedure is as follows:

1. payer logs in to TRACES;
2. selects Form 129;
3. enters payer and non-resident recipient details;
4. mentions nature and amount of payment;
5. uploads agreement, contract, sale document, invoice or other transaction document;
6. uploads estimated taxable income computation and tax liability working;
7. uploads TRC, Form 10F / Form 41, no PE declaration or beneficial ownership declaration, wherever relevant;
8. e-verifies the application;
9. tracks AO processing and replies to clarification, if any;
10. downloads the certificate/order after approval.

Form 129 should be filed before remittance/payment where the payer wants statutory determination of taxable portion or lower/nil withholding.

7. PAN requirement for lower/nil TDS certificate

PAN is compulsory for Form 128. A non-PAN NRI or non-resident cannot submit Form 128 for lower or nil TDS certificate.

The practical position is as follows:

Therefore, where the NRI does not have PAN, the cleanest route is:

Apply PAN of NRI first → prepare computation → file Form 128 → obtain certificate → payer deducts TDS as per certificate.

For NRI property sale cases, the buyer should not deduct TDS at lower/nil rate merely on verbal assurance or computation. The buyer should deduct lower/nil TDS only after receiving and verifying the AO-issued certificate.

8. When is the certificate especially advisable?

A lower/nil TDS certificate is particularly advisable where:

1. the payment amount is substantial;
2. the payer is a company, LLP, bank, buyer of property or other organised deductor;
3. the NRI wants to avoid excess TDS and long refund waiting period;
4. the DTAA position is beneficial but fact-sensitive;
5. taxability depends on PE, place of service, beneficial ownership or classification of income;
6. the payment will be remitted outside India and bank compliance is involved;
7. the transaction is likely to be examined in future assessment or TDS proceedings.

9. When may a lower/nil TDS certificate not be required?

A lower/nil certificate may not be required in every case.

However, where there is doubt about taxability, the payer should avoid deducting nil TDS merely on assumption. If the Department later holds the sum to be chargeable, the payer may face consequences as an assessee-in-default, along with interest and other proceedings.

10. Documents and details to be kept ready

Although the exact documents depend on the nature of payment, the following broad details should be kept ready:

1. PAN, residential status and identity details of the NRI;
2. payer details, including name, PAN/TAN, address and amount payable;
3. computation of estimated income and tax liability;
4. transaction documents such as sale deed, agreement, rent agreement, bank certificate, invoice or contract;
5. DTAA documents such as TRC, Form 10F / Form 41, no PE declaration and beneficial ownership declaration, wherever treaty benefit is claimed;
6. exemption or deduction proof, such as section 54, 54EC or 54F details in capital gain cases;
7. past ITR, AIS, Form 26AS, TDS details, advance tax details and outstanding demand status, wherever relevant.

In property sale cases, extra care should be taken regarding holding period, indexed cost, improvement cost, co-ownership share, stamp duty value under section 50C and exemption claim under section 54 / 54EC / 54F.

11. Precautions while filing and using the certificate

A. File before payment, credit or remittance

The application must be filed well before the transaction. The certificate must be available to the payer before deduction of tax. Practically, the payer should not release payment or credit the amount before verifying the certificate.

B. Fill correct payer/deductor details

The certificate is generally valid only for the specified payer, specified payment, specified amount and specified period. Wrong PAN/TAN, wrong payer name, wrong amount or wrong income classification may make the certificate unusable or create future dispute.

In case of property purchase from an NRI, the buyer may need TAN because section 195 compliance is not the same as resident property TDS under section 194-IA.

C. Select correct nature of income

Wrong classification may lead to rejection, wrong certificate rate or future dispute.

Do not classify the payment as “other income” where the actual nature is capital gain, rent, royalty, FTS, interest or dividend.

D. Computation should be realistic and evidence-backed

The computation is the most important part of the application. It should clearly show gross receipt, taxable portion, cost or deduction, exemption claimed, applicable rate, existing tax credit and final tax payable.

A nil TDS request should not be made merely because the NRI wants to avoid refund blockage. The computation must legally support nil or lower deduction.

E. Check past compliance and outstanding demand

Before filing, verify ITR filing status, outstanding demand, old refund adjustment, PAN status, AIS/Form 26AS mismatch, earlier lower TDS certificate and pending proceedings, if any. The Assessing Officer may consider past compliance, estimated income, existing liability and tax credits before issuing the certificate.

F. Ensure certificate amount matches payment amount

The payer should apply the lower/nil rate only up to the amount covered by the certificate.

For example, if the certificate is issued for ₹50,00,000 but actual payment is ₹60,00,000, the lower/nil rate can be applied only up to ₹50,00,000. For the balance ₹10,00,000, normal TDS treatment should be followed unless a revised certificate is obtained.

If the payment is delayed beyond the certificate validity period, or the amount/payer changes, a fresh or revised certificate should be obtained before making payment.

12. Form 15CA / 15CB and remittance reporting

Form 15CA and Form 15CB are separate remittance-related compliances. They do not replace the lower/nil TDS certificate.

For remittance reporting under the earlier framework:

Under the current form framework, Form 145 and Form 146 correspond to the remittance reporting and CA certification framework. Where an AO certificate is obtained, the reporting route is different from the CA certificate route.

Therefore, even after obtaining a lower/nil TDS certificate, the remitter should separately examine Form 15CA/15CB or Form 145/146 compliance, as applicable.

Conclusion

A lower or nil TDS certificate is an important tax-planning and compliance tool for payments to NRIs. It is particularly useful in property sale, rent, interest, dividend, professional fee, royalty, FTS and other cases where the normal TDS rate is higher than the actual tax liability.

The direct benefit to the NRI is that tax is deducted on the correct estimated taxable income, instead of excessive deduction on the gross payment. This avoids unnecessary blockage of funds and reduces dependence on refund after return filing.

The payer-side route is equally important in composite or doubtful cases. Where the payer is unsure whether the full amount is taxable, or only part of the payment is taxable, Form 129 helps the payer obtain AO determination before payment/remittance and reduces withholding-risk exposure.

The safest professional approach is:

First determine chargeability → prepare tax computation → identify correct route → ensure PAN availability → file Form 128 or Form 129, as applicable → wait for certificate → verify certificate on TRACES → deduct TDS as per certificate → complete Form 15CA/15CB or Form 145/146 compliance, where applicable → make payment or remittance.

The certificate should always be obtained before the payment or credit event. A post-facto attempt may not protect the payer or the NRI from excess TDS, interest, demand or compliance issues. In case of an NRI without PAN, PAN should generally be obtained first before applying for Form 128.

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