A major change has been proposed in the new Income Tax Bill, 2025, which could significantly impact how tax is deducted at source (TDS) for both resident and non-resident taxpayers, including NRIs.
What Has Changed?
Under the current Income Tax Act, a taxpayer can apply for a Nil TDS Certificate if they expect their tax liability to be zero for a specific income. This certificate ensures that no tax is deducted at the time of payment.
For example, if someone is due to receive an income of ₹10 lakh but their actual tax liability is zero (because of exemptions or losses), a nil TDS certificate allows them to receive the full amount without any TDS deduction. This prevents unnecessary blocking of funds and avoids the hassle of claiming a refund later.
However, the proposed Income Tax Bill, 2025 removes this option. It only allows for a Lower TDS Certificate, not a nil TDS certificate. In simple terms, even if you are not liable to pay any tax, some amount of TDS will still be deducted. You will then have to file an income tax return to claim a refund if eligible.
How Will This Affect Taxpayers?
- No more exemption from TDS even for zero-tax payees: Whether you are a salaried employee with tax exemption, a start-up with losses, a charitable trust, or an NRI receiving income not taxable in India-TDS will still be deducted. You will no longer be able to apply for a certificate that says "no deduction required."
- More refunds, more return filings: Since TDS will be deducted even if the actual tax payable is zero, taxpayers will now have to file returns just to claim refunds. This increases compliance requirements and may lead to cash flow pressure, especially for start-ups, non-profits, and early-stage businesses.
- Broader scope for lower TDS certificates: On the positive side, the new law allows lower TDS certificates for all kinds of income, not just specific payments. So, even if you can't get a nil TDS certificate, you can still apply for a lower rate of TDS across more income types than before.
Why This Change?
The primary goal behind this move appears to be greater transparency and traceability. TDS not only collects tax early but also creates a trail of reported income. When no TDS is deducted, that income may remain unreported, especially if the taxpayer does not file a return. Even a minimal deduction, like 0.1%, helps keep that income visible to the tax department.
By eliminating nil TDS certificates, the government ensures that all transactions are at least partially captured in the system-even if the actual tax due is zero. This approach supports a more robust and transparent tax administration.
Key Takeaways
- Nil TDS certificates may no longer be available under the proposed law.
- Lower TDS certificates will still be allowed and will apply to all types of payments, not just specific categories.
- Refunds will need to be claimed by filing income tax returns, even for exempt or zero-tax income.
- Cash flow could be impacted for entities with no actual tax liability.
- The change aims to strengthen reporting and income visibility, rather than raise revenue.
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