What is nil deduction certificate and how will Budget 2026 change the process?

Finance Minister Nirmala Sitharaman during her Budget 2026 speech announced a scheme where small taxpayers will be issued a nil-deduction certificate through a rule-based automated process by the Income Tax Department. The amendment will take effect from April 1, 2026.

As per the present provisions, the payee has to make an application before the Assessing Officer. After the application, if the Assessing Officer is satisfied that the total income of the recipient justifies deduction at any lower rates or no deduction, he/she issues a certificate. However, the process for issuance of such certificates is uniform both for cases involving small amounts as well as large amounts, as per Income tax department.

For small taxpayers, it is proposed that the application for issuance of certificates for lower rate or nil deduction of tax may be made electronically to the prescribed income-tax authority. The prescribed income-tax authority will examine the application electronically and issue the certificate subject to fulfilment of conditions, or reject the application.

The category of taxpayers and other related conditions will be prescribed by the Board by making rules in this regard.

Neeraj Agarwala, partner, Nangia & Co LLP, explains the proposal is particularly important as excess tax deduction at source frequently creates liquidity challenges for small taxpayers, who are then required to wait for refunds after filing their returns.

"For instance, a professional consultant with no ultimate tax liability may still face TDS at 10% under the current provisions, resulting in unnecessary blockage of funds. By enabling an automated process for lower or nil deduction certificates, the scheme aims to address these cash-flow constraints and reduce reliance on post-filing refunds," says Agarwala.