Summary
The introduction of the Income-tax Act, 2025 marks a significant shift in India’s tax administration framework. One of the areas that has undergone a meaningful transformation is the Lower Withholding Certificate (LWC) mechanism. While the concept remains the same—allowing taxpayers to reduce or eliminate excess tax deduction at source—the new law broadens its scope, simplifies compliance, and introduces a more practical approach for businesses dealing with a large number of customers or deductors.
The transition from the provisions under the Income-tax Act, 1961 to Section 395 of the Income-tax Act, 2025 reflects the government’s intention to align tax procedures with the faceless assessment regime, digital initiatives, and modern compliance standards. The introduction of Annexure II and Child Certificates, along with the expansion of LWC eligibility across all TDS and TCS provisions, represents a major change that taxpayers should understand before planning their future withholding tax strategy.
Background
Tax deduction and collection at source have always played an important role in India’s tax system. Under both the Income-tax Act, 1961 and the Income-tax Act, 2025, certain specified payments such as salary, interest, rent, and other prescribed transactions require tax to be deducted or collected at rates specified by law.
However, a practical challenge often arises when the actual tax liability of a taxpayer is substantially lower than the tax deducted at source. In such situations, taxpayers experience unnecessary cash flow pressure because a higher amount of tax gets deducted upfront, even though their final tax liability may be considerably lower.
To address this concern, the Lower Withholding Certificate mechanism was introduced. The certificate enables the deductor to deduct tax at a reduced rate or, in some cases, at a nil rate instead of applying the standard withholding rate prescribed under the relevant provisions.
This mechanism has historically been beneficial for taxpayers whose effective tax liability is lower than the statutory withholding rate. Individuals, non-resident taxpayers, and various other categories of taxpayers often rely on these certificates to avoid excessive tax deductions and working capital blockage.
Without such a mechanism, taxpayers would have to wait until the income tax return filing process is completed and refunds are processed before recovering excess taxes deducted during the year. The resulting delay can create significant cash flow challenges.
Recognizing these practical concerns, the Income-tax Act, 2025 has revamped the LWC framework to make it more efficient, technology-driven, and aligned with modern tax administration practices.
Transition from Sec 197/206C (9) to Section 395 – A Comparative Analysis
One of the most important developments under the Income-tax Act, 2025 is the shift from the earlier provisions contained in Sections 197 and 206C(9) to the new Section 395 framework.
The earlier law provided a mechanism through which eligible taxpayers could apply for lower or nil deduction certificates. While effective in many situations, the framework had certain limitations regarding its applicability and operational flexibility.
The new Section 395 seeks to streamline the process while expanding its reach. The objective is not merely to replicate the earlier mechanism but to make it more practical for taxpayers operating in an increasingly digital business environment.
The transition reflects a broader policy direction toward simplification, faceless administration, and improved taxpayer convenience.
For businesses, this means that obtaining lower withholding relief is expected to become more structured and aligned with the government’s digital compliance ecosystem.
Requirements For Applying LWC
Obtaining a Lower Withholding Certificate continues to require taxpayers to satisfy prescribed documentation requirements and conditions.
The application process is designed to enable tax authorities to evaluate whether a lower deduction or collection rate is justified based on the taxpayer’s circumstances.
The Income-tax Act, 2025 also continues to recognize certain specified entities for the purpose of these provisions. These include research institutions, mutual funds, universities, educational institutions, and other entities referred to under the relevant provisions of the Act.
Taxpayers seeking relief under Section 395 should ensure that supporting documentation is maintained properly and that applications are submitted within the prescribed timelines. A well-prepared application remains critical to securing approval and avoiding unnecessary withholding.
As tax authorities increasingly rely on digital review processes, accurate and complete documentation is likely to become even more important than before.
Sections Newly brought within LWC Ambit under Sec 395 of the Act
Perhaps the most impactful change introduced by the Income-tax Act, 2025 is the expansion of the scope of the LWC regime.
Under the erstwhile provisions of Sections 197 and 206C(9), the benefit of lower withholding certificates was restricted to specific TDS and TCS provisions. As a result, taxpayers receiving payments covered by certain sections could not apply for lower withholding relief, even when their actual tax liability justified such treatment.
This often resulted in avoidable cash flow inefficiencies and increased refund dependency.
The new Section 395 addresses this limitation in a comprehensive manner.
Under the Income-tax Act, 2025, taxpayers can apply for a Lower Withholding Certificate in relation to all TDS and TCS provisions. This significantly widens the scope of relief available and creates a more equitable system where withholding taxes can better reflect the taxpayer’s actual liability.
The change is expected to benefit a wide range of taxpayers, including businesses operating across multiple transaction categories where withholding obligations arise.
From a compliance perspective, the expanded coverage removes many of the restrictions that previously prevented taxpayers from seeking lower withholding relief.
This development alone represents one of the most taxpayer-friendly changes introduced under the new legislation.
Spotlight: Annexure II & Child Certificates (New in 2025)
Among the new features introduced under the Income-tax Act, 2025, the Annexure II and Child Certificate mechanism stands out as one of the most practical innovations for businesses.
Many taxpayers, particularly those operating large-scale businesses, interact with hundreds of customers or deductors during a financial year. Under traditional processes, obtaining withholding certificates for such a large network could become administratively burdensome.
The new framework introduces a smarter two-step approach.
In the first step, the taxpayer applies for a Parent Certificate in its own name without necessarily providing details of every deductor at the application stage.
In the second step, once customer or deductor details become available, Child Certificates can be generated specifically for individual deductors.
This approach offers significant flexibility and reduces administrative complexity.
The mechanism is particularly useful where the number of deductors is expected to exceed one hundred or where customer information is not available when the initial application is submitted.
For growing businesses, technology companies, service providers, and organizations dealing with a large customer base, this enhancement can substantially simplify compliance management.
The introduction of Child Certificates demonstrates a practical understanding of how modern businesses operate and reflects an effort to make tax administration more business-friendly.
Action Points
As taxpayers prepare for the transition to the Income-tax Act, 2025, several action items deserve immediate attention.
Applications submitted on or before 31 March 2026 will continue to operate under the existing Form 13 framework.
Applications filed on or after 1 April 2026 must be made using the newly introduced Form 128.
Businesses should review and update their internal compliance procedures to ensure alignment with Section 395 and Rule 213 under the new Act.
Organizations with a large customer base should assess whether the Annexure II and Child Certificate mechanism can improve their withholding tax administration process.
Taxpayers should also recognize that the new law now permits LWC applications across all TDS and TCS provisions, removing many of the restrictions that existed under the earlier framework.
A proactive review of withholding tax practices can help businesses improve cash flow efficiency, reduce refund dependency, and strengthen overall tax compliance.
Conclusion
The Lower Withholding Certificate framework under the Income-tax Act, 2025 represents much more than a procedural update. It is a substantial modernization of a mechanism that directly affects taxpayer cash flow and compliance efficiency.
By expanding LWC eligibility to all TDS and TCS provisions, introducing the Parent and Child Certificate structure, and aligning the process with India’s broader digital tax administration goals, the new law creates a more flexible and practical system for taxpayers.
Businesses and individuals who regularly experience excess tax deductions should carefully evaluate the opportunities presented by Section 395. Early preparation, timely applications, and updated compliance processes will be essential to fully benefit from the changes introduced under the new regime.
As the transition from the Income-tax Act, 1961 to the Income-tax Act, 2025 progresses, understanding these developments will be critical for taxpayers seeking to optimize cash flow while maintaining compliance with evolving tax regulations.
FAQs
What is a Lower Withholding Certificate (LWC)?
A Lower Withholding Certificate allows tax to be deducted or collected at a lower rate or nil rate instead of the standard rate prescribed under tax laws.
Why is an LWC important?
It helps taxpayers avoid excess tax deductions and prevents unnecessary blockage of working capital.
Which provision governs LWC under the Income-tax Act, 2025?
Section 395 governs the Lower Withholding Certificate framework under the Income-tax Act, 2025.
What is the biggest change introduced under Section 395?
The biggest change is that LWC can now be applied across all TDS and TCS provisions.
What are Child Certificates?
Child Certificates are deductor-specific certificates generated under the new Parent Certificate framework introduced by the Income-tax Act, 2025.
Which form should taxpayers use after 1 April 2026?
Taxpayers filing LWC applications on or after 1 April 2026 must use Form 128.
About M2K Advisors
M2K Advisors is an international tax advisory firm having offices in India, Singapore, USA & UAE. Our firm offers Tax advisory, GST & sales tax compliances, FEMA & corporate law compliance & transfer pricing solutions across multiple geographies. Whether you are an MNC managing complex cross-border tax structures, an NRI requiring income tax compliance, or a business planning to setup operations in India, Singapore, the USA, or the UAE, our expert team provides comprehensive and seamless support across jurisdictions. With deep expertise in mergers and acquisitions, company valuation, due diligence, and succession planning, M2K Advisors is your global strategic partner in building, growing, and scaling businesses across borders.
For Queries, Contact – mukesh@m2kadvisors.com, info@m2kadvisors.com, knowledge@m2k.co.in
