The Union Budget 2026 has introduced a major reform aimed at simplifying tax compliance for small taxpayers, freelancers, consultants, and professionals. The government has proposed a technology-driven system to make it easier to obtain Lower or Nil Tax Deducted at Source (TDS) certificates, reducing unnecessary tax deductions and improving cash flow.

This move is expected to significantly benefit individuals who currently face higher TDS deductions despite having a much lower actual tax liability. Under the proposed changes, the process will become more automated, faster, and less dependent on manual approvals.

The Problem: Excess TDS Hurting Small Taxpayers

Under current income tax rules, when payments such as professional fees or consultancy charges are made, a fixed 10% TDS is deducted at source. However, in many cases, the recipient’s actual tax liability is far lower, sometimes only 2–3% of total receipts.

As a result, taxpayers end up paying excess tax upfront and must later claim refunds by filing income tax returns. This often leads to:

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  Cash flow constraints

  
  


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  Delays in refund processing

  
  


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  Administrative burden and compliance stress

  
  


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  Dependence on professional tax assistance

  
  

Although taxpayers are currently allowed to apply for Lower or Nil TDS certificates, the existing system requires submitting applications to an Assessing Officer, following a manual and office-based process. This procedure can be time-consuming, complex, and resource-intensive, especially for small taxpayers.

What Budget 2026 Proposes: A Smarter, Automated System

To address these challenges, the Finance Minister announced a major digital reform in her Budget 2026 speech. The proposal aims to replace the manual approval system with a rule-based automated process.

As stated in the budget announcement:

“I propose a scheme for small taxpayers where applications for Lower or Nil TDS certificates will be processed through a rules-based, automated system instead of being submitted to Assessing Officers.”

Key Features of the New Lower/Nil TDS System

Under the proposed framework:

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  Small taxpayers will be able to apply electronically

  
  


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  Applications will be processed through a rule-based automated system

  
  


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  A designated Income Tax Authority will verify applications digitally

  
  


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  Certificates will be issued or rejected based on electronic verification

  
  


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  Manual intervention will be significantly reduced

  
  

Once the certificate is approved, payers will deduct TDS only at the reduced or zero rate specified, eliminating unnecessary over-deductions.

Legal Backing in Finance Bill 2026

The Finance Bill 2026 proposes amendments to Section 395 of the Income Tax Act, 2025, enabling taxpayers to apply for Lower or Nil TDS certificates through a designated tax authority instead of an Assessing Officer.

The government will later notify detailed procedures, eligibility criteria, and operational guidelines for this system.

CBDT Clarification: Focus on Reducing Compliance Burden

The Central Board of Direct Taxes (CBDT) has clarified through official FAQs that the primary goal of this reform is to reduce compliance pressure on small taxpayers.

The CBDT will notify:

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  Eligible categories of taxpayers

  
  


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  The designated authority responsible for approvals

  
  


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  Applicable conditions, rules, and procedures

  
  

Taxpayers will have two options:

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  Apply through the Assessing Officer, OR

  
  


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  Apply through the new electronic route

  
  

However, both options cannot be used simultaneously.

When Will the New Rules Take Effect?

Once the Finance Bill 2026 is passed, the proposed amendments will come into force from April 1, 2026. Necessary forms, digital platforms, and official notifications will be released before implementation.

Expected Benefits of This Reform

This initiative is expected to bring multiple advantages, including:

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  Improved cash flow for freelancers and small taxpayers

  
  


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  Reduced dependency on tax refunds

  
  


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  Faster and more transparent approvals

  
  


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  Lower human intervention and discretionary decisions

  
  


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  Simplified compliance procedures

  
  


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  Stronger trust-based and technology-driven tax administration

  
  

By minimizing delays and reducing excessive deductions, the reform will help taxpayers retain more of their earnings in real time, instead of waiting months for refunds.

Why This Is a Big Win for Freelancers and Professionals

Freelancers, consultants, self-employed professionals, and small businesses often operate with tight cash flows. The new system will allow them to avoid unnecessary tax deductions upfront, giving them better financial flexibility and stability.

Experts believe this move marks a significant step toward modernizing India’s tax ecosystem, aligning it with digital governance goals and taxpayer-friendly reforms.

Final Takeaway

Budget 2026’s proposal to simplify Lower or Nil TDS certificate issuance represents a major shift toward automation, efficiency, and fairness in taxation. If implemented smoothly, it could significantly ease financial pressure on small taxpayers, boost confidence in the tax system, and promote a more transparent and technology-driven compliance environment.