LDC Verification: How to Verify Lower Deduction Certificates in Bulk Before Deducting TDS

LDC Verification: How to Verify Lower Deduction Certificates in Bulk Before Deducting TDS

A lower deduction certificate (LDC) moves the TDS risk from the deductee to you. The deductee gets cash-flow relief, but if the certificate does not apply, the shortfall becomes your default. For banks, NBFCs and large corporates paying thousands of vendors, contractors and lenders, LDC verification has to be a routine, bulk process, not a one-time check at vendor onboarding.

This guide covers what has changed under the 2025 Act, what to check, how to verify on TRACES, and how to run LDC verification in bulk.

What is a lower deduction certificate?

A lower deduction certificate is issued by the Assessing Officer to a deductee whose estimated tax liability for the year justifies TDS at a lower rate, or no TDS at all. The deductor named in it must then deduct at the rate in the certificate, for the period and amount it specifies.

Source: Form 128 FAQs and Rule 213 published on incometaxindia.gov.in.

Rule 213 says three things deductors need to know:

• Payer-specific. The certificate is generally issued in the deductor's name and covers specified payments from that deductor only.
• Period-bound. It is valid only for the part of the tax year stated in it.
• Amount-bound. It applies only up to the amount stated in it. Payments beyond that amount attract the normal rate.

The Assessing Officer can also cancel a certificate before it expires.

Child certificates (new under the 2025 Act)

Where a deductee expects more than 100 deductors and does not know their details at the time of applying, it can apply through Annexure-II of Form 128. The main certificate is then issued in the deductee's own name, and the deductee generates a child certificate for each deductor on TRACES, within the overall limit of the main certificate. As a deductor, you deduct as per the child certificate you receive and quote its details in your TDS statement.

For lower or nil TDS deduction, deductors should not rely solely on a copy of the deductee’s main certificate; they must verify that the certificate is applicable to their TAN, deductee PAN, financial year, and payment details through the TRACES certificate validation facility. Where a TAN-specific child certificate is issued, its details should also be verified before applying the concessional TDS rate.

Transition from Section 197

CBDT addressed this in FAQs on the savings provision (Section 536 of the 2025 Act), annexed to an office memorandum dated 6 June 2026 and reported in July 2026. Lower and nil deduction certificates issued under Section 197 before 1 April 2026 remain protected for the period and amount they cover. A Section 197 application filed on or before 31 March 2026 and still pending on 1 April 2026, seeking a certificate for tax year 2026-27 onwards, may be administratively treated as filed under the corresponding provision of the 2025 Act. Applications made from 1 April 2026 fall fully under Section 395 and Form 128. In practice, a certificate issued for FY 2025-26 does not cover payments in tax year 2026-27, but a 1961-Act certificate issued for tax year 2026-27 can still be applied.

Why LDC verification matters

When CPC (TDS) processes your quarterly statement, it checks each row reported at a lower rate against its certificate database. If the certificate number is wrong, issued to another TAN, expired or exceeded, the gap between the normal rate and the rate you applied is raised as short deduction. The deductor is treated as an assessee in default for the shortfall under Section 398(1) of the 2025 Act, and interest runs at 1% per month or part of a month under Section 398(3)(a)(i), which replaces Section 201(1A). The amount the amount appears in your justification report and default notices.

Common causes of these defaults:

• A manually issued or scanned certificate that was never on the system. CBDT has required system-generated certificates since Instruction No. 36 of 2009, and TRACES validates only those.
• The certificate is issued to a different TAN of the same group (for example, head office instead of a branch).
• The certificate expired mid-year, or was cancelled, and the vendor master was not updated.
• Cumulative payments crossed the limit because several business units paid the same deductee.
• The certificate covers one nature of payment (say, contract payments) but was applied to another (say, professional fees).
• Wrong rate keyed in the ERP, or a typo in the certificate number.
• The deductee's PAN in your master does not match the PAN on the certificate, or the PAN has become inoperative. See our guide on bulk PAN verification.

LDC verification checklist: what to check

Run these checks for every deductee row before applying a lower or nil rate:

Keep the date and result of each check. If CPC (TDS) raises a short deduction demand later, the evidence helps you decide whether to correct the statement or respond to the notice.

How to verify a lower deduction certificate on TRACES

TRACES offers deductors a facility to validate a certificate before quoting it. The usual steps are:

• Log in to TRACES (www.tdscpc.gov.in) as a deductor.
• Go to Statements / Payments → Validate Lower Deduction Certificate. On TRACES this option has carried the label "u/s 197"; under the 2025 Act it covers certificates issued under Section 395.
• Enter the deductee's PAN, select the financial/tax year and click Go.
• Review the result. TRACES shows the certificate number, year, deductee PAN and name, valid-from and valid-to dates, cancellation date (if any), applicable section, nature of payment, reduced TDS rate, certificate limit, amount consumed to date and date of issue. Click the consumed amount to see the deduction entries already set off against the certificate.

This works well for a handful of certificates. A bank or corporate with hundreds of LDC holders across branches needs to repeat it before every payment run and before every quarterly filing, which is where manual checks break down.

Running LDC verification in bulk

A practical bulk process for a large deductor:

1. 1

   Build a single LDC register

   Hold every certificate in one register keyed by deductee PAN and your TAN: certificate number, rate, section, validity dates, certificate amount, and source (AO-issued or child certificate). Do not leave certificates scattered across business-unit mailboxes.

2. 2

   Verify at receipt, then at every payment run

   Validate when the certificate is first received, and again before each payment run. Certificates can be cancelled, and the remaining limit changes every time anyone in the group pays the deductee.

3. 3

   Track consumption across units

   Add up the amount paid or credited against each certificate across all branches, plants and ERPs. Switch the vendor back to the normal rate automatically once the limit is reached.

4. 4

   Push the result back to the ERP

   Only the verified rate should flow to the vendor master or payment system. Block lower-rate deduction for any deductee whose certificate failed a check.

5. 5

   Validate again before filing

   Before filing the quarterly statement (Form 140 for residents, Form 144 for non-residents), re-check every lower-deduction row. The deductee annexure of both forms has a "Reason for non/lower/higher Deduction" column and a "Certificate Number u/s 395" column: select the lower-deduction reason and quote the certificate number exactly as it appears on TRACES. Then review the justification report for short deduction defaults before the statement is processed.

6. 6

   Handle failures quickly

   If a certificate fails after deduction, decide whether to recover the shortfall from the next payment to the deductee, deposit it with interest, or correct the statement. Ask the deductee for a valid certificate or child certificate as soon as possible: Form 128 applications cannot be processed once the transaction is complete (Form 128 FAQs).

Lower deduction certificate vs Form 121 declaration

These two are often handled by the same team but are different:

How TaxCPC handles LDC verification

TaxCPC, Figment's TDS return filing software, is built for deductors with very large data volumes, such as banks and large corporates. For LDCs, the relevant features are:

• Bulk LDC verification, so certificates for many deductees are checked together instead of one at a time.
• Complete TRACES integration with live API validation, so records are checked against TRACES before the statement is filed.
• Bulk PAN verification, to catch PAN mismatches and inoperative PANs that also break lower-rate deduction.
• A justification report before filing, to find short deduction and other defaults early.
• Custom data templates for ERP extracts, and capacity for crores of records per quarter.

On the receiving side, 26ASCPC reconciles Form 26AS and AIS with your books, so a company that holds its own LDC can check whether its customers deducted at the certificate rate.

Decisions on recovering shortfalls or correcting statements still sit with your tax team.