Your income may be tax-free up to ₹12 lakh–but your cash flow still isn’t

 

For many taxpayers, it now feels like a strange bargain-no tax liability, but still a deduction at source. Tax law often simplifies things-only after adding a new layer of complexity. The transition from Forms 15G and 15H to a unified Form 121 under Section 393 of Income Tax Act, 2025 is a classic example. On paper, it appears to be a welcome move towards simplification. In reality, it has opened up a fresh round of confusion-particularly in a year where a large number of taxpayers may have nil tax liability despite having income up to ₹12 lakh. Let us decode this evolving situation in a structured manner.

From Form 15G/15H to Form 121 – What Has Changed?

Earlier, under the older Income Tax Act – 1961, taxpayers were required to file Form No. 15G (for Non-Senior Citizen) or Form No. 15H (for Senior Citizen) to receive certain incomes without deduction of tax at source (TDS) under the declaration mechanism provided in Section 197A of the Income-tax Act, 1961.

Now, under the Income Tax Act – 2025, both have been merged into a single declaration-Form No. 121. The intent is clear: reduce multiplicity of forms and bring uniformity. However, while the form is unified, the eligibility logic is not. The distinction between categories of taxpayers continues to influence how Form 121 operates in practice.

Senior Citizen Vs. Non-Senior Citizen – The Old Divide Still Matters:

Under the earlier law, senior citizens enjoyed a significant advantage. They could submit Form 15H if their tax liability was nil, irrespective of their income level.

Non-senior citizens, on the other hand, had to satisfy two conditions:
a) Tax liability should be nil, and
b) Income should not exceed the basic exemption limit

With Form 121 now in place, many assumed that this distinction has disappeared. But practically, the spirit of this differentiation continues. Senior citizens can still rely on nil tax liability as the key criterion. But for non-senior citizens, crossing the basic exemption limit may disentitle them from filing Form No. 121, as the underlying principle of the earlier law continues to influence its applicability

Additional Compliance – UIN Requirement for payer of Income:

Wherever a taxpayer files Form No. 121, the payer of income would be required to comply with the following:
a) Generate a 26-digit Unique Identification Number (UIN)
b) Report the same in quarterly TDS returns.

This makes the system more traceable-but also more compliance-heavy.

The ₹12 Lakh Nil Tax Regime – A Game Changer with a Catch:

The real twist in Tax Year 2026–27 arises from the expanded rebate framework. A large number of taxpayers with income up to ₹12 lakh (excluding special rate income like capital gains) may now have zero tax liability. But here is the fine print. The basic exemption limit has not been increased. Only the tax rebate has been enhanced. In short, income has become tax-free-but not tax-exempt. This leads to two important consequences:
a) Income beyond the basic exemption limit still brings the taxpayer within the compliance net,
b) Filing of Income Tax Return (ITR) remains mandatory in such cases.

So, while tax may be nil, compliance obligations continue.

In simple terms, the law has said “You may not have to pay tax-but we may still deduct it first”.

 

Nil Tax, Yet TDS – The Liquidity Challenge:

Now comes the real pain point. TDS provisions operate independently of final tax computation. So even if the tax liability of a non-senior citizen is nil –
• Banks will deduct TDS on interest of depositors,
• Firms will deduct TDS on interest and remuneration paid to partners,
• Clients will deduct TDS on professional receipts to professionals, etc.

This creates a clear mismatch in logic: No tax liability → Yet tax deducted → Refund later. It’s like giving an interest-free loan to the Government-without even applying for it. The consequence? A significant blockage of funds for taxpayers who are otherwise not liable to pay tax. Refunds may come-but only after filing returns, processing, and waiting. Until then, the taxpayer’s own money remains locked with the department.

 

A Practical Example – Partner in a Firm:

Consider a partner earning Interest on capital & Remuneration from a firm of say ₹ 10 lakh. Tax liability: NIL (due to rebate). However, the firm is required to deduct TDS on such payments. Can the partner rely on Form 121? If he is not a senior citizen, the answer is no – despite having zero tax liability – a classic case of ‘no tax, but still tax deducted’. The option now for avoiding TDS could be LDC.

 

Lower Deduction Certificate (LDC) – The Practical Solution:

To address this mismatch, the law provides for obtaining a certificate for lower or nil deduction of tax. Earlier, this was governed by Section 197 read with Rule 28, requiring application in Form 13. Under the new framework, the mechanism continues in substance through the corresponding provisions for lower or nil deduction, with application now to be made in Form No. 128. The process broadly involves the following:
• Filing an online application
• Declaring estimated income
• Providing details of payers
• Verification by the Assessing Officer

If satisfied, the officer issues a certificate allowing:
• Lower TDS, or
• Nil TDS

This certificate is binding on the payer and helps avoid unnecessary deduction.

 

Why LDC Has Become More Important in TY 2026–27:

Earlier, LDC was relevant for a limited class of taxpayers—those with losses, heavy deductions, or special circumstances. Now, due to the ₹ 12 lakh nil tax regime, a much larger segment falls into this category. Professionals, interest earners, and small business taxpayers may all face the same issue – Nil tax, but ongoing TDS. As a result, LDC is no longer optional—it is becoming a key tax tool for larger categories of the individual taxpayers.

Conclusion – Time for a Policy Rethink:

The intent of the ₹12 lakh nil tax regime is clearly to reduce tax burden for small & medium class taxpayers. Similarly, the intent of New Income Tax Act – 2025 & unified Form No. 121 is to carry out simplification & ease for the taxpayers. But the current framework creates a paradox – Taxpayers with no tax liability still face TDS, refund cycles, and procedural hurdles like LDC.

A simple solution could be:
Extend the scope of Form 121 to all taxpayers with nil tax liability, irrespective of income level-just as is effectively available to senior citizens.

Such a move would:
• Reduce blockage of funds,
• Minimise refund dependency,
• Lower compliance burden,
• Reduce LDC applications & administrative workload of the tax authorities.

Until then, taxpayers must remember one practical truth – While your income may be tax-free up to ₹12 lakh, your cash flow still remains dependent on compliance.

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]