Reduced withholding rate applies where tax deduction is required under section 194-O, substituting the default higher withholding rate. Amendment to section 206AA inserts a proviso to subsection (1) providing that where tax is required to be deducted under section 194-O, the application of clause (iii) of section 206AA(1) shall be as if the ordinarily prescribed higher withholding rate had been substituted by a lower specified rate for deductions made under section 194-O.