Section 206 AB- High TDS/TCS rates for non-filing ITR
A guide to Section 206 AB of TDS
In this post, we’ll discuss the new TDS /TCS provision Section 206AB. Let’s take a closer look at each section:
What is section 206AB?
The new Section 206AB and 206CCA are proposed to be added in the Income Tax Act, 1961 by the Finance Bill, 2021. The deduction under section 206AB is higher than the TDS rates under each relevant section.Therefore, when making payments or providing credits for sums requiring TDS deduction, the tax must be deducted at a higher rate.The provision of Section 206AB only applies to certain taxpayers.
This will be added after Section 206AA and Section 206CC respectively of the Act which provides for a higher rate of TDS/TCS for not furnishing Permanent Account Number (PAN).
Section 206AB as proposed in the 2021 Union Budget will come into effect from 1st July 2021.
The higher TDS is applicable to those having interest income, dividend income, annuity pensions, income from capital gains.
The deductor/collector will now have to request documentation validating proof of ITR submission in the previous 2 years. Thus, it will increase the burden of compliance for such deductors/collectors.
Note: Section 206AB is not applicable for the transactions where the full amount of tax is deducted e.g. salary income, payment to a non-resident, lottery, etc.
The main purpose of Section 206AA and Section 206CC was to encourage the person to obtain the PAN.
Rate of Deduction under section 206AB
Section 206AB sub-section (1) indicates the applicable TDS rate when a payment or credit to a specific person is higher than the below rates:
- at twice the rate specified in the relevant provision of the Act; or
- twice the rate / rates in force; or
- the rate of 5%.
Who is a specified person under section 206AB
The Specified Person is the person who:
- has not filed the income tax return (ITR) for the previous financial year, and the due date for filing the income tax return (not a late return) has passed.
- has deducted or collected more than Rs.50,000 in tax in the previous fiscal year (TDS and TCS)
Note: If a non-resident does not have a permanent establishment in India, it does not apply to them. A fixed location where the business is conducted entirely or in part qualifies as a permanent establishment for this purpose.
Applicability of section 206AB
Sub-section (2) of Section 206AB states that if both Section 206AA and 206AB are applicable i.e. the “specified person” has not submitted the PAN and not filed the return; There is a higher rate of TDS deduction under Section 206AA than in Section 206AB.
This section applies to any sum or income or the amount paid, or payable or credited, by a person (deductee) to a “specified person”.
Sub-section (3) of Section 206AB gives a list of conditions to be considered as “Specified person”:
- Person who has not filed the Income Tax Return (ITR) for 2 previous years immediately before the previous year in which tax is required to be deducted;
- The time limit of ITR filing under sub-section (1) of Section 139 is expired; and
- The aggregate tax deducted at source (TDS) or tax collected at source (TCS), is Rs. 50,000 or more in each of the 2 previous years.
Note: The non-resident who does not have a permanent establishment is excluded.
Non- Applicability of section 206AB
Section 206AB does not apply to deductions under the following sections:
TDS on Salary
TDS on Premature withdrawal from EPF
TDS on Lottery
TDS on Horse Riding
TDS on Income in respect of investment in securitization trust
TDS on cash withdrawal in excess of 1 crore
ABC Ltd made a contract payment of Rs.90 lakhs to Arjun for 2 consecutive years and tax under Section 194C was deducted (Rs.90,000 every year) and remitted by ABC Ltd. Arjun however, did not file his Income Tax Return (ITR) for both the years. Then, in the 3rd year, the payer must deduct tax at source (TDS) at the higher rates given above.
How To Calculate TDS Under Section 206AB?( Example)
Example 1: If section 206AB is applicable
Mr.Deepak pays Mr.Kiran a professional consulting fee of Rs 5,00,000 on December 21, 2021.Section 194J of the Income Tax Act of 1961 applies to such a payment. Mr.Kiran failed to file her income tax returns for the previous two financial years, i.e. FY 2020-2021 and FY 2019-2020. Section 206AB applies to her since she did not file her income tax returns.The TDS rate for professional fees is 10% under Section 194J.
The applicable TDS rate will be the greater of the following:
- Twice the rate imposed in section 194J- 20% (10% x 2)
TDS rate of 5%
As a result, the applicable TDS rate is 20%. TDS will be Rs 1,000,000 (Rs 500,000 x 20%).
Example 2: If section 206AA and section 206AB are applicable simultaneously.
Miss Sruthi pays a fee of Rs 5,00,000 as per the contractual arrangement. Miss Bhavana on December 21, 2021. Section 194C of the Income Tax Act of 1961 applies to such a payment.
Miss Bhavana failed to file her income tax returns for the previous two financial years, i.e. FY 2020-2021 and FY 2019-2020. Also, she did not provide Miss Sruthi with her PAN. As a result, sections 206AA and 206AB apply simultaneously.In the case of an individual taxpayer, the TDS rate for a fee paid under a contractual agreement under section 194C is 1%.
According to Section 206AA, the applicable tax rate is greater if any of the following conditions are met :
At the rate of 1%, as specified in section 194C;
or at a rate of 20%
As per Section 206AB, the applicable tax rate is greater if any of the following conditions are met:
- Twice the rate specified in the section 194C- 2% (1% as per section 194C x 2)
- 5% TDS rate
In this case, the applicable TDS rate will be the higher of the rates specified in sections 206AA and 206AB:
- Section 206AA- 20%
- Section 206AB- 5%
As a result, Miss Bhavana’s TDS rate will be 20%. TDS will be Rs 1,000,000 (Rs 500,000 x 20%).We have reached the conclusion of this post on Section 206AB. Feel free to share your views and opinions with us in the comment section below.