TDS @ 20%, if PAN is not provided or PAN is invalid
TDS without PAN - Rate of TDS @ 20%
Provisions for TDS without PAN
Finance Act (2) of 2009 makes PAN compulsory in case of TDS eligible payments. Failing that, the deductor will be paying TDS at a higher rate.
The government of India issued a notification dated January 20, 2010, relating to tax deduction at source (TDS) under Income Tax Act 1961. This was applicable with effect from 1st April 2010.
As per the notification, all transactions liable for TDS will have a tax deductions at a higher percent of 20% if the Permanent Account Number (PAN) of the payees is not available.
The law also applies to all non-residents in respect of payments/remittances liable to TDS.
Section 206AA
Income Tax Act has introduced a New Section, Section 206AA to bring the notified changes. As per this new section, any Deductor making a TDS eligible payment to a party, who has not provided PAN, should make TDS at a higher rate.
In this case, the TDS rate is determined by the greater of the following conditions:
- TDS rate prescribed in the Act
- Rate of Tax in force
- At 20%
The first condition states the rate of tax prescribed by Section 193 to 196. The second condition states the rate of tax for salaries (Section 192), where the tax should be calculated at normal rates for individuals. The third is a flat rate of 20%. The taxpayer has to determine the tax amount for all three conditions and apply the higher tax amount among the three.
The new section will be applicable only for the payments made on or after April 01, 2010. Till then, normal rates / prescribed rates would be applicable even in the case, PAN is not available/invalid.
Rate of TDS if PAN is not provided
If an employee/party receives a payment that is eligible for TDS and assures the deductor of giving the PAN in a short while, then such a case has to be considered for higher rate determination.
The Maximum TDS rate (20%) is applicable in the following case:
- if the pan is not provided by the deductee.[section 206AA(1)]
- If the pan provided by the deductee is invalid, [Read section 206AA(6) in conjunction with section 206AA(1)]
As per the new provisions, a certificate for deduction at a lower rate or no deduction will be given by the Assessing Officer under section 197, or declaration by deductee under section 197A for non-deduction of TDS on payments (Form 15G/Form 15H) will not be valid unless the application bears PAN of the applicant/deductee.
Applicability in case of
Salaries
Section 206AA states that TDS-eligible payments covered under Chapter XVII-B need compulsory valid PAN. Failing to provide Valid PAN will attract TDS at the higher rate.
Chapter XVII – B (Chapter 17B) of Income Tax Act covers all payments including Salaries. This makes even Salaries payments include under Section 206AA
Non-residents
Non-Resident payments also come under the purview of Section 206AA. In those cases, foreign residents should take an Indian PAN and provide it, before the payment.
Form 15g and 15h
In case of certain payments (Eg. Interest), Deductee was permitted to declare on Form 15G / 15H for non-deduction of tax. In these cases, many were not providing PAN during the declaration.
But, the newly introduced section makes such payments, if eligible for TDS, to compulsory quote the PAN. In case PAN is not-available/invalid, TDS should charge at the higher rate and not ZERO rates, irrespective of Form 15G / 15H.
NRI payment
Non-Resident payments also come under the purview of Section 206AA. In those cases, foreign residents should take an Indian PAN and provide it, before the payment.
5 things to know about the PAN card rule
1) When your income is below the taxable limit, there is no requirement to submit your PAN or Aadhaar card. Hence, no TDS is supposed to be deducted by your employer under section 206AA of the Income Tax Act. Income up to 2.5 lakh is tax-exempt for the financial year 2019–20.
2) Your employer will deduct TDS at a rate of 20% or even more if you fail to give the information for your PAN card. However, if the employee’s income is below the taxable limit when it is calculated for TDS under Section 192, no tax will be deducted.
3) You can use the 12-digit identity number provided by the UIDAI in place of the 10-digit alphanumeric number issued by the income tax department ever since PAN and Aadhaar became interchangeable last year. But first, make sure the two identity documents are connected together.
4) If you choose to use your Aadhaar number in place of a PAN, you must be careful because filling in an incorrect number will lead to a penalty of ₹10,000 under Section 272B of the Income Tax Act of 1961
5) If you fail to provide your PAN to your employer, who deducts a higher rate of tax from your salary, you can always claim a tax refund once you have filed your income tax returns (ITR).
How can the deductor verify that the PAN is correct?
The procedure for obtaining a PAN is simple, inexpensive, and quick. Form 49A is the form to apply for a new PAN at National Securities Depository Ltd. (NSDL) or Unit Trust of India Investor Services Ltd. (UTIISL) or their intermediaries. Non-residents can apply through the local embassy/consulate of India.
When a person provides PAN to the deductor, then it is the deductor’s responsibility to verify the correctness of the PAN of the deductee. If the PAN provided is correct, then deduct tax as per the normal rate provided in the income tax act. Otherwise, deduct tax at 20 % or the rate provided, whichever is higher. If a deductor fails to deduct and deposit tax at the correct rate, he must pay a penalty for a late deposit of TDS as well as disallowance under section 40a(ia). Both these penalties are very stringent.
A few things which may be helpful for the deduction to ensure the correctness of PAN are:
- What the deduction should do is demand photocopies of the pan card from regular service providers and agents etc
- If photocopies have not been provided by the deductee and only PAN is provided, then verify by logging into your TRACES account
If you are a Saral TDS user, you can check the PAN of the taxpayers in bulk.
We have reached the conclusion of TDS without PAN and the 20% rate if PAN is not provided. Share your views and opinions with us in the comment section below.
