Section 206AA of the Income Tax Act: TDS Rates & Applicability
Many transactions and payments between taxpayers involve deduction of TDS (Tax deducted at source) at rates prescribed by applicable income tax laws. A person liable to make payments (deductor) of a specific nature must deduct TDS before giving it to the deductee. Then, he/she needs to deposit the same to the Central Government.
Recipients of specific payments need to furnish their PAN card to the respective deductor so that their payments are recorded. Otherwise, the payer has to deduct tax at a higher rate under Section 206AA of the Income Tax Act.
Read along to know more about this Section of the IT Act.
What Is Section 206AA of the Income Tax Act?
On April 1 2010, the government inserted a new Section 206AA to the IT Act, stating that furnishing PAN is mandatory. As per this Section, any person entitled to receive any sum or income taxable under Chapter 17B must furnish his/her Permanent Account Number (PAN) to the deductor. TDS will be deducted at a higher rate in the absence of a PAN.
This Section ensures that TDS deductions reflect all payees’ names and their Form 26AS. It was made with the aim to strengthen the PAN mechanism and deal with problems related to processing tax credits and delays in issuing refunds.
TDS Rate under Section 206AA of the Income Tax Act
Both resident and non-resident Indians are required to furnish their PAN under the provisions of Section 206AA. Both the deductor and deductee need to quote the PAN in all correspondence, bills, documents or vouchers sent to each other. Otherwise, their payers will have to deduct TDS at a higher rate.
The TDS rate u/s 206AA is the higher of these rates mentioned below:
- A rate specified by this Act
- TDS rates of the current assessment year
- 20%
Let us understand the TDS rates under Section 206AA of the Income Tax Act with an example. Mrs. Yadav is responsible for paying Mrs. Sharma Rs. 60 lakh for purchasing certain goods. If Mrs. Sharma fails to quote her PAN to Mrs. Yadav, she will have to pay TDS at a 20% rate instead of a 0.1% rate u/s 194Q. Thus, a TDS of Rs. 2,00,000 (20% of Rs. 10,00,000) will be deducted before payment.
Also read: Penalty And Interest For Late Payment of TDS
Applicability in Case of Section 197 and Section 197A
Under Section 197 of the IT Act, a recipient of payment subject to TDS can seek an application for a lower or nil TDS deduction. In such cases, his/her respective AO (Assessing Officer) will issue a certificate for TDS deduction at specified rates for a specific period.
However, if you do not furnish your PAN at the time of application, such certificates will become invalid. These certificates can also become invalid due to incorrect PAN or validity. In this case, no benefits of lower/nil deduction will be applicable, and TDS rates will be based on Section 206AA.
You can also submit a declaration under Section 197A to your payer for a nil deduction of taxes. Recipients under 60 years of age can make declarations under Form 15G, while those above 60 years can submit Form 15H for this purpose. However, this declaration becomes invalid if it does not contain your PAN, and TDS will be deducted at higher rates.
Cases of Non-applicability of Section 206AA
The following is a list of cases where provisions under Section 206AA do not apply:
- If the payee’s PAN is invalid or does not belong to him/her, it will have the same effect as not furnishing PAN. When this happens, the tax would be deductible at rates u/s 206AA.
- From June 1 2016, an amendment to Section 206AA of the Income Tax Act stipulated that its provisions would not apply to non-residents and foreign companies. It would not apply to interest payments on long-term bonds under Section 194LC.
- The Finance Act of 2016 also relaxed the requirements u/s 206AA for royalties, interest, payments for capital transfers and charges for technical services paid to non-residents. Under Rule 37BC, foreign companies and individual non-residents do not have to furnish PAN provided that they furnish their names, contact numbers, complete addresses, tax identification numbers, etc.
Final Word
Thus, Section 206AA of the Income Tax Act stipulates that if you receive payments subject to TDS, you must mandatorily furnish your PAN. If you do not furnish your PAN, you will have to pay a higher rate of TDS. This Section is applicable to both resident and non-resident Indians.
FAQs on Section 206AA of the Income Tax Act
Ans: No, neither cess nor surcharge is applicable on TDS as it is only deducted at a base rate. Cess is a tax levied on current taxes so that the Central Government can get funds for a certain project. The surcharge is an extra fee levied for no particular reason, and the government can use it for any purpose.
Ans: Section 206AA stipulates that a person liable for TDS must mandatorily furnish PAN to avoid higher tax rates. Section 206AB stipulates higher rates of TDS deductions for certain taxpayers. Taxpayers who have not filed ITR (income tax returns) for two assessment years or whose total TDS exceeds Rs. 50,000 have to pay higher TDS.
Section 206A refers to how banking companies, public companies or cooperative societies need to furnish quarterly returns for payment of interest where transactions had no applicable TDS. These companies have to submit e-statements to the Income Tax Department every year on June 30, September 30, December 31 and March 31.
Ans: Under provisions of Section 197, taxpayers whose income is subject to TDS can furnish an application for lower deductions. You have to furnish the prescribed Form No. 13 to the Assessing Officer (AO) with jurisdiction over your residence. You can find this form by logging in to the TRACES portal and clicking on ‘Request for Form 13’.
Form 26AS is an annual statement that includes details about TDS collected, advance tax, tax refunds, self-assessment tax, etc. It is your tax credit statement that lets you check if a deductor has correctly filled TDS or TCS (Tax collected at source) statements.
You can also check and verify tax credits and income tax when filing ITR. Additionally, you can know if the tax deducted on your behalf is submitted to the government’s account in time.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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