Section 206AB of Income Tax Act: Eligibility And TDS Rate
Section 206AB was introduced in the Finance Bill 2021 as a new provision pertaining to higher deduction of TDS (Tax Deducted at Source). Before the implementation of Section 206AB, the existing act – Section 206AA dictated higher tax deductions for not providing PAN to the TDS deductor. Let’s understand Section 26AB of the Income Tax Act in detail.
What is Section 206AB?
Section 206AB mandates higher deduction of TDS prescribed under each relevant section of the Income Tax Act. However, this is applicable to specific taxpayers only. As per Section 206AB of the Income Tax Act, the rate of TDS shall be double of the normal rate or at the rate of 5%, whichever is higher for payments made to vendors who haven’t filed their ITR (Income Tax Return) for the immediately two previous years and the TDS for each year was Rs.50,000 or more.
Applicability of Section 206AB of Income Tax Act
As per Section 206AB, a higher rate of TDS would be applicable for any type of transaction including but not limited to rent, contract payments, and professional charges. However, there are certain exclusions depending on the type of payment.
Non-Applicability of Section 206AB of Income Tax Act
- Section 192A: Premature Withdrawal of EPF
- Section 192: Salary
- Section 194B: Winnings from Lottery or Card Games
- Section 194BB: Winnings from Horse Races
- Section 194N: Cash Withdrawals
- Section 194LBC: Income Pertaining to Investment in Securitisation Trust
- Section 194D-IA: Consideration for Transfer of any Immovable Property
- Section 194 -IB: Rent above Rs.50,000 Paid to the Landlord
- Section 194M: Payment of above Rs.50 Lakh Paid for Professional or Contractual Services
- Section 194S: Virtual Digital Assets Transfer made to:
- Individual or HUF (Hindu Undivided Family), whose gross business turnover is less than Rs.1 crore or gross receipts from the profession are less than Rs.50 lakh during the preceding financial year
or,
- Individual/HUF who does not have ‘income from business or profession’
- Non residents who don’t have permanent-establishment (PE)
TDS Rate Under Section 206AB
The following rates of TDS are applicable if a taxpayer satisfies the conditions under Section 206AB of the Income Tax Act:
- 5% TDS or,
- At double the rate in force or,
- At double the rate prescribed in the respective sections of TDS,
whichever is higher. This is for taxpayers who haven’t filed their ITR (Income Tax Return) for the immediate two previous years and the TDS for each year was Rs.50,000 or more.
Also Read
How to Calculate TDS Under Section 206AB?
Go through the following examples to get a better understanding of this section:
Example 1: When Section 206AB is Applicable
Ankit pays a consultancy fee of Rs.5 lakh to Jay on 18.12.2021. Section 194J of the Income Tax Act covers this payment. Jay didn’t file his ITR for the last two financial years, that is, FY 2019-20 and FY 2020-21. Since he didn’t file his ITR, Section 206AB will be applicable.
Under Section 194J, TDS rate for professional charges is 10%. So, the applicable rate is the higher of the following:
- 5% TDS
- Double the rate prescribed under Section 194J: 10% x 2 = 20%
Here, the TDS rate will be 20% (higher). The amount of TDS turns to Rs.1 lakh (20% x Rs. 5 lakh).
Example 2: When Section 206AB and Section 206AA are in Force Simultaneously
Rohit pays a fee of Rs.5 lakh to Ajit on 18.12.2021 against a contractual agreement. Section 194C of the Income Tax Act covers this payment. Ajit didn’t file his ITR for the previous two fiscal years, that is, FY 2019-20 and FY 2020-21. Further, he didn’t provide his PAN details to Rohit. Therefore, Sections 206AA and 206AB will be applicable simultaneously.
Under Section 194C, the rate of TDS for a fee against a contractual agreement is 1%. So, according to Section 206AA, the tax rate will be higher of the following:
- At 20%; or
- At 1% as prescribed under Section 194C
According to Section 206AB, the tax rate will be higher for the following:
- 5% Tax Deducted at Source
- Double the rate prescribed under Section 194C: 1% x 2 = 2%
For the above-mentioned case, the TDS rate is higher of the tax rates in Section 206AB and Section 206AA:
- Section 206AB: 5%
- Section 206AA: 20%
Therefore, the rate of TDS for Ajit is 20%. The amount of TDS is Rs. 1 lakh (20% x Rs. 5 lakh).
Final Word
Section 206AB of the Income Tax Act was introduced for the collection and deduction of TDS at higher rates Transactions such as rent, professional charges and contract payments are applicable under this provision.
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FAQs
The Finance Bill of 2021 added Section 206AB to deduct TDS at a higher rate. Prior to this Bill, Section 206AA covered TDS deduction at a higher rate for not providing PAN details to a deductor.
The IT Department has offered tools to the taxpayers to recognise a specified person. That will make sure that a deductor can easily identify a defaulting deductee taxpayer and subtract the TDS in accordance with Section 206AB. Compliance check functionality enables a taxpayer to recognise certain defaulting persons using the individual search through the PAN.
For using the compliance check functionality, a taxpayer should furnish the particular taxpayer’s details such as status of the Aadhaar-PAN link, PAN allotment number, name, fiscal year and PAN. It also facilitates a search in bulk for numerous PANs of multiple taxpayers. In this case, there is a need to prepare a CSV file in the required format.
Section 206AB doesn’t apply for salary payment against Section 192. Moreover, this provision applies to a salaried individual for payments other than the exempted payments as per provisions of Sections 194LBC, 194N, 194BB, 194B and 192A. So, if a salaried employee gets a payment that falls under any other section for TDS deduction, and he/she doesn’t file the ITR, then Section 206AB will be applicable.
Section 206AB applies to a non-resident Indian (NRI). However, if he/she doesn’t have a permanent establishment in the country, this provision will not be applicable. So, if you are an NRI with no permanent establishment in India, you need not pay higher TDS as per Section 206AB.
The provision is applicable to taxpayers who haven’t filed their ITR for two consecutive years provided that their total TDS and TCS during each of the two years exceeds Rs.50,000.
Here’s how declaration format for 206AB would look:
“I/We hereby declare that I/we am/are duly authorized to give this declaration and the information stated above is true to the best of my/our knowledge and belief. If there is any misdeclaration, I/we undertake to indemnify you/your organisation; for any interest or any penal consequences.”
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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