Section 206AB offers a tax deduction at a higher rate compared to TDS rates specified under each applicable section. So, while making credit for an amount or making a payment that needs a TDS deduction, the TDS should be deducted at a higher rate.
Here’s everything you need to know about Section 206AB of the IT Act. Read on!
This provision is available for certain taxpayers only. The Section overrides other rules/sections/provisions opposing this section of the Income Tax Act. It is applicable on satisfying the following conditions:
This section is not applicable in the following instances:
The following rates of TDS are applicable if a taxpayer satisfies the conditions under Section 206AB of the Income Tax Act:
If a taxpayer doesn’t file ITR for the previous 2 financial years and doesn’t provide his/her PAN details to the deductor, TDS rates will vary. In this instance, the TDS rate is higher of the following:
When a deductee doesn’t provide the PAN details to a deductor, Section 206AA will be applicable. Further, this transaction requires a mandatory subtraction of TDS. For this section, TDS rate will be higher of the following:
Go through the following examples to get a better understanding of this section:
Example 1: When Section 206AB is applicable
Ankit Agarwal pays a consultancy fee of Rs. 5 lakh to Jay Singh 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:
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 Bhagat pays a fee of Rs. 5 lakh to Ajit Kapoor 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, rate of TDS for a fee against a contractual agreement is 1%. So, according to Section 206AA, tax rate will be higher of the following:
According to Section 206AB, tax rate will be higher of the following:
For the above-mentioned case, TDS rate is higher of the tax rates in Section 206AB and Section 206AA:
Therefore, the rate of TDS for Ajit is 20%. The amount of TDS is Rs. 1 lakh (20% x Rs. 5 lakh).
Also Read: How to Use a TDS Calculator?
Section 206AB of the Income Tax Act is introduced for the collection and deduction of TDS at higher rates in case a sum is payable or paid to a particular individual who didn’t file the ITR for 2 consecutive years in the past. Transactions such as rent, professional charges and contract payments are applicable under this provision.
If you are paying an amount to an individual who fulfil the eligibility of TDS deduction u/s 206AB, make sure to learn about how to make the necessary TDS deductions accurately!
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 other 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.
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