Section 206AB of Income Tax Act: Eligibility And TDS Rate

Income Tax

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!

Terms and Conditions for Section 206AB of the Income Tax Act  

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:

• A deductee taxpayer hasn’t filed the ITR for the 2 assessment years relevant to the previous 2 years immediately before the previous year during which tax is needed to be subtracted. Let’s assume, a payee has to deduct TDS for FY 2021-22. If the taxpayer hasn’t filed the ITR for FY 2019-20 and FY 2020-21, then Section 206AB will be applicable. 
• The due date to file the ITR for the previous fiscal years has expired. 
• Total TDS deducted in the last 2 fiscal years is Rs. 50,000 or above. 

Also Read: 6 Ways To e-Verify Your Income Tax Returns Online

When is Section 206AB Not Applicable?

This section is not applicable in the following instances:

• Non-resident individuals who do not possess a permanent establishment in India are not eligible for this provision. A permanent establishment denotes a particular place of business via which a non-resident taxpayer can conduct his/her business entirely or partially. 
• Any payment of an amount on which the below-mentioned sections of TDS (Tax Deducted at Source) are applicable does not qualify for this section:

1. Payments in cash above the limit specified under Section 194N
2. Income with regards to investment in any securitisation trust against Section 194LBC
3. Winning in a horse race as per Section 194BB
4. Winning through crossword puzzle or lottery under Section 194B
5. An employer paying an accumulated balance to his/her employee under Section 192A
6. Payment of salary under Section 192

TDS Rate in 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 

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:

• TDS rate under Section 206AB
• TDS rate under Section 206AA 

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:

• At 20% or
• At a rate specified in the respective section of TDS 

TDS Calculation Under Section 206AB 

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:

• 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 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:

• At 20% ; or
• At 1% as prescribed under Section 194C

According to Section 206AB, tax rate will be higher of the following:

• 5% Tax Deducted at Source 
• Double the rate prescribed under Section 194C: 1% x 2 = 2%

For the above-mentioned case, 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). 

Also Read: How to Use a TDS Calculator?

Final Word 

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! 

FAQs on Section 206AB of the Income Tax Act

1. When did the tax department introduce Section 206AB?

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.  

2. How can a taxpayer recognise a specified person under Section 206AB?

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.  

3. Which details do I need to furnish for the compliance check?

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. 

4. Do salaried individuals qualify for Section 206AB?

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. 

5. Are NRIs eligible for Section 206AB?

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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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.