Section 206AB of the Income Tax Act

Certain new provisions were implemented in the Finance Bill 2021 related to TDS (Tax Deducted at Source) and TCS (Tax Collected at Source). As per the new provisions, TDS and TCS were to be deducted and collected at higher rates for those who had not filed their IT returns.

 

Known as Section 206AB, this has been specifically introduced to implement a higher TDS deduction. However, before this revision, Section 206AA also insisted on a higher TDS deduction if you failed to provide your PAN details.

 

After implementing Section 206AB of the Income Tax Act, higher TDS deductions are applicable under specific conditions. To know what Income Tax Section 206AB is all about, read on.

With effect from July 1 2021, Section 206AB related to TDS came into existence. Understand this is not a separate new section but is only a new provision implemented in the existing Income Tax Act. 

 

Sec. 206AB mandates a higher tax deduction than applicable TDS rates under each section. So, when you make any payment involving TDS deductions, your TDS gets deducted at higher rates. However, this new provision of Section 206AB is applicable only when you fail to file your income tax returns.

You may now be familiar with the relationship between Section 206AB and TDS. However, knowing various conditions wherein Section 206AB can be applicable is crucial. 

 

Here are a few parameters to ascertain whether or not Section 206AB of the Income Tax Act applies to you.

• Check if you have missed filing your IT returns for two assessment years 

• Assess if the due date for filing your returns of the previous financial year is over

• Review if the cumulative TDS in those two assessment years exceeds ₹50,000

 

To help you understand better, consider this hypothetical example. Assume you have TDS deductions in the financial year 2022-23. If you missed filing your IT returns for the previous assessment years such as 2021-22 and 2020-21, Sec 206AB of Income tax Act comes into play.

This section is not applicable under the following circumstances:

• If you are a Non-Resident Indian without any business establishment in India

• If you get paid in cash above a specific limit mentioned in Section 194N

• If you gain money by winning a lottery as per Section 194B

• If you receive cash by winning a horse race per Section 194BB

• If you get a salary as per Section 192

When eligible for Section 206AB, per the applicability provisions, tax is deducted at source at the following rates:

• Two times more than the rate prescribed in the relevant section of the Finance Act or Income Tax Act

• Twice more than the current rates

• 5% TDS rate

 

If you do not file your returns for the last two assessment years and do not furnish your PAN details, your TDS rates under such conditions may be slightly different. Here, rates will be applicable according to both Section 206AA and Section 206AB. 

 

Hence, you may end up paying at higher rates. As per Section 206AA, the TDS rate is calculated at 20%, or the rate mentioned in the relevant TDS section. 

To help you calculate TDS, per Section 206AB, consider an example. Assume you pay around ₹8 Lakhs as consultancy fees to an organisation. This payment is applicable under Income Tax Act. 

 

However, the person you have paid has not filed IT returns for the last two assessment years. In such a case, he/she is applicable for Section 206AB. As per Section 194J of Income Tax Act, the applicable TDS rate for payments toward professional or technical courses is 10%.

 

Hence, you can calculate TDS in the following ways: 5% of the applicable TDS rate or twice the TDS rate mentioned in Section 194J, whichever is higher. You may observe that the latter is higher than the former.

 

So, the applicable TDS rate is 20%, which is arrived at by multiplying 10 into 2, as IT returns have not been filed for two assessment years. You get the TDS amount as ₹1.6 Lakhs, which is calculated the following way:

 

TDS Amount = ₹8 Lakhs * 20% (or 0.2)

 

Consider another hypothetical example to understand when Sections 206AB and 206AA apply. Assume you pay around ₹5 Lakhs as contractual agreement fees to an individual who has not filed IT returns for the previous two assessment years.

 

Furthermore, the concerned individual has not submitted PAN details, wherein both sections become applicable here. According to Section 194C of the Income Tax Act, the TDS rate is 1% if you are an individual taxpayer.

 

As per Section 206AA, the tax rate is calculated at 20% and 1% based on 194C, whichever is higher. According to 206AB, twice the rate is calculated, which is 2% and 5% TDS rate, whichever seems higher.

 

In such a scenario, the final TDS rate calculated includes Sections 206AA and 206AB. Here, 20% of Section 206AA and 5% of Section 206AB is considered relevant. Hence, the final applicable TDS rate will be 20% as Section 206AA is higher than the latter. 

 

The final TDS amount is ₹1 Lakh, which is calculated in the following way:

 

TDS Amount = ₹5 Lakhs * 20% (or 0.2)

 

Implementing Section 206AB makes it easy to identify taxpayers who have not filed returns for two consecutive assessment years. Before initiating any payment, understand the TDS deduction provisions properly. For more tax-related details, visit Bajaj Markets.