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Section 206AB of Income Tax Act | Finserv MARKETS

What is Section 206AB of the Income Tax Act? Know Applicability, Limits & More

15 Nov 2021
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What is Section 206AB of the Income Tax Act?

Section 206AB of the Income Tax Act is a unique provision that allows some non-filers (Specified Persons) of the Income Tax Returns to deduct tax at a higher rate at the source. Section 206AB deals with a higher rate of tax deduction (TDS). It was added to the Income Tax Act of 1961 by the Finance Act of 2021. This section came into effect on 1st July 2021. Section 206AB is a non-obstante part that supersedes any other provision or section of the Income Tax Act that is contradictory to it.

Section 206AB Applicability

Transactions based on all types of payments attract TDS under Section 206AB

like brokerage commissions, contractor payments, etc.

In the Act, it is mentioned that Section 206 AB is applicable for Specified Persons. But who are Specified Persons?

Who are Specified Persons?

A specified person is an individual who meets the following two criteria:

 

  1. He/she has failed to file income tax returns for the two previous fiscal years preceding the previous year in which tax is supposed to be deducted. For example, prior years for the current fiscal year 2021-22 would be 2018-19 and 2019-20.

  2. In each of the preceding two years, the total of tax deducted at source (TDS) is Rs. 50,000 or higher.

A non-resident who does not have a permanent establishment in India is not included in the category of Specified Persons. The term "permanent establishment" refers to a fixed location of business where the enterprise's business is conducted entirely or partially.

Section 206AB Limit

Is there any way to avoid the increased TDS rates? Yes.

Under the new provision of the income tax legislation, the following items are exempt from the higher rate of tax:

 

  • TDS on Salary ( Section 192)

  • Withdrawals from the provident fund are subject to TDS (Section 192A)

  • TDS if you win the lottery (Section 194B)

  • TDS on Horse Racing Winnings (Section 194BB)

  • Income from TDS on investments in securitization (Section 194LBC)

  • TDS (Tax Deducted at Source) on Cash Withdrawals (Section 194N)

Forms Required to be Submitted under Section 44AB

Forms 3CA and 3CB are required by section 44AB. In addition to these two 44AB forms, the auditor must provide Form 3CD. Let's take a closer look at these forms.

“ According to section 44AB of Income Tax Act,1961, an individual running a business is required to get his accounts audited if the gross turnover exceeds ₹1 crore during the year (In case of presumptive taxation u/s 44AD, the threshold limit is ₹2 crore). However, an audit of books of accounts is obligatory if gross receipts/turnover is greater than 50 lakh if the individual is in business”.

FAQs

  • ✔️What is the higher tax rate that must be deducted under section 206AB?

    The higher rate is either double the specified rate or 5%, whichever is greater. In the absence of a PAN, the existing rate of 20% or the rates applicable under this section, whichever is greater, will be applied.

  • ✔️How will a tax deductor determine if the deductee is a “Specific Person”?

    On the Income Tax Department's reporting portal, a new feature named "Compliance Check for Sections 206AB" has been made accessible. It allows you to use your PAN to determine if the deductee is a specified person or not.

  • ✔️How does the portal compliance check facility work?

    During the start of the fiscal year, a list of specified persons will be created. For example, for FY 2021-22, relevant two previous years (2018-19, 2019-20) will be considered. The list includes names of taxpayers that did not submit income tax returns both in the 2019-20 and 2020-21 assessments, and who, in each of these two prior years, had a TDS total of 50,000 or more.

  • ✔️Will the deductee's name be added or deleted from the list of designated people during the fiscal year?

    During the fiscal year, no new names of specified individuals will be added. However, the names on the list can be deleted under the following circumstances:

    1. If any specified person submits a legitimate income return (filed and validated) for any of the prior assessment years during the fiscal year.

    2. If, in the case of a certain individual, the sum of TDS in the preceding year was less than 50,000 INR.

    3. Late and amended TDS returns for the relevant fiscal years submitted during the fiscal year.

  • ✔️How frequently should the deductor use the functionality to check the PAN?

    Only at the start of the fiscal year should the deductor validate the PAN using the compliance check feature. There is no need to check the PAN of the unspecified individual because no new names will be added throughout the fiscal year. Nonetheless, the designated people can be deleted from the list. However, depending on the circumstances, they may need to be reviewed while making tax deductions or collecting taxes.

     

    For example, let’s assume a deductor has 10,000 vendors with whom he does business. He can utilise the feature in bulk search mode to retrieve the results for all 10,000 PANs at once. Assume that the functionality determined that 5 PANs out of these 10,000 PANs are designated persons for sections 206AB and 206CCA of the Act. Now, it is apparent that the remaining 9,995 PAN are not on the list of designated people for that fiscal year. Because no new names will be added to the list of specified individuals throughout the fiscal year, the deductor or collector may be confident that these 9,995 PANs will stay outside the list of specified persons during the fiscal year.

     

    As a result, the deductor or collector does not need to examine these 9,995 PANs again throughout that fiscal year. There is a risk that the 5 PANs of specified people will go off the list during the fiscal year, necessitating a recheck at the time of tax deduction or tax collection.