Section 206AB was introduced with effect from 1st July 2021. This section mandates a higher tax deduction than applicable TDS rates under other sections. So, when you make any payment involving TDS, the tax is deducted at higher rates. However, this new provision of Section 206AB is applicable only when you fail to file your income tax returns.
Certain provisions were implemented in the Finance Bill 2021 related to TDS and Tax Collected at Source (TCS ). As per the new provisions, TDS and TCS will be deducted and collected at higher rates for those who had not filed their I-T returns.
Before this revision, Section 206AA had been implemented to deduct higher TDS if taxpayers failed to provide their PAN details.
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.
Learning the various conditions wherein Section 206AB can be applicable is crucial. Here are a few parameters to ascertain whether or not Section 206AB applies to you:
Check if you have missed filing I-T 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 I-T returns for the previous assessment years such as FY22 and FY21, Section 206AB comes into effect.
This section is not applicable under the following circumstances:
If you are a Non-resident Indian (NRI) 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 have not filed your returns for the last two assessment years and do not furnish your PAN details, your TDS rates under such conditions may be different. Here, rates will be applicable according to 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 the following examples:
Assume you pay around ₹8 Lakhs as consultancy fees to an organisation, and this payment is applicable under Income Tax Act. However, the person you have paid has not filed I-T returns for the last two assessment years.
In such a case, he/she is applicable for Section 206AB. Under Section 194J, the applicable TDS rate for payments toward professional or technical courses is 10%. Hence, you can calculate TDS in either of the following ways, depending on which is higher:
5% of the applicable TDS rate
Twice the TDS rate mentioned in Section 194J
In this case, the TDS rate is 20%, which is arrived at by multiplying 10 into 2, as I-T returns have not been filed for two assessment years. You get the TDS amount as ₹1.6 Lakhs, which is calculated as:
TDS Amount = ₹8 Lakhs / 20% (or 0.2)
Assume you pay around ₹5 Lakhs as contractual agreement fees to an individual who has not filed I-T returns for the previous two assessment years. Furthermore, the concerned individual has not submitted PAN details, wherein both sections become applicable here.
Under Section 194C, 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, either 5% of the TDS rate or twice the rate at 20% is applicable, depending on which is higher.
Here, the final applicable TDS rate will be 20% as Section 206AA is higher than the latter. Therefore, the final TDS amount is ₹1 Lakh, which is calculated as:
TDS Amount = ₹5 Lakhs / 20% (or 0.2)
The Income Tax Department has introduced user-friendly tools to assist taxpayers in identifying individuals who may not be complying with tax regulations. This ensures that those deducting taxes can easily pinpoint defaulting payees and apply the correct TDS rates under Section 206AB.
This compliance check feature enables taxpayers to identify specified defaulters by conducting individual searches using their PAN. To use this functionality, taxpayers need to provide details such as PAN, financial year, name, PAN allotment number, and the status of the PAN-Aadhaar link. The tool also facilitates bulk searches by enabling users to upload a CSV file with details of multiple PANs for various taxpayers in the specified format.
The TDS deduction provision under Section 206AB does not apply to:
Section 192: TDS on salary income
Section 192A: TDS on early EPF withdrawal
Section 194B: TDS on lottery winnings
Section 194BB: TDS on horse race winnings
Section 194LBC: TDS on income in respect of investment in securitisation
Section 194N: TDS on withdrawal of cash
Section 194-IA: Consideration payments made for the sale of an immovable property
Section 194-IB: Rent paid of over ₹50,000 to a landlord
No. In the case of salaried employees, there will be no higher deduction of TDS.
There are two types of taxpayers who are eligible for sections 206AA and 206AB:
Individuals who have not filed their ITR for the last two assessment years
Individuals who fail to furnish their PAN details
All NRIs without a permanent establishment in India are exempted from Section 206AB.
You can check if someone is eligible for Section 206AB by using the compliance check functionality introduced by the Income Tax Department. You may search the details using PAN.