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Section 206AB: Understanding Higher TDS Deductions for Non-Filers

‍The Finance Bill 2021 includes new rules for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS), specifically Section 206AB. This section implies increased TDS deductions for those not filing Income Tax returns. While Section 206AA already required higher TDS for no PAN details, Section 206AB extends this. This article will discuss Section 206AB of the Income Tax Act, its applicability, and effects on taxpayers.

Understanding Section 206AB 

Section 206AB, effective from July 1, 2021, is a part of the Income Tax Act. It requires higher TDS deductions than usual. When making a payment needing TDS deduction, the TDS is deducted at a higher rate under Section 206AB. This rule applies only when a person doesn't file their income tax returns.

Understanding Section 206AB of the Income Tax Act 1961 

Here's how to determine if Section 206AB applies to you: 

  1. Did you fail to file Income Tax returns for two successive years?
  2. Has the deadline for filing last year's returns passed?
  3. Is your total TDS for those two years more than ₹50,000?

For instance, if you have TDS deductions for 2022-23 and didn't file your IT returns for 2021-22 and 2020-21, Section 206AB of the Income Tax Act will apply.

Non-Applicability of Section 206AB 

Section 206AB is not applicable in the following cases: 

  1. For Non-Resident Indians (NRI) without business establishment in India.
  2. When receiving cash payments above the limit in Section 194N.
  3. When receiving income from lottery winnings per Section 194B.
  4. When receiving cash from horse race winnings per Section 194BB.
  5. When receiving a salary as per Section 192.

Applicable Rate of TDS Under Section 206AB

When eligible for Section 206AB, the TDS is deducted at the following rates:

  1. Two times the rate prescribed in the relevant section of the Finance Act or Income Tax Act.
  2. Twice the current rates.
  3. 5% TDS rate.

It is important to note that if you fail to file your returns for the last two assessment years and do not provide your PAN details, the TDS rates under such circumstances may differ slightly. In such cases, the rates applicable will be based on both Section 206AA and Section 206AB, potentially resulting in higher TDS deductions. Under Section 206AA, the TDS rate is calculated at 20% or the rate mentioned in the relevant TDS section

Illustrations to Understand Section 206AB

To illustrate the application of Section 206AB, let's consider a couple of examples.

Example 1: Consultancy Fees 

If you pay ₹8 Lakhs as consultancy fees and the recipient hasn't filed their tax returns for two years, they fall under Section 206AB. The standard TDS rate for such services is 10% according to Section 194J. 

The TDS is the greater of 5% of the rate or double the rate in Section 194J. Here, double the rate is higher, making the TDS rate 20%. So, the TDS is ₹1.6 Lakhs, calculated as: 

TDS Amount = ₹8 Lakhs * 20% (or 0.2) 

Example 2: Contractual Agreement Fees 

For a ₹5 Lakhs contractual fee payment to someone who hasn't filed tax returns for two years and hasn't provided their PAN, Sections 206AB and 206AA apply. The standard individual TDS rate under Section 194C is 1%. 

Section 206AA gives a TDS rate of 20% or 1% based on Section 194C, whichever is higher. Section 206AB gives a double rate, resulting in 2% and 5% TDS rates. The higher rate of 20% applies, making the TDS ₹1 Lakh, calculated as: 

TDS Amount = ₹5 Lakhs * 20% (or 0.2)

Conclusion

Section 206AB of the Income Tax Act is for identifying taxpayers who haven't filed returns for two years in a row. Understanding TDS deductions before making any payment is vital. Higher TDS rates under Section 206AB emphasize the need to meet tax obligations. Visit Bajaj Markets for more tax information. 

More Info: Section 206AB encourages prompt tax return filing. Higher TDS deductions for non-filers aim to improve tax compliance and foster a fair taxation system. Taxpayers should be aware of TDS rates and comply with the Income Tax Act to avoid penalties.


 

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The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

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