Section 206AB - High TDS TCS rates for non-filing ITR

In this post, will look into the new TDS /TCS provision Section 206AB as specified in the 2021 Union Budget.

We will discuss the following topics in this post:

What is Section 206AB?

The new Section 206AB and 206CCA are proposed to be added in the Income Tax Act, 1961 by the Finance Bill, 2021. These Sections impose a higher rate of TDS / TCS if the transactions are done with the non-filers of income tax return (ITR).

This will be added after Section 206AA and Section 206CC respectively of the Act which provides for a higher rate of TDS/TCS for not furnishing Permanent Account Number (PAN).

Section 206AB as proposed in the 2021 Union Budget will come into effect from 1st July 2021.

The higher TDS is applicable to those having interest income, dividend income, annuity pensions, income from capital gains.

The deductor/collector will now have to request documentation validating proof of ITR submission in the previous 2 years. Thus, it will increase the burden of compliance for such deductors/collectors.

Note: Section 206AB is not applicable for the transactions where the full amount of tax is deducted e.g. salary income, payment to a non-resident, lottery, etc.

The main purpose of Section 206AA and Section 206CC was to encourage the person to obtain the PAN.

Rate of deduction under Section 206AB

Sub-section (1) of Section 206AB gives the applicable TDS rate if the amount is paid/ credited to a specific person being higher than the below rates:

  • at twice the rate specified in the relevant provision of the Act; or
  • twice the rate /rates in force; or
  • the rate of 5%.

Applicability of Section 206AB

Sub-section (2) of Section 206AB states that if both Section 206AA and 206AB are applicable i.e. the “specified person” has not submitted the PAN and not filed the return; TDS is deducted at the higher rates amongst Section 206AA and 206AB.

This section applies to any sum or income or the amount paid, or payable or credited, by a person (deductee) to a “specified person”.

Sub-section (3) of Section 206AB gives a list of conditions to be considered as “specified person”:

  • Person who has not filed the Income Tax Return (ITR) for 2 previous years immediately before the previous year in which tax is required to be deducted;
  • The time limit of ITR filing under sub-section (1) of Section 139 is expired; and
  • The aggregate tax deducted at source (TDS) or tax collected at source (TCS), is Rs. 50,000 or more in each of the 2 previous years.

Note: The non-resident who does not have a permanent establishment is excluded.

Non-Applicability of Section 206AB

Deduction under Section 206AB does not apply if tax is deducted under the following sections:

Section Details
192 TDS on Salary
192A TDS on Premature withdrawal from EPF
194B TDS on Lottery
194BB TDS on Horse Riding
194LBC TDS on Income in respect of investment in securitization trust
194N TDS on cash withdrawal in excess of 1 crore

Example

ABC Ltd made a contract payment of Rs.90 lakhs to Arjun for 2 consecutive years and tax under Section 194C was deducted (Rs.90,000 every year) and remitted by ABC Ltd. Arjun however, did not file his Income Tax Return (ITR) for both the years. Then, in the 3rd year, the payer must deduct tax at source (TDS) at the higher rates given above.

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