Sections 206AA and 206AB of the Income Tax Act, 1961, stipulate conditions under which tax must be deducted at source (TDS) at higher-than-normal rates. Section 206AA addresses the failure of a recipient to furnish their Permanent Account Number (PAN) to the tax deductor. If a PAN is not provided, the tax deduction rate must be the highest of three specified rates: the rate in the relevant Income Tax provision, the rate or rates in force, or 20%. This 20% rate is, however, reduced to 5% when tax is deducted by an e-commerce operator under Section 194-O or by a buyer under Section 194Q. Importantly, Section 206AA provisions do not apply to certain income received by a non-resident or a foreign company, including interest on Section 194LC bonds, specified payments under Rule 37BC, and income related to investments in Category I or Category II Alternative Investment Funds (AIFs) under Rule 114AAB.
Section 206AB imposes a higher TDS rate on individuals designated as “specified persons” due to their failure to file their return of income. This section applies if three cumulative conditions are met for the deductee: they have not filed their return of income for the assessment year immediately preceding the current financial year; the due date for filing that return (Section 139(1)) has expired; and the aggregate tax deducted and collected at source (TDS/TCS) for that preceding year was ₹50,000 or more. For a specified person, the tax must be deducted at the highest of three rates: twice the rate specified in the relevant Act provision, twice the rate or rates in force, or 5%. The Income-tax Department assists deductors in identifying such “specified persons” via an online tool, “Compliance Check for section 206AB & 206CCA” on the insight portal, where the deductor can check the IT Return filing status for single or multiple PANs.
The higher rates mandated by Section 206AB apply to most income types subject to TDS under Chapter XVII-B, with specific exceptions. The higher rate does not apply to TDS on salary (Section 192), EPF withdrawal (Section 192A), winning from lotteries or racehorses (Sections 194B/194BB), payments for immovable property/rent (Sections 194-IA/194-IB), Securitization Trust income (Section 194LBC), payments to contractors/professionals by certain individuals/HUFs (Section 194M), cash withdrawals (Section 194N), and transfers of Virtual Digital Assets (Section 194S). Furthermore, the provision is inapplicable to payments made to a non-resident without a Permanent Establishment (PE) in India or to a Central Government-notified person not required to furnish a return. If a recipient triggers both provisions—i.e., they have neither furnished a PAN (Section 206AA) nor filed a return as specified (Section 206AB)—the tax deductor is required to deduct tax at the rate that is higher between the rates prescribed by Section 206AA and Section 206AB.
Q.1 What are the provisions of Section 206AA of the Income Tax Act, 1961?
Ans Section 206AA provides that where any person is entitled to receive any income on which tax is deductible at source, he is required to furnish his PAN to the deductor. In case the PAN is not furnished, the tax shall be deducted at a higher rate under section 206AA.
Q.2 What is the rate of tax if provisions of Section 206AA are applicable?
Ans As per Section 206AA, if the recipient fails to furnish his PAN to the deductor then tax shall be deducted at the highest of the following rates:
(a) At the rate specified in the relevant provision of the Income-tax Act; or
(b) At the rate or rates in force; or
(c) At the rate of 20%
Q.3 Is there any exception to the higher rate prescribed as per section 206AA?
Ans The rate of 20% shall be reduced to 5% in the case where:
a) Tax is required to be deducted by an e-commerce operator undersection 194-O; or
b) Tax is required to be deducted by a buyer under section 194Q.
Q.4 Is there any exemption available to a person from the provisions of section 206AA?
Ans The provisions ofsection 206AA shall not be applicable in respect of the following income received by a non-resident (or a foreign company):
(a) Interest on bonds referred to underSection 194LC;
(b) Specified payments as referred underRule 37BC; and
(c) Income in respect of investment in Category I or Category II AIFs as referred under Rule 114AAB.
Q.5 What are the provisions of Section 206AB?
Ans As per section 206AB, where any person fails to furnish his return of income for a specified period and tax deducted/collected during that period exceeds the specified limit, the deductor shall deduct the tax at a higher rate under section 206AB.
Q.6 When do provisions of section 206AB apply?
Ans The provisions of section 206AB apply if the following conditions are satisfied:
a) Deductee has not filed the return of income for the assessment year relevant to the previous year immediately preceding the financial year in which tax is required to be deducted;
b) The due date to file the return of income of such assessment year, as prescribed under section 139(1), has expired; and
c) The aggregate amount of tax deducted and collected at source is Rs. 50,000 or more in the said previous year.
Q.7 Which sum or income is liable for a higher rate of TDS under section 206AB?
Ans Tax is required to be deducted at higher rates in respect of every sum or income or amount from which tax is deductible under any provision of Chapter XVII-B except the sum or income or amount on which tax is deductible under any of the following provisions:
a. Section 192: TDS on Salary;
b. Section 192A: TDS on withdrawal from EPF;
c. Section 194B: TDS on winning from lotteries, crossword puzzles, gambling, betting, etc.
d. Section 194BB: TDS on winning from racehorses;
e. Section 194-IA: TDS from payment of consideration to buy an Immovable Property other than rural agricultural land;
f. Section 194-IB: TDS from payment of rent by certain Individuals or HUF;
g. Section 194LBC: TDS on income in respect of investment in Securitization Trust;
h. Section 194M: TDS from payment to the contractor, commission agent, broker, or professional by certain Individuals or HUF;
i. Section 194N: TDS on cash withdrawal; and
j. Section 194S: Payment on transfer of Virtual Digital Asset (if the payer is a specified person)
Further, the tax shall not be deducted at higher rates under this provision if such sum (or income or amount) is paid (or payable or credited) to a non-resident who does not have a permanent establishment (PE) in India or to a person who is not required to furnish the return of income for the specified period and is notified by the Central Government.
Q.8 What is the rate of tax under section 206AB?
Ans Where tax is required to be deducted under this provision, the tax shall be deducted at the higher of the following rates:
a) Twice the rate specified in the relevant provision of the Act; or
b) Twice the rate or rates in force; or
c) 5%.
Q.9 How to check the return filing status of a person for deduction of tax at source under Section 206AB?
Ans The Income-tax Department has issued a new functionality “”Compliance Check for section 206AB & 206CCA”” on https://report.insight.gov.in to check the IT Return filing status of the deductee. The tax deductor can feed the single PAN or multiple PANs of a person and get a response from the functionality if such a person is a specified person for the purpose of section 206AB.
Q.10 What is the applicable rate of deduction of tax in case both Section 206AA and Section 206AB apply to a person?
Ans In case both the provisions ofSection 206AA and section 206AB apply to a person, that is, the person has neither furnished his PAN to the deductor nor he furnished his return of income for the specified period, the tax shall be deducted at the rates provided inSection 206AA or section 206AB, whichever is higher.
(Republished with amendments)
