A new provision  introduced in the Finance Act, 2021, regarding the deduction of TDS at higher rates on the non-filers of the income tax return under section 206AB of the Income Tax Act, 1961. Article explains  Need of the Section 206AB of Income Tax Act, 1961, On whom the higher TDS rates  under Section 206AB are applicable, What are the higher rates of TDS under Section 206AB, What are the exclusion from the section 206AB and What if PAN is also not furnished by the deductee.

Need of the Section 206AB of Income Tax Act, 1961

We are having the section 206AA in the Income Tax Act, which was implemented for ensuring the obtaining and furnishing of PAN by various person. There is also need to have a similar provision to ensure the filing of return of income by the person who have suffered a reasonable amount of TDS/TCS. Therefore, a section 206AB is introduced in the TDS provision, thus, at the time of deducting the TDS, a consideration to the provisions of Section 206AB by the deductor of TDS are mandatory. Here, we have listed the provisions as follows which shall be applicable from 01 July 2021:

A. On whom higher TDS rates under section 206AB are applicable?

The higher TDS rates are applicable on the deductees:

1. Who has not filed the returns of income for both of the two assessment years which are immediately before the previous year in which tax is required to be deducted,

2. The time limit for filing tax return under section 139(1) of the Act has expired for both these assessment years, and

3. The amount of TDS in each of two assessment years is INR 50,000 or more.

All the three conditions to be satisfied cumulative for the deduction of TDS at higher rates.

B. What are the higher rates of TDS under section 206AB?

The TDS rates shall be higher of the following:

1. Twice the rate specified in the relevant provision of the Act; or

2. Twice the rate or rates in force; or

3. The rate of five per cent

Rates in force here means rates applicable at present. For eg, due to COVID-19 pandemic, the rates of TDS was reduced by 25% for the period 14 May 2020 to 31 March 2021. The rate in force u/s 194J was 7.5%.

Let’s take an example, a deductee has not filed the return of income for the AY 2020-21. TDS shall be deducted under section 194J shall be higher of the following:

  • Twice the rate specified in the relevant provision of the Act – 20%
  • Twice the rate or rates in force – 20% as there is no reduction in rates now.
  • 5%

Finally TDS shall be deducted @ 20%.

C. What are the exclusion from the section 206AB?

The provisions of deduction of TDS at higher rate shall not be applicable on the     following sections:

1. Section 192 – TDS on Salary

2. Section 194A – TDS on Premature withdrawal of EPF.

3. Section 194B – TDS on winnings from lottery

4. Section 194BB – TDS on winnings from horse races

5. Section 194LBC – TDS by securitization trust

6. Section 194N – TDS on cash withdrawal

7. Non-resident who does not have a permanent establishment in India.

D. What if PAN is also not furnished by the deductee?

The TDS shall be deducted at higher of the following:

1. Rates as per this section; or

2. Rates as per section 206AA

Therefore, for the practical application of the section, a declaration is required to be obtained from the deductee that he/it has filed the return of income for the preceding two assessment years, where time limit u/s 139(1) has been expired or the amount of TDS is not equal or more than INR 50,000 in case of non-filing of return. For considering the rate for the deduction of TDS in the FY 2021-22 (from 01 July 2021 onwards), income tax return and TDS amount of the assessment year AY 2020-21 and AY 2019-20 shall be considered.

The similar provisions are for the TCS rate under section 206CCA of the Income Tax Act, 1961.

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