Section 206AA of the Income-tax Act mandates that every recipient of income subject to Tax Deducted at Source (TDS) must furnish a Permanent Account Number (PAN) to the deductor. If PAN is not furnished, TDS is deducted at the highest of the applicable rate, the rate in force, or 20%, although a reduced rate of 5% applies for deductions under Sections 194-O and 194Q. The provision does not apply to certain payments made to non-residents or foreign companies, including specified payments covered by Section 194LC, Rule 37BC, and Rule 114AAB. Section 206AB, which prescribed a higher TDS rate for specified non-filers of income tax returns, applied where prescribed conditions relating to return filing and TDS/TCS thresholds were satisfied, with TDS deductible at the higher of twice the prescribed rate, twice the rate in force, or 5%. However, Section 206AB is no longer applicable from 1 April 2025. Where both Sections 206AA and 206AB applied, the higher of the prescribed rates governed TDS deduction, ensuring stricter compliance with PAN and return filing requirements.
FAQs on Higher rate of TDS under section 206AA
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 under section 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 of section 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 under Section 194LC;
(b) Specified payments as referred under Rule 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 of Section 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 in Section 206AA or section 206AB, whichever is higher.
(Republished with Amendment, Source -Income Tax Website)
