The Finance Minister in Budget 2021 has introduced a special provision of TDS in the Income Tax Act, 1961. Section 206AB has been inserted which will be applicable from July 01, 2021.

This new section requires deduction of TDS at the higher rate while making payment to the “Specified person”*. TDS rates would be higher of the following –

-at twice the rate specified in the relevant provision of the Act; or

-at twice the rate or rates in force; or

-at the rate of five per cent.

*Meaning of Specified person –

A person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

In addition to non-filing of the income tax returns within the due dates, if the specified person does not furnish PAN to the payer, then the TDS rate shall be higher of the rates mentioned above or 20%.

Non – Applicability of this section

This provision is not applicable to deduction of tax at source under –

1. Section 192 (i.e. Salary),

2. Section 192A (i.e. Premature withdrawal of employees provident fund),

3. Section 194B (i.e. Winnings from lottery or crossword puzzle),

4. Section 194BB (i.e. Winnings from horse race.),

5. Section 194LBC (i.e. Income from investment in securitisation trust) or

6. Section 194N (i.e. Payment of certain amounts in cash.)

Conclusion:

The new rule requires the payers to verify below three things every time while deducting TDS on making payments to the specified persons:

  • Whether payee’s last two years tax deduction and tax collection was Rs. 50,000 or above;
  • Whether the person from whom TDS is deductible has filed his return of income for the previous two years;
  • And for both the previous years, the due date to file the original return has expired.

Note: While making a particular payment, if the due date to file ITR of any of the year has not expired, there is no need to deduct tax at higher rates on that payment.

The object of the above section is to make the taxpayer file their income tax returns without fail.  To identify the deductee’s return filling status, the deductor may have to collect the return filed acknowledgement or declaration from the deductee.

This provision might be an additional burden on the taxpayer, however, it is an additional step taken by the Government in order to catch people who do not file their ITRs even when their tax has been deducted and is shown in Form 26AS.

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4 Comments

  1. Pradeep D says:

    I think you need to change the wording of conclusion’s 2nd bullet point “Whether the person from whom TDS is deductible has filed his return of income for the previous two years” to “….any of the pervious year” since the section starts with the wording “A person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year” (refer if he fails both the years ITR and not just 1 year) – Please clarify.

    1. CA Sweta Kaseruwala says:

      As per the provisions —- A person who has not filed the returns of income for both of the two assessment years relevant to the two previous years “immediately prior to the previous year” in which tax is required to be deducted.
      Hence, deductor need to check the ITR filing status for “both” the previous two financial year. For E.g. While deducting TDS in the FY 2021-22, deductor need to check whether a person has filed ITR for both FY 2020-21 & FY 2019-20 (Also check the 3rd Conclusion point).
      Hope this clarifies your query.

  2. Srinivas says:

    Hi, Please clarify, If i am paying any payment to the vendor or service provider , do i need to verify or opt two years ITR acknowledgment copies .

    1. CA Sweta Kaseruwala says:

      Higher rate of TDS is applicable for payment made to specified person i.e. person for whom TDS & TCS is deducted & collected for not less than Rs.50,000/- for each preceeding two years. If the vendor/service provider falls under above criteria then you may verify / get ITR – V copies so as to avoid any non-compliance, as right now there is no facility/option to check the ITR filing status of the taxpayer.

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