Sections 206AB and 206CCA were added to the Income Tax Act to improve tax compliance. These sections introduced higher TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) rates for certain individuals who failed to file their income tax returns, despite having considerable TDS or TCS in previous years. The aim was to encourage timely return filing and discourage tax evasion by applying stricter deduction and collection rules.
These provisions mainly targeted those who did not submit their ITRs on time and whose tax deductions or collections crossed a certain threshold. As the tax system evolves, the government has reviewed and updated these provisions to make tax compliance easier for businesses and taxpayers.
With the Union Budget 2025, a significant change has been proposed – the removal of the additional TDS and TCS rates for non-filers under Sections 206AB and 206CCA. This move aims to simplify compliance and reduce complications for tax deductors and collectors. In this article, we’ll take a closer look at Section 206AB, its applicability, tax rates, and how the latest budget proposals affect these sections.
Budget 2025 removes higher TDS/TCS u/s Section 206AB and Section 206CCA for non-filers of income tax return
One of the highlights of the Budget 2025 is the proposal to remove the higher TDS and TCS rates under Sections 206AB and 206CCA for those who have not filed their income tax returns. This step is seen as a way to ease compliance and simplify the tax deduction and collection process. With this change, deductors and collectors will no longer have to apply higher tax rates based on ITR filing history, making tax compliance more straightforward for everyone involved.
For honest taxpayers, Section 206AB has minimal impact. But for those who neglect their tax filing duties, it can mean paying significantly more tax upfront. The higher TDS rates under Section 206AB can range from 5% to double the normal rates, depending on the nature of the payment.
This article will explore Section 206AB in detail, explaining its scope, application, and impact on various stakeholders. We will also look at how staying compliant helps you avoid these higher rates and manage your finances better, including when planning major investments like home purchases.
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What is Section 206AB of Income Tax Act?
Section 206AB, introduced through the Finance Act 2021 and effective from 1 July 2021, applied higher TDS rates to individuals who had not filed their income tax returns for the previous two financial years and had a total TDS/TCS of Rs. 50,000 or more in each year. This provision was meant to encourage regular return filing and curb tax evasion by enforcing stricter tax deduction rules. Essentially, it ensured that those who didn’t file their ITRs still contributed to the tax system fairly through higher deductions at source.
The main purpose of Section 206AB is to ensure better tax compliance. It targets taxpayers who have consistently failed to file their income tax returns for the past two assessment years. These taxpayers face higher TDS rates on various payments they receive.
Under Section 206AB, the tax deductor must verify if the recipient is a "specified person" before making any payment. If the recipient falls under this category, the deductor must apply a higher rate of TDS than what is normally applicable.
This section applies to most payments that are subject to TDS under various provisions of the Income Tax Act. The higher rate under Section 206AB is either twice the rate specified in the relevant section or 5%, whichever is higher.
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How is TDS deducted under section 206AB?
Under Section 206AB, the TDS deduction process follows specific rules designed to ensure higher tax collection from non-compliant taxpayers.
When making payments to a "specified person" (a non-compliant taxpayer), the deductor must apply TDS at whichever is higher: twice the normal rate or 5%. For example, if the normal TDS rate is 2%, the rate under Section 206AB would be 5% (as it is higher than 4%, which is twice the normal rate).
The deductor needs to verify the status of the recipient before making the payment. The Income Tax Department provides an online facility called "Compliance Check for Sections 206AB & 206CCA" to help deductors verify if a recipient is a specified person.
This verification must be done at the beginning of each financial year or before making the first payment in a financial year. The results of this verification can be relied upon for all subsequent payments during that financial year.
How is TCS collected under section 206AB?
While Section 206AB primarily deals with TDS (Tax Deducted at Source), it has a companion provision called Section 206CCA that applies the same principles to TCS (Tax Collected at Source).
Section 206CCA imposes higher TCS rates on specified persons who have not filed their income tax returns. The TCS is collected at the higher of twice the applicable rate or 5%.
Just like with TDS, the collector needs to verify if the buyer is a specified person. The same online compliance check facility can be used for this verification.
The higher TCS rates apply to transactions like sale of goods, provision of services, and other activities that normally attract TCS under the Income Tax Act.
Example
Let’s take an example to understand how Section 206AB worked in practice. Suppose a company pays professional fees of Rs. 50 lakhs to Ms. A, and the standard TDS rate on such a payment is 10%. However, if Ms. A has not filed her ITR for the previous financial year and the filing deadline has already passed, the company must apply a higher TDS rate.
Under Section 206AB, the company will need to deduct tax at the higher of:
- Twice the applicable rate under the Income Tax Act, i.e., 2 × 10% = 20%, or
- A flat 5%
Since 20% is higher than 5%, the TDS will be deducted at 20%.
If, in addition, Ms. A fails to provide her PAN to the company, the TDS rate of 20% will still apply, as the rate for non-PAN cases does not change the outcome in this scenario. This highlights how Section 206AB imposed stricter rules on non-filers, increasing the tax burden on them.
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Who is the specified person U/S Section 206AB?
A "specified person" under Section 206AB refers to a taxpayer who meets specific non-compliance criteria. Understanding this definition is crucial for both deductors and taxpayers.
A person is considered a "specified person" if they have not filed income tax returns for the past two assessment years immediately preceding the year in which tax is to be deducted. Additionally, the time limit for filing the return under section 139(1) must have expired for both years.
The person must also have been subject to TDS and TCS of Rs. 50,000 or more in each of these two previous years to be classified as a specified person.
It is important to note that non-resident taxpayers who do not have a permanent establishment in India are not considered specified persons under this section. The status of being a specified person is determined at the beginning of each financial year based on the compliance status of the previous years.
Budget 2025 update on Section 206AB
The Union Budget 2025 introduced a key change by proposing the removal of Sections 206AB and 206CCA from the Income Tax Act. These sections previously required higher TDS and TCS rates for individuals who had not filed their ITRs. The change aims to simplify the compliance process for tax deductors and collectors, reducing the administrative burden.
From 1 April 2025, the higher tax deduction and collection rates for non-filers will no longer be applicable. This means that deductors no longer need to check whether someone has filed their ITRs before applying the appropriate TDS or TCS rate. The government hopes this move will streamline processes, make tax compliance easier for all stakeholders, and encourage voluntary and timely filing of returns without the fear of higher tax deductions.
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What are the exclusions under Section 206AB?
Section 206AB does not apply universally to all payments. Several important exclusions exist where normal TDS rates continue to apply regardless of the recipient's compliance status.
The key exclusions under Section 206AB include payments that attract TDS under:
- Section 192 (Salary payments)
- Section 192A (Payments from Employees Provident Fund)
- Section 194B (Winnings from lottery, crossword puzzles)
- Section 194BB (Winnings from horse races)
- Section 194LBC (Income from investment in securitisation trust)
- Section 194N (Cash withdrawals exceeding specified limits)
Additionally, non-resident taxpayers without a permanent establishment in India are excluded from the purview of Section 206AB.
These exclusions ensure that certain essential or specific payments remain unaffected by the higher TDS rates, even if the recipient is a non-filer.
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Conclusion
The decision to eliminate Sections 206AB and 206CCA marks a positive shift in tax administration. By removing the requirement for higher TDS and TCS on non-filers, the government is reducing complexity and making tax compliance easier for businesses and individuals. This change reflects a broader effort to simplify India’s tax system and promote a more supportive environment for honest taxpayers. As the new rules take effect from 1 April 2025, taxpayers and deductors alike will benefit from streamlined procedures and fewer compliance challenges.
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Frequently asked questions
Yes, both sections apply to NRIs. However, if the non-resident individual does not have a permanent establishment (a fixed business location) in India, these provisions will not be applicable.
A specified person is one who has not filed their income tax return for the previous year, despite the due date having passed, and whose total TDS and TCS in that year was Rs. 50,000 or more.
No. Section 206AB does not apply to salaried individuals. Higher TDS under this section is not deducted from salary payments. As a salaried professional, you have stable income that lenders value for home financing. This makes it easier to secure competitive home loan rates. Check your eligibility for a home loan from Bajaj Finserv by entering your mobile number and OTP. You may already be eligible for special rates starting from 7.15%* p.a. for salaried applicants.
The Income Tax Department provides a compliance check tool. By uploading PAN details (single or bulk), tax deductors can find out if a person is classified as a specified person.
The department prepares a list of specified persons at the start of each financial year. This includes those who didn’t file ITRs for the relevant year and had TDS/TCS of Rs. 50,000 or more. Names can be removed if the return is later filed or if TDS/TCS drops below the limit.
No. Only deductors with TAN-based logins can check this status. A PAN holder cannot check their own classification on the portal.
Both sections were introduced through the Finance Act, 2021 and became effective from 1 July 2021. With these sections now being phased out from April 2025, tax planning becomes simpler for property investments and major purchases. If you're considering buying a home, this is a good time to explore financing options. Check your eligibility for a home loan from Bajaj Finserv by entering your mobile number and OTP. You may already be eligible for loans with no foreclosure charges and flexible repayment terms.
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