3 min
05-August-2024
Section 206AA is a section included in the Income Tax Act 1961 that deals with the responsibility of the payee to furnish their PAN card to the payer of income that is liable for Tax Deducted at Source (TDS). TDS is one of the most common taxes in India, and a payment made to a resident or non-resident must be subject to TDS.
The Indian government requires the payer to deduct the TDS amount from the payment made to residents and non-residents and deposit it within a specific time frame. However, previously, without the PAN of the payee, the TDS deduction process created inconvenience for the Indian government, especially in the case of non-residents. Hence, the Indian government introduced section 206AA in the Income Tax Act to ensure that the payees provide their PAN cards to the payers for effective TDS compliance.
If you are a payer or a payee, sending or receiving money from a resident or a non-resident Indian, it is important to comply with the provisions of section 206AA. This article will help you understand everything about section 206AA of the Income Tax Act and how you can better comply with TDS laws in India.
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The Indian government requires the payer to deduct the TDS amount from the payment made to residents and non-residents and deposit it within a specific time frame. However, previously, without the PAN of the payee, the TDS deduction process created inconvenience for the Indian government, especially in the case of non-residents. Hence, the Indian government introduced section 206AA in the Income Tax Act to ensure that the payees provide their PAN cards to the payers for effective TDS compliance.
If you are a payer or a payee, sending or receiving money from a resident or a non-resident Indian, it is important to comply with the provisions of section 206AA. This article will help you understand everything about section 206AA of the Income Tax Act and how you can better comply with TDS laws in India.
What is section 206AA of the Income Tax Act?
Section 206AA of the Income Tax Act mandates taxpayers to provide their PANs to a resident or non-resident who has paid a certain amount and is liable for a TDS deduction. The Indian government introduced section 206AA in the Income Tax Act in FY 2010-11 and made it applicable to both residents and non-residents to furnish their PAN cards to the payer for effective TDS deduction and compliance. Under section 206AA, if a taxpayer fails to provide the PAN to the payer responsible for deducting and depositing the TDS from the amount, the TDS is liable to be deducted at a higher rate.Rate of TDS
As per the provisions of section 206AA of the Income Tax Act, TDS deduction is applicable at a higher rate if a taxpayer (resident or non-resident) fails to provide PAN to the payer liable to deduct and deposit the TDS from the amount before sending. In such a case, the higher rate is the highest of the following:- The rate specified in the relevant provision of the Act.
- The rate or rates in force, which are the rates prescribed in the Finance Act.
- A rate of 20% (5% in case sections 194-O and 194Q are applicable).
Scope of section 206AA
Section 206AA of the Income Tax Act applies to all payments subject to Tax Deducted at Source (TDS), where the recipient needs to provide their PAN to the deductor. This includes payments like salaries, interest, professional fees, commissions, and rent. The section ensures that tax is deducted at a higher rate in the absence of PAN, promoting better tax compliance and reporting. It also applies to non-residents, requiring them to furnish PAN or face higher TDS rates. As long as taxpayers furnish their PAN to the payer at the time of payment and TDS deduction, the provisions of section 206AA do not apply, and higher TDS deduction at a higher rate is not applicable.TDS rates with Form 15H and 15G
According to section 197A of the Income Tax Act 1961, the payee is also required to submit a declaration under Forms 15H and 15G for nil TDS deduction for nil or lower TDS deduction to the payer. Form 15H applies to individuals under the age of 60, while Form 15G applies to individuals above the age of 60. However, if you do not furnish your PAN card, the declaration will be deemed invalid, and higher TDS rates will be applied at the following rates:- The rate specified in the relevant provision of the Act.
- The rate or rates in force which are the rates prescribed in the Finance Act.
- A rate of 20%.
Applicability and non-applicability of section 206AA
Here is a detailed table with the applicability and non-applicability of section 206AA of the Income Tax Act:| Applicability of section 206AA | Non-applicability of section 206AA |
| If section 206AA applies, the payee receiving a payment that is subject to TDS can submit an application for nil or smaller TDS deduction u/s 197 of the Income Tax Act. In some cases, the Assessing Officer may issue a certificate for the person submitting the application for TDS deduction at the designated TDS rates for the relevant and predetermined period. | The same results arise if the PAN of the payee is not rightfully attributed to them or is invalid. In such a case, a higher TDS deduction rate is applicable as per section 206AA. |
| However, it is mandatory that such certificates have the applicant's PAN and the correct PAN details at the time of application. If not, the application will be deemed invalid, and a higher TDS under section 206AA will be applied. | Since June 1, 2016, the Indian government has exempted foreign corporations and non-residents from the provisions of section 206AA of the Income Tax Act. Furthermore, u/s 194LC, the section doesn’t apply to interest payments on long-term bonds. |
| If you want to request the payer for a zero TDS deduction, you can submit a declaration under Form 15G (under the age of 60) and Form 15H (above the age of 60) u/s 197A. However, to avoid a TDS deduction at a higher rate, it is mandatory to attach your PAN to the declaration submitted through both Forms. | After the Finance Act 2016, the regulations under section 206AA for interest, royalties, fees for technical services provided to non-residents, and capital transfers were loosened. Furthermore, under Rule 37BC, foreign corporations and non-residents are not required to furnish their PAN cards if they disclose information such as their names, complete addresses, tax identity numbers, contact details, etc. |
Exemption u/s 206AA
Here are the exemptions under section 206AA of the Income Tax Act:- If a taxpayer has paid interest on long-term bonds u/s 194LC to a non-resident.
- The Finance Act 2016 has provided relaxation in case of the applicability of section 206AA if payments are made to non-residents in the nature of interest, royalties, fees for technical services provided to non-residents, and capital transfers.
- Section 206AA provisions are exempted for non-resident payees, and they do not have to furnish their PAN card to the payer if they provide the following documents and details under Rule 37BC inserted vide Notification No. 53/2016):
- Name, contact number, email ID.
- Complete address in the resident country or specified territory outside India of which the payee is a resident.
- A certificate of the non-resident being a non-resident and residing in any other country or specified territory outside India which is issued by the government of that country or specified territory. Applicable only if that country’s or specified territory’s law allows the issuance of such a certificate.
- Tax Identification Number of the non-resident in the country or specified territory of residence. In case the government of a resident country or specified territory doesn’t assign such a number, then any number issued by the government on whose basis the non-resident is identified in the resident country or specified territory.
Section 206AA for NRIs
The following payments are not eligible under the provisions of section 206AA if made by non-residents:- On paying royalties, fees for technical services provided to non-residents, capital transfers, and interest for long-term bonds u/s 194LC. This is when the non-resident Indian provides the following information to the Income Tax Department:
- Name, email ID, and contact information.
- Complete address in the country of residence or specified territory outside India.
- Tax Identification number or any other relevant identification number issued by the government of a resident country or specified territory outside India.
Conclusion
Section 206AA of the Income Tax Act mandates that taxpayers receiving payments that are liable for TDS deduction must furnish their PAN cards to the payer. If they fail to do so, a higher TDS rate is applicable, and the payer is liable to deduct and deposit the higher TDS amount with the government. However, there are certain exemptions, mainly for non-residents, allowing them to not furnish their PAN cards if they provide certain documents or information to the Income Tax Department. Where you are a resident or a non-resident receiving or making a payment that is liable for TDS deduction, it is important to adhere to the provisions of section 206AA.Essential tools for mutual fund investors
