Section 206AB mandates higher TDS rates if you do not file your income tax return.
Section 206AB of Income Tax Act signifies a provision where a citizen must pay a higher Tax Deducted at Source (TDS) rate if he/she has not filed income tax returns for the past two financial years and also has a TDS/TCS credit of Rs 50,000 or more each of the two particular years. This section was introduced in 2021 with the main goal of making people file their IT returns regularly and on time. This article will discuss the specifics of Section 206AB and how it is applied.
New provisions were introduced through the Finance Bill, 2021 to deduct TDS (Tax Deducted at Source) or collect TCS (Tax Collected at Source) at higher rates from specified persons who have not filed their income tax returns.
Section 206AB was inserted after Section 206AA of the Income Tax Act. Section 206AA already provides for the deduction of TDS at higher rates when a person does not furnish their Permanent Account Number (PAN).
Similarly, Section 206CCA, relating to TCS, was inserted after Section 206CC of the Income Tax Act. This article explains these provisions in detail, including the latest CBDT Circular No. 10/2022, the compliance check functionality, and other important aspects.
Under Section 206AB, the TDS rate is higher of the following three things:
What this essentially means is that non-complying taxpayers are put in a situation to pay a significantly higher TDS as a penalty, which acts as a financial deterrent.
Under Section 206AB, a specified person is someone who fulfills the following criteria:
The second condition ensures that Section 206AB mainly targets substantial taxpayers who have a history of not complying with taxation rules and obligations.
Also read: Section 111A of Income Tax Act
In order to calculate the TDS under Section 206AB, you must first determine the applicable rate based on the specific criteria mentioned in the act. Then double the specified rate or the rate in force or 5% and double it.
Let’s take for example a businessman who has not filed his IT returns for the past two assessment years. He has a total TDS credit of Rs 60,000 each year. Now, assuming the standard TDS rate for businessmen in his tax bracket is 1%, under Section 206AB, he will be taxed at a rate of either 2% (doubling the specified 1%), or 5%, whichever is higher. Therefore, the TDS rate applicable to him would be 5%.
Under Section 206AA, the taxpayer is mandated to pay a higher TDS if he has not furnished his Permanent Account Number (PAN). In case the specified person under Section 206 AB has not supplied PAN, then the TDS rate applied to him will be the one that is higher between the rates prescribed under both sections. For instance, if the specified 206AA is say, 30% and after calculation (as per above), the rate under Section 206AB is 5%, then the applicable TDS would be Rs 20%.
Also read: Section 56 of Income Tax Act
Section 206AB of the Income Tax Act prescribes higher Tax Deducted at Source (TDS) rates for specified taxpayers who have not filed their Income Tax Returns (ITR) for the previous two assessment years and meet the prescribed conditions. The objective of this provision is to encourage timely tax compliance and return filing. However, Section 206AB does not apply to certain types of payments and categories of taxpayers. These exclusions ensure that specific transactions already governed by separate TDS provisions are not subjected to higher deduction rates. In addition, some taxpayers, such as eligible non-residents, are also kept outside the scope of this section. The table below outlines the major exclusions under Section 206AB and explains why the higher TDS rates are not applicable in these cases.
Exclusions | Explanation |
Salaries (Section 192) | TDS on salary income is not subject to the higher rates under Section 206AB. Salary payments continue to be taxed under the standard TDS provisions of Section 192. |
Winnings from lotteries, card games, or puzzles (Section 194B) | Income earned from lotteries, card games, crossword puzzles, and similar activities is excluded from Section 206AB, as these payments are specifically covered under Section 194B. |
EPF accumulation or withdrawal (Section 192A) | Withdrawals from or payments relating to the Employee Provident Fund (EPF) are not liable for higher TDS rates under Section 206AB because they are governed by Section 192A. |
Winnings from horse races (Section 194BB) | TDS on horse race winnings remains outside the scope of Section 206AB and continues to be regulated under Section 194BB. |
Winnings from online games (Section 194BA) | Income earned from online games is exempt from the higher TDS provisions of Section 206AB, as it falls under the specific rules of Section 194BA. |
Cash withdrawals (Section 194N) | TDS on cash withdrawals exceeding Rs. 20 lakhs, or Rs. 1 crore in certain cases, is not affected by the higher rates under Section 206AB. These transactions are covered by Section 194N. |
Income from investment in securitisation trusts (Section 194LBC) | Income received from investments in securitisation trusts is excluded from the higher TDS rates because it is governed by Section 194LBC. |
Non-residents without a permanent establishment | Non-residents who do not have a permanent establishment in India are not covered by Section 206AB and are therefore exempt from the higher TDS rates. |
Certain transactions exempted in Budget 2022 | The Union Budget 2022 introduced additional exemptions from higher TDS rates for certain transactions, including specific property sale transactions and selected rental payments. |
In order to ensure that non-compliant people are pushed to pay their taxes on time, Section 206AB of the Income Tax Act was created. It’s a robust tool for deterring people from defaulting on their tax-paying duties. Since it forces upon them a higher TDS rate, it ensures that substantial taxpayers stick to their tax-paying duties and obligations. This in turn helps broaden the tax base and include more people in tax-paying brackets.
If you are looking to navigate the complexities of investments and tax payments, then Bajaj Finance offers a comprehensive platform that helps do a bunch of things.
You can also use their Income Tax Slabs tool, to figure out which bracket you fall into and how you can fulfill your tax obligations.
Based on your financial goals, you can choose from a plethora of mutual fund schemes and use their resources that make investing in mutual funds easy and hassle-free.
Under Income Tax Section 206AB, a specified person is a taxpayer who has not filed their income tax returns for the two relevant assessment years immediately preceding the financial year in which tax was required to be deducted. In addition, the due date for filing those income tax returns must have already passed.
A specified person under Section 206AB of the Income Tax Act, 1961 is an individual who has not filed their Income Tax Return (ITR) for the previous assessment year by the prescribed due date. It also includes a person whose total Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) amounted to Rs. 50,000 or more during the preceding financial year. This provision helps ensure timely tax return filing and compliance with tax regulations.
You check for the applicability of an individual, you must verify whether the individual or entity has filed or not filed their IT returns for the past two years or has met their TDS/TCS threshold.
There are a few exceptions to 206AB. These are non-residents with a permanent establishment or address in India, and transactions covered under Sections 194IA, 194IB, and 194M.
Section 206AA is about higher TDS rates applied for not furnishing PAN. Section 206AB is about higher TDS rates applied for not having filed income tax for two years.
The two main conditions for applying Section 206AB are the non-filing of IT returns for two consecutive years and a credit of Rs 50,000 or more in the form of TDS/TCS in each of the two years.
The TDS rate applied under Section 206AB is either twice the specified rate, twice the rate in force or 5%, whichever is higher.
If you check their IT returns filing status, you will know whether they have paid taxes in the last two years. You must also check their TDS/TCS credit amount in the last two years and see if it meets the given criteria.
Any person or entity like a business receiving payments that are subject to TDS but doesn’t have a permanent establishment or address in India. This applies to all kinds of taxpayers without exception.
FD & The Power of Compounding
Make your money work hard with FD
Why choose Bajaj Finance Fixed Deposit
How to invest in mutual funds
Trusted by 50 million+ customers in India, Bajaj Finance App is a one-stop solution for all your financial needs and goals.
You can use the Bajaj Finance App to:
Download the Bajaj Finance App today and experience the convenience of managing your finances on one app.
Now request money from your friends and family and make instant payments.
