written by | April 26, 2022

The Income Tax Act, Section 206AB

Section 206AB of the Income Tax Act allows for greater TDS deductions, and section 206AA of the Income Tax Act requires a higher TDS penalty for not providing a PAN card. Section 206AB offers a tax deduction at source (TDS) at rates higher than those prescribed in the Income Tax Act while making payments or collections to those who have not filed their income tax return.

Did you know?

We can trace documented records of taxation all the way back to ancient Egypt, sometime around 3000 to 2800 BCE.

What Is Section 206AB?

Section 206AB allows for more significant tax deductions than the TDS charges outlined in each applicable section. As a result, whenever you make a payout or credit for an amount that requires TDS reduction, they take TDS out at a greater rate. Only certain taxpayers are subject to the provisions of section 206AB. Section 206AB of the Income Tax Act of 1961 takes precedence over other laws, sections, or rules that conflict with this section.

Applicability of Section 206AB

Section 206AB applies in the following cases:

  • Suppose the person has failed to submit income tax returns for consecutive assessment years applicable to the past two years promptly before the year when the tax payment is due. For instance, within the fiscal year 2021-22, TDS charges are applicable. Section 206AB applies only when the person eligible to pay tax has not submitted a taxable income for the fiscal years of both 2020-21 as well as 2019-20.
  • The deadline for submitting the past fiscal year's taxable returns has passed.
  • If the subtracted TDS was more than ₹50,000 in the preceding two fiscal years.

Also Read: What comes under Section 119 of the Income Tax Act, 1961

Non-applicability of Section 206AB

  • A non-occupant who doesn't have an enduring institution in India isn't subject to section 206AB. In India, a stable institution is a contact centre where non-occupant taxpayers can conduct operations partially or wholly.
  • Section 206AB does not apply to just about any reimbursement of money that is subject to TDS under the subsequent subsections:
  • Payment of wages under section 192
  • Company's payments of a worker's cumulative sum owed per section 192A
  • Lottery or game prizes are subject to section 194B.
  • When one wins a horse race, it falls under section 194BB
  • Income from subprime trusts investment, as defined by section 194LBC
  • Contributions in currency above the amount set out in section 194N

TDS Rate Under Section 206AB

When a taxpayer meets the requirements for section 206AB to be relevant, the relevant TDS fees apply:

  • At double the rates provided in the applicable TDS provision or
  • At double the rates in effect or
  • Even at a charge of 5% TDS.

TDS fees vary if the individual has not filed their taxable income within the previous two fiscal years and has not provided their PAN to a deductor. The appropriate TDS rates in this scenario will become the greater of the accompanying:

  • TDS rates according to section 206AA
  • TDS amount according to section 206AB

Whenever a deductee fails to provide the deductor with their PAN, section 206AA applies. In addition, the purchase necessitates the removal of TDS, and section 206AA has a larger TDS ratio.

  • At the rates indicated in the applicable TDS subsection or
  • At a charge of 20%

How to Calculate TDS Under Section 206AB?

  • Example-1: If section 206AB is applicable

On December 21, 2021, Pooja paid Radha ₹ 5,00,000 for professional counselling. Section 194J of the Income Tax Act 1961 applies to this form of income. Radha failed to submit her taxable income for the two previous fiscal years of 2020-2021 and 2019-2020. Section 206AB applies because Radha did not pay any income taxes. Professional charges are subject to a 10% TDS per section 194J. It will apply the highest of the preceding TDS rates:

20% (10% X 2) 5% TDS charge,i.e., double the amount provided in section 194J

As a result, the TDS rates are set at 20%. TDS shall equal to ₹ 1,00,000 (₹ 5,00,000 X 20%).

  • Example-2: If section 206AA and section 206AB are relevant concurrently.

On December 21, 2021, Ganga paid Swapna a sum of ₹ 5,00,000 as per the business agreement. Section 194C of the Income Tax Act 1961 applies to this type of contribution. Swapna failed to submit her tax returns for the previous two fiscal years, 2020-2021 and 2019-2020, and she also failed to provide Ganga with her PAN. As a result, both sections 206AA and 206AB apply simultaneously. The TDS rates for payment underneath a legal contract within subsection 194C are 1%.

The relevant tax rates increase whenever both sections apply.

  • At 1%, as stated in article 194C
  • At a 20% annual rate

According to section 206AB, the appropriate tax rates are more in the below conditions:

  • 2 %( 1% according to section 194C X 2), which is double the list in clause 194C.
  • Rates of TDS of 5%

Therefore in this situation, the relevant TDS rates under section 206AA and section 206AB would be greater:

  • 20% under section 206AA
  • 5% under section 206AB

As a result, Swapna's applicable TDS rates would be 20%. TDS will equal ₹ 1,00,000 (₹ 5,00,000 X 20%).

The Recently Introduced Segment's Difficulties (Section 206AB of Income Tax Act)

This section presents three key issues. The difficulties stem from the deductor's inability to identify:

  • Whether or not the deductee has submitted an income taxes in the last 2 years;
  • Whether the total TDS for the past 2 years exceeds ₹ 50,000;
  • Whether or not the deductee has to file income tax returns.

Also Read: Know About Section 194D and 194DA of the Income Tax Act 1961

Identification of Specified Person

The IT department has supplied consumers with resources to help them identify specific taxpayers. It will allow the deductor to determine the delinquent deductee and charge TDS in accordance with section 206AB. Using PAN, such conformance checking feature assists the taxpayers in identifying selected delinquent taxpayers. For using this feature, the taxpayer should give information on the chosen client, like

  • PAN
  • Name
  • Fiscal year
  • PAN allotment number
  • The PAN-Aadhar link's status

This also enables a mass search for several PANs belonging to various taxpayers. One must prepare and upload a CSV file mostly in the specified format.

Conclusion

To apply for it, the deductee must declare that he\she has submitted income tax returns for the preceding two evaluation years unless the period per section 139(1) has elapsed or even the TDS value is not equivalent to or above ₹ 50,000 of unpaid returns. Beginning July 1, 2021, it will include income tax returns and TDS amounts from the assessment year (AY) of 2020-21 and AY2019-20 when determining the TDS reduction rates in the fiscal year of 2021-22. Nevertheless, the administration needs a greater explanation on fully comprehending section 206AB of the Income Tax Act 1961.
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FAQs

Q: How can you tell whether someone is there on the list?

Ans:

You may employ the compliance check feature to see whether the payee is a certain individual or not. One can conduct personal research by entering someone's PAN and other information, and you can also conduct a mass search by exporting a CSV file.

Q: Is 206AB relevant to employees who are regularly receiving a salary?

Ans:

Section 206AB does not apply to section 192 (salaries). It does not apply to a full-time worker for any compensation, except contributions exempted by sections 192A, 194B, 194BB, 194N, and 194LBC. As a result, if a paid individual receives a payout protected by other TDS provisions and misses to complete their tax returns, section 206AA applies.

Q: What is the functionality of the gateway compliance checker?

Ans:

They prepare a database of designated individuals at the beginning of the fiscal term. For instance, during the fiscal year 2021-22, they consider the past two years (2018-19, 2019-20). The list comprises the names of people who failed to file an income tax return in two consecutive years of 2019-20 and 2020-21 evaluations and have a TDS amount of ₹ 50,000 or above for each of the 2 previous years.

Q: On which criteria can a tax deductor assess whether the deductee is just a "Particular Individual"?

Ans:

A new function called "Compliance Check for section 206AB" has already been added to the IT department's reporting online. It enables you to utilise your PAN to verify whether or not the deductee is a specific individual.

Q: As per section 206AB, what's the greater tax rate deduction?

Ans:

The greater rates are equal to either twice the given rates or 5%, whichever is more. In the case of a missing PAN, imposition of 20% of current rates, or the charges payable underneath this section, whatever is higher.

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