Section 206AB Of Income Tax Act: Eligibility, TDS Rate And More

Section 206AB of the Income Tax Act mandates higher TDS rates for taxpayers who haven’t filed their Income Tax Returns (ITRs) for the past two years and have a total TDS or TCS exceeding ₹50,000 annually. The higher TDS rate is either 5% or double the standard rate, depending on the case. This provision ensures that non-compliant taxpayers are incentivized to meet their tax obligations.

1,740 Views | Updated on: Mar 05, 2025

Grow with Assured Savings

The Income Tax Department is like a vigilant teacher keeping an eye on the class. Most students (read: taxpayers) submit their assignments (ITRs) on time, but there are always a few who miss deadlines or don’t show up at all. Now, imagine the teacher introducing a rule that says, “Late submissions? Higher penalties!” That’s the essence of Section 206AB of Income Tax Act.

It’s not just about rules; it’s about accountability. If you have been diligent with your filings, you’re in the clear. But for those who’ve skipped their homework (or tax returns), the repercussions could show up as higher 206AB TDS rates. This is more of a nudge to get everyone back on track.

So, what’s the story behind this rule? Who does it affect? How does it actually work, and what are the implications for your finances? Let’s find out, think of it as a handy roadmap to navigate Section 206AB effortlessly.

What is Section 206AB of Income Tax Act?

Section 206AB of Income Tax Act is a special provision designed to encourage tax compliance among taxpayers. It mandates higher Tax Deducted at Source (TDS) rates for individuals or entities who haven’t filed their income tax returns for the previous two years and whose total TDS deducted exceeds ₹50,000 in each of those years. Essentially, this section is a penalty for non-compliance, ensuring that individuals meet their tax filing obligations on time. By applying a higher TDS rate, the government aims to identify and prompt defaulters to become regular filers, ultimately broadening the tax base and promoting fiscal responsibility.

Applicability of Section 206AB of Income Tax Act

Section 206AB of Income Tax Act imposes a higher rate of Tax Deducted at Source (TDS) on certain transactions, such as contract payments, professional services, and rent. However, specific payments are exempt from this rule, including:

Salary (Section 192)
Winnings from lotteries, card games, or crossword puzzles (Section 194B)
Early withdrawal of EPF (Section 192A)
Winnings from horse races (Section 194BB)
Winnings from online games (Section 194BA)
Cash withdrawals (Section 194N)
Income from investments in securitization trusts (Section 194LBC)
Payments to non-residents without a permanent establishment in India

Additionally, the Union Budget 2022 outlines more transactions where higher TDS rates do not apply, such as:

Sale of immovable property with consideration exceeding a specific limit (Section 194-IA)
Rent payments exceeding ₹50,000 to landlords (Section 194-IB)
Payments for contractual or professional services above ₹50 lakh (Section 194M)
Transfer of virtual digital assets (Section 194S) to:

Individuals or HUFs with a business turnover below ₹1 crore or professional receipts under ₹50 lakh in the previous financial year.
Individuals or HUFs without income from business or profession.

Non-Applicability Of Section 206AB of Income Tax Act

Section 206AB of Income Tax Act enforces a higher TDS rate on several types of transactions. However, certain transactions are excluded from this provision, including:

Salaries (covered under Section 192)
Lottery winnings (Section 194B)
Income derived from investments in securitization trusts (Section 194LBC)
Accumulated balances payable to employees (Section 192A)
Winnings from horse races (Section 194BB)
Cash payments of specified amounts (Section 194N)

These exemptions ensure that specific types of income and transactions are not subjected to the increased TDS rates under this section.

How To Calculate TDS Under Section 206AB?

Section 206AB of Income Tax Act was introduced to encourage tax compliance by imposing higher TDS rates on specific taxpayers. It applies to individuals who have not filed their income tax returns for the previous two financial years and where the aggregate TDS deducted exceeds ₹50,000 in each of those years. This section ensures that non-compliant taxpayers contribute their fair share. Let’s explore how the income tax calculator is used under Section 206AB with practical examples..

Example 1: When Section 206AB Applies

Consider Mr. A, who is a contractor providing services to a company. The payment for these services is ₹5,00,000, and the usual TDS rate under Section 194C (applicable to contractors) is 1%.

Scenario: Mr. A has not filed his income tax returns for the past two financial years, and his yearly TDS exceeded ₹50,000.

Calculation:

As per Section 206AB, the TDS rate will be higher of:

1. Twice the standard rate (1% × 2 = 2%)

2. 5% (default rate under Section 206AB)

Since 5% is higher, the company must deduct TDS at this rate.

TDS Amount: ₹5,00,000 × 5% = ₹25,000

In this case, Mr. A faces a higher TDS deduction due to non-compliance with filing requirements.

Example 2: When Sections 206AA and 206AB are Applied Together

Now, let’s consider a scenario where both Section 206AA (failure to provide PAN) and Section 206AB (non-compliance with filing returns) are applicable.

Scenario:

Ms. B is a freelancer earning ₹3,00,000 from a client.
She has not filed her income tax returns for the last two years, her TDS exceeds ₹50,000 annually, and she has not provided her PAN to the client.

Standard TDS Rate: As per Section 194J (applicable to professional fees), the rate is 10%.

Applicable Rates:

Section 206AA prescribes TDS at 20% for non-furnishing of PAN.
Section 206AB prescribes the higher of:

1. Twice the standard rate (10% × 2 = 20%)

2. 5% (default rate under Section 206AB)

Final TDS Rate: When both sections apply, the higher of the two rates is considered. In this case, 20% (under Section 206AA) will apply.
TDS Amount: ₹3,00,000 × 20% = ₹60,000

Ms. B’s failure to provide PAN and non-compliance with tax filing resulted in a significant TDS deduction.

How is TCS Collected Under Section 206AB?

Section 206AB also extends its provisions to Tax Collected at Source (TCS), mirroring the stricter rules applied to TDS. For certain specified individuals, the applicable TCS rate will be the higher of the following: 5%, twice the current rate, or twice the rate specified under the relevant TCS sections. This elevated TCS rate applies to taxpayers who have failed to file their income tax returns for the last two financial years, provided their annual TDS and TCS amount to ₹50,000 or more each year. The primary objective of this rule is to encourage timely compliance with income tax filing obligations.

Who is the Specified Person Under Section 206AB?

Under Section 206AB, a “specified person” refers to an individual who meets any of the following conditions:

They did not file their Income Tax Return (ITR) for the previous financial year.
They missed the deadline for filing their ITR despite being required to do so.
Their total TDS and TCS during the last financial year amounted to ₹50,000 or more.
These provisions aim to enforce tax compliance by levying higher TDS rates on individuals categorized as specified persons, thereby encouraging timely tax filing.

TDS Rate Under Section 206AB

If Section 206AB applies to you, the TDS on your income will be calculated at the higher of the following rates:

Twice the standard applicable TDS rate
5%, as the default rate under Section 206AB

Additionally, if you fail to file your income tax return for one financial year and do not provide your PAN to the deductor, a different set of TDS rates will come into play. In such cases, the higher rate between the following will be applicable:

TDS under Section 206AA
TDS under Section 206AB

Section 206AA is triggered when you fail to furnish your PAN to the deductor, particularly in transactions where TDS is mandatory. Under this section, the applicable TDS rate will be the higher of:

The rate specified in the relevant section of the Income Tax Act
20%

This mechanism ensures non-compliance with filing returns or PAN submissions, which results in stricter tax deductions.

How is TDS Deducted Under Section 206AB?

Under Section 206AB of Income Tax Act, any payment made to a “specified person” is subject to a higher TDS rate. This measure is designed to enforce tax compliance and discourage non-filing income tax returns. The TDS is calculated based on the following criteria:

1. 5% Rate: A flat TDS rate of 5% is applicable.

2. Double the Standard Rate: TDS will be deducted at twice the rate prescribed under the relevant section of the Finance Act or the Income Tax Act, whichever applies to the transaction.

In addition to the above, if the specified person fails to provide their Permanent Account Number (PAN), a separate provision under Section 206AA comes into play. In such cases, the TDS rate will be determined as the higher of the following:

20%: A flat TDS rate of 20%.
Applicable Rate: The rate specified under the relevant section of the Income Tax Act for that particular transaction.

For instance, if the specified TDS rate for a payment is 10%, and the individual does not furnish their PAN, the TDS will be deducted at 20% as it is the higher rate. Similarly, if the individual is classified under Section 206AB and the applicable rate doubles, the higher rate among the options will apply.

What are the Exclusions Under Section 206AB?

Section 206AB of Income Tax Act introduces higher TDS rates for non-compliant taxpayers who fail to file their Income Tax Returns (ITR) for the previous two years. However, there are certain exclusions where these higher TDS rates do not apply. Below is a table summarizing the key exclusions under Section 206AB:

Exclusions	Explanation
Salaries (Section 192)	TDS on salaries is exempted from the higher rates under Section 206AB. This is because salaries are subject to TDS under the normal provisions of Section 192.
Winnings from lotteries, card games, or puzzles (Section 194B)	TDS on winnings from lotteries, card games, or crossword puzzles is excluded from the provisions of Section 206AB, as these payments are covered under Section 194B.
EPF Accumulation or Withdrawal (Section 192A)	Withdrawals or accumulated balance from Employee Provident Fund (EPF) are not subject to the higher TDS rates under Section 206AB, as per Section 192A.
Winnings from Horse Races (Section 194BB)	TDS on winnings from horse races is not affected by Section 206AB, as it is already governed by Section 194BB.
Winnings from Online Games (Section 194BA)	TDS on winnings from online games is excluded from the higher rates under Section 206AB, as it is specifically covered under Section 194BA.
Cash Withdrawals (Section 194N)	TDS on cash withdrawals exceeding ₹20 lakhs (or ₹1 crore for certain individuals) is not impacted by the higher rates of Section 206AB. Covered under Section 194N.
Income from Investment in Securitization Trusts (Section 194LBC)	TDS on income earned from investments in securitization trusts is exempt from the higher rates, as it is governed by Section 194LBC.
Non-Residents without a Permanent Establishment	Non-residents without a permanent establishment in India are excluded from the provisions of Section 206AB, as they are subject to the old tax regime and the new tax regime.
Certain Transactions Exempted in Budget 2022	The Union Budget 2022 has provided additional exemptions from higher TDS rates for certain transactions, such as the sale of immovable property and certain rental payments.

FAQs on Section 206AB Of Income Tax Act

What is Section 206AA as per Income Tax Act?

Section 206AA mandates a higher TDS rate for individuals who fail to provide their PAN to the deductor. The TDS rate in such cases is either 20% or the rate specified in the applicable section, whichever is higher.

What is the 206AB declaration form?

The 206AB declaration form is a self-declaration submitted by taxpayers confirming their compliance with ITR filing requirements. It helps the deductor determine whether Section 206AB applies to the taxpayer.

Is 206AB applicable for salaried employees?

No, Section 206AB does not apply to salaried employees. Salaries are explicitly excluded under this section, as they are governed by Section 192 of the Income Tax Act.

How can I check my TDS 206AB?

You can check if Section 206AB applies to you by reviewing your ITR filing status for the last two financial years and ensuring that your total TDS and TCS exceed ₹50,000 annually. The tax department also provides online tools for deductors to verify compliance.

Who is required to deduct TDS under Section 206AB?

Any individual or entity responsible for making payments to specified persons (non-compliant taxpayers) must deduct TDS under Section 206AB at higher rates.

What is the relevance of the non-obstante clause in Section 206AB?

The non-obstante clause ensures that Section 206AB overrides conflicting provisions in other sections of the Income Tax Act, mandating higher TDS rates for specified persons regardless of lower rates mentioned elsewhere.

Written By :

Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Reviewed By :

Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Kotak Guaranteed Fortune Builder

Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.

Guaranteed^@ Income Benefit for upto 25 years
Flexibility to choose income period
Premium break for females on child birth or any listed specific illnesses
Life cover for the premium payment period
Enhance your life cover with rider offerings

View Kotak Guaranteed Fortune Builder

Invest NOW

ARN. No. KLI/23-24/E-BB/1201

T&C

Features

Increasing Life Cover*
Guaranteed^ Maturity Benefits
Enhanced Protection Through Riders
Tax Benefits
Dual Benefits: Guaranteed^Maturity + Death benefits

View Kotak Assured Savings Plan?

BUY NOW

Ref. No. KLI/22-23/E-BB/999

T&C

Calculator bookmarks

Term Insurance bookmarks

ULIP bookmarks

Savings bookmarks

Retirement and Pension Bookmarks

Investment Bookmarks

Buy Online

Kotak Guaranteed Fortune Builder

Guaranteed Income for bright financial future

Invest Now

Kotak Assured Savings Plan

Guaranteed Lumpsum returns for achieving life goals

Invest Now

Section 206AB Of Income Tax Act: Eligibility, TDS Rate And More

What is Section 206AB of Income Tax Act?

Applicability of Section 206AB of Income Tax Act

Non-Applicability Of Section 206AB of Income Tax Act

How To Calculate TDS Under Section 206AB?

Example 1: When Section 206AB Applies

Example 2: When Sections 206AA and 206AB are Applied Together

How is TCS Collected Under Section 206AB?

Who is the Specified Person Under Section 206AB?

TDS Rate Under Section 206AB

How is TDS Deducted Under Section 206AB?

What are the Exclusions Under Section 206AB?

FAQs on Section 206AB Of Income Tax Act

What is Section 206AA as per Income Tax Act?

What is the 206AB declaration form?

Is 206AB applicable for salaried employees?

How can I check my TDS 206AB?

Who is required to deduct TDS under Section 206AB?

What is the relevance of the non-obstante clause in Section 206AB?

Also read

Calculator bookmarks

Term Insurance bookmarks

ULIP bookmarks

Savings bookmarks

Retirement and Pension Bookmarks

Investment Bookmarks

Kotak Guaranteed Fortune Builder

Kotak Assured Savings Plan

popular searches