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. By legally mandating a significantly higher Tax Deducted at Source (TDS), the Income Tax Department ensures that those who ignore their ITR filing duties do not get away. It is an aggressive, highly effective move to broaden the taxpayer base and encourage fiscal responsibility among citizens. If you do not file your income tax return, this rule allows the government to deduct a higher amount of tax from your income.
When and to Whom Does Section 206AB Apply?
Section 206AB comes into effect when a payment is credited to your account or actually paid out, whichever happens earlier. Any taxpayer (whether an individual, a firm, or a company) who failed to file their ITR before the official deadline expired falls under this category. If that specific individual also accumulated ₹50,000 or more in TDS and TCS during that same year, the higher deduction rates instantly activate.
Applicability of Section 206AB of Income Tax Act
The reach of Section 206AB is incredibly broad, covering everyday transactions that ordinarily attract regular TDS. We are talking about professional fees, contract payments, rent, brokerage, and commission payouts. If you fit the non-filer criteria, the entity processing your payment has absolutely no choice but to slash a larger percentage of your income before the money ever reaches your bank account.
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 subject to the increased TDS rates under this section.
Rate of Tax Under Section 206AB
The governing rule dictates that the person paying you must evaluate two options and apply whichever yields the absolute highest tax deduction:
1. Twice the standard rate specified in the relevant Income Tax provision
2. A flat baseline rate of 5%
However, if PAN is not provided, the rate is the highest of:
1. The rate under 206AB (Higher of 2x or 5%)
2. 20%
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. |
Why It is Important to File ITR on Time?
Filing your income tax return (ITR) on time is very important. When you file your ITR before the deadline, you avoid extra tax deductions under Section 206AB, which means more money stays in your pocket instead of being deducted unnecessarily. It also helps you avoid late fees and penalties that can add up over time.
Filing your ITR regularly also makes your financial life smoother. It improves your chances of getting loans or credit cards approved, as banks often check your tax returns as proof of income. Plus, it keeps your financial records clean and ensures you don’t face notices or issues from the tax department later on.
Staying consistent with your tax filings saves money, reduces stress, and helps you stay financially secure.
Section 206AB is a robust, highly aggressive compliance tool designed to financially penalize anyone trying to stay off the grid. By legally forcing deductors to increase the TDS rates for non-filers, the government is making a cultural shift toward mandatory, timely tax filing. The math is simple: the upfront cost of avoiding your ITR is now vastly higher than any temporary convenience of ignoring it. So to avoid any extra TDS deduction, keep your PAN active, file your annual returns religiously, and hold onto your hard-earned money.
FAQs on Section 206AB Of Income Tax Act
1
What is Section 206AA as per Income Tax Act?
Section 206AA demands an increased TDS rate for anyone who refuses or fails to hand over 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.
2
What is the 206AB declaration form?
It is a self-declaration document where taxpayers explicitly confirm to deductors that they have met their past ITR filing obligations. While the government’s online compliance portal usually automates this verification today, some cautious deductors still require this physical or digital form to safely bypass applying the higher TDS rates.
3
Is 206AB applicable for salaried employees?
No, the Section 206AB does not apply to salaried employees. Your monthly employer-deducted tax falls under Section 192, meaning your paycheck remains untouched by these specific penal rates. If a salaried person also earns income from other sources, such as freelance work or contract payments, Section 206AB may apply to that extra income.
4
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.
5
Who is required to deduct TDS under Section 206AB?
Any individual, business, or corporate entity responsible for paying out money that usually attracts TDS should deduct TDS under Section 206AB. If the person receiving the payment has repeatedly not filed their tax returns, the payer is legally required to deduct tax at higher rates under Section 206AB.
6
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.
7
What returns are covered under Section 206AB?
It specifically targets standard annual income tax returns filed under Section 139(1) of the Income Tax Act. If you miss the original deadline for the preceding financial year without filing this return, you will have to pay a penalty.
8
What is the difference between 206AA and 206AB?
Section 206AA penalizes you for hiding your PAN from the deductor. Section 206AB penalizes when you fail to file your actual Income Tax Returns for the prior year.
9
From when is Section 206AB and Section 206CAA applicable?
Both of these strict compliance provisions were introduced by the Finance Act 2021 and officially became the law of the land starting July 1, 2021.
10
Who is eligible for 2% TDS?
A 2% TDS deduction normally applies to a few distinct scenarios. Under Section 194C, it is applicable for payments made to contractors (if they are not individuals or HUFs). Under Section 194J, specific technical fees (not standard professional fees) attract a 2% rate. Finally, under Section 194N, you will see a 2% deduction on cash withdrawals crossing ₹1 crore from a bank, or over ₹20 lakh if you happen to be a non-filer.
