Learn about Section 206AB of Income Tax Act: High TDS Deductions Explained!

Last Updated : Sept. 12, 2023, 12:46 p.m.

Specific new provisions were implemented in the 2021 Finance Bill related to TCS and TDS. According to the new provisions, TDS and TCS are to be collected and subtracted at high rates for individuals who haven’t filed their income tax returns for Income Tax returns. Section 206AB of Income Tax Act has been introduced to implement a high tax deducted at source deduction. Nonetheless, Section 206AA suggested a high TDS deduction before the revision if you failed to furnish your PAN information. After implementing Section 206AB, high TDS deductions apply under certain conditions. Read on to learn more about Section 206AB!

What Does Section 206AB Necessitate?

Section 206AB of Income Tax Act related to TDS existed from 1st July 2021. It is, separately, not a new section but a new provision implemented in the existing 1961 Income Tax Act. Section 206AB authorises a higher tax deduction than the applicable TDS rates under every section. Therefore, your TDS is subtracted at high rates when you pay, including tax deductions. Thus, the new Section 206AB applies when you fail to file your Income Tax Returns.

Section 206AB of the Income Tax Act Applicability

You might now know the relationship between Section 206AB and TDS. Nonetheless, knowing the multiple conditions where Section 206AB of the 1961 Income Tax Act can be applicable is vital. Given below are some factors to determine whether or not Section 206AB applies to you:-

• Check if you still need to file your Income Tax Returns for two assessment years.
• Evaluate if the deadline for filing your return for the preceding year is over.
• Review whether the accumulated TDS in those assessment years is Rs.50,000 or above.

To aid you in understanding the applicability better, consider the following example. Suppose you have TDS deductions in the 2023-24 fiscal year. In that case, if you failed to file your Income Tax Returns for the preceding assessment years, like 2020-21 and 2021-22. Section 206AB of Income Tax Act is applicable.

Non-Applicability of Section 206AB of the Income Tax Act

Section 206AB of Income Tax Act is not applicable under the following scenarios:-

• If you are an NRI without any business venture in India
• If you receive payment in cash covered over a certain limit specified in Section 194N
• If you win a lottery or crossword puzzle and earn money according to Section 194B
• If you win a horse race and get cash, according to Section 194BB
• If you receive a salary according to Section 192
• Accumulated balance payment because of an employee by an employer under Section 192A
• Income regarding investment in a security trust under Section 194 LBC

Applicable TDS Rate under Section 206AB of the Income Tax Act

If you meet the criteria for Section 206AB applicability, then the TDS applicable TDS rates are as follows:-

• At twice the rate mentioned in the TDS relevant section
• At two times the TDS rate in force
• A TDS rate of 5%

If you still need to file an ITR for the previous two assessment years and do not give your PAN information to the deductor, your TDS rate will be different in such scenarios. In such cases, the applicable TDS rates will be according to Section 206AB of Income Tax Act or Section 206AA. Therefore, you may pay high rates. According to Section 206AA, the TDS is computed at a rate of 20% or what is specified in the levant TDS section.

Specified Person Under Section 206AB

A specified individual under Section 206AB of Income Tax Act is as follows:-

• An individual who hasn’t filed an ITR for the previous years
• A person who hasn’t filed an ITR before the specified deadline
• The overall TDS and TCS amount in the past fiscal year is Rs.50,000 or above.

Note:- It doesn’t apply to a person who doesn’t have a permanent establishment in India and is a non-resident. A permanent establishment means a fixed business place to carry out business operations.

How are TCS and TDS Collected and Deducted Under Section 206AB?

A payment made to a specified person mentioned above, according to Section 206AB. The TCS collected and TDS deducted at a high rate are as follows:-

• A 5% rate
• Twice the rate mentioned in the Finance or Income Tax Act
• A 20% tax deduction rate or the applicable rate according to Section 206AB of  Income Tax Act, whichever is high, if the specified individual doesn’t furnish PAN details.

Conclusion

Section 206AB of the 1961 Income Tax Act was introduced for collecting and deducting tax deducted at the source at high rates. Transactions like rent, professional fees, and contractual payments are applicable per the provisions. The specified section was included in the 2021 Finance Bill as a new provision about a high tax deducted at the source deduction. Before Section 206AB of Income Tax Act was implemented, the current act- Section 206AA dominated high tax deductions for not furnishing the PAN to the tax deducted at the source deductor. Section 206AB introduction of the 1961 Income Tax Act covers a scenario where a high TDS deduction is compulsory for a taxpayer.

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