206AB: Section 206AB of the Income Tax Act

Written by : Knowledge Centre

2024-08-02

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Section 206AB mandates TDS at rates higher than standard prescribed rates if you do not file your income tax return. This section was introduced in 2021 and nudges people to file returns. Missing the ITR filing is a major problem with the NRI population which stays out for extended periods of the country.

Thus, the introduction of this new section is also considered a way to push NRI taxpayers into filing their ITRs. Here’s everything you should know about Section 206AB of the Income Tax Act of India:

Section 206AB prescribes a higher rate of TDS for specific persons. Therefore, for any payments that you are due to receive and require TDS, the rate of TDS would be higher than the standard prescribed rates if you fall under its ambit.

When and Whom Does Section 206AB Apply?

You may check the following conditions to ascertain whether section 206AB applies to you:

a. You have not filed your income tax return for One assessment year related to the one year preceding the year in which tax is to be deducted
b. The due date for filing ITR for those 1 years has passed by
c. The cumulative TDS in those 1 years is greater than Rs.50,000

When Does Section 206AB Not Apply?

While section 206AB applies to almost anyone who hasn’t filed their ITRs, you can skip this section if the following conditions apply to you:

1. Section 206AB does not apply to NRIs who do not have a fixed place of work in India.

2. This section also does not apply to any payments on which the following IT sections apply:

a. Salaries paid under section 192
b. Payment of arrears under section 192A
c. Money from a lottery and crossword puzzle u/s 194B
d. Money won in a horse race u/s 194BB
e. Money received in cash and excess of the limit prescribed u/s 194N

Rate of Tax Under Section 206AB

If section 206AB applies to you, then the following TDS rates are levied on your income. The higher of the following rates of TDS will be levied on your income:

i. TDS at twice the standard applicable
ii. 5%

If you do not file an income tax return for 1 financial years and do not submit your PAN to the deductors then different TDS rates apply. In all such scenarios, the higher of the following applies:

TDS u/s 206AA
TDS u/s 206AB

Section 206AA applies only when you don’t submit your PAN to the deductors. This is more critical if the transaction attracts a mandatory TDS. The TDS u/s 206AA is higher of these two:

Rate listed in the relevant section of IT Act; or
At the rate of 20%

How to Calculate TDS Under 206AB

Calculating your TDS amount under the new section is easy, and it will help you in planning your incomes, while you figure out a way to file your pending ITRs.

Example 1: When Section 206AB Applies

Ramesh pays Rs 5 lakhs towards professional consulting to Suresh on 1st July 2021. This payment comes under the ambit of section 194J of the Indian Income Tax Act.

Suresh did not file his income tax return for the past 1 financial year, namely, 2017-2018. Therefore, section 206AB becomes applicable. The rate of TDS rate applicable under section 194J is 10%.

The applicable TDS rate will be the higher of the following:

Twice the rate specified in section 194J. The rate works out to 20% (10% * 2)
5% TDS rate

As 20% is higher, the applicable rate of TDS will be 20%. The deducted amount will be Rs.1 lakh (Rs.5 lakhs * 20%)

Example 2: When Sections 206AA and 206AB are applied together

Sita pays Rs.5 lakhs towards fees as applicable under a contract to Gita on 1st July 2021. This payment comes under the ambit of section 194C of the Indian Income Tax Act.

Gita did not file her income tax return for the past 2 financial years, namely, 2017-2018 and 2016-2017. Moreover, Gita did not submit her PAN too. Therefore, both sections 206AA and 206AB apply in conjunction. The applicable TDS rate, u/s 194C, is 1%.

U/s 206AA, the applicable rate of tax is higher of:

at 1% as per 194C; or
20%

U/s 206AB, the applicable rate of tax is higher of:

Double the rate mentioned in 194C, i.e., 2% (1% * 2)
5%

The final applicable rate of TDS will be higher than rates u/s 206AA and 206AB:

Therefore, Gita’s income will be taxed at the rate of 20%. The deducted amount will be Rs.1lakh (Rs.5lakhs * 20%)

File Your ITRs on Time

Filing your ITR ensures that you are clear off from your tax liabilities. Whether you owe the government more than the TDS or less, only ITR can make it a certainty and avoid penalties. Differential tax rates apply depending on whether you have filed IT returns in the past and/or furnished your PAN to the contractor that you worked for. Not filing tax returns and/or not furnishing PAN will lead to higher tax rates and this is a deterrent in itself. Besides, it is always a healthy practice to file income tax returns and be a law-abiding citizen.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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