Analysis of Section 206AB, Income Tax Act, 1961 (w.e.f 1st July 2021)

Special Provision to deduct TDS on Non-Filers of Income Tax Return

Illustration:

M/s ABC Ltd. is making payment to Mr. Kushwaha of INR 10 Lacs on 1st October 2021, on account of professional fee under section 194-J. Mr. Kushwaha declares to the company that:

i) He hasn’t filed his ITR for the last two financial year (i.e., FY 2019-20 & FY 2020-21); and

ii) Time limit for filings ITR for FY 2019-20 & FY 2020-21, has been already expired on 31st May 2021 & 30th September 2021 respectively under section 139(1) of the Act; and

iii) Income in these two FYs was INR 10 lacs each which means TDS was INR 1 Lac in each of these two financial years.

Now, the company will deduct the TDS u/s 206AB in the case of Mr. Kushwaha, at the higher of the following rates:

i) Twice the rate as mentioned in Section 194-J (10%*2= 20%)

ii) Twice the rate in force (specified in Finance Act of the relevant year, as per Sec-2(37A))

iii) At the rate of 5%

TDS Rate is 20%.

What if Mr. Kushwaha doesn’t provide his PAN number (as per Section 206AA)

In this case, the TDS rate would be higher of the following:

i) TDS rate u/s 206AB i.e., 20%

ii) TDS rate u/s 206AA i.e., 20%

TDS Rate is 20%.

GENERAL FAQs:

1. How Deductor would come to know that Deductee has not filed his ITR?

We would suggest you take the declaration from all the deductees regarding the filing of ITRs in the last two previous years. It would help you to apply Section-206AB specifically only on those deductees, who fall under the category of “Specified Person”.

2. Does Section-206AB apply to all payments?

No, you wouldn’t be required to deduct TDS under Section-206AB, if you are making payments under the following sections:

Section 192: Salary

Section 192A: On making payment from EPF.

Section 194B: Winnings from lottery or crossword puzzle

Section 194BB: Winnings from horse race

Section 194LBC: Income in respect of investment in securitization trust

Section 194N: Payment of certain amounts in cash

3. What about the payments already made or credited in the period 1st April 2021 to 30th June 2021?

This section shall come into force w.e.f 1st July 2021, which means not applicable on any payments made or credited before 1st July 2021.

4. How to report in TDS return i.e., FORM 26Q?

Respective changes have been made in the FORM 26Q regarding Section-206AB vide Notification No. 71/2021 dt. 8th June 2021

5. Does tax need to be deducted under both, section-206AB and specific sections?

No, if Section-206AB applies then tax shall be deducted under this section only. It prevails over any specific section of deduction.

6. Who is the Specified Person?

As per Section 206AB “Specified Person” means:

1. Who has not filed his ITR for two previous years, immediately prior to the year in which tax is required to be deducted.

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2. Time limit for filing ITR for these two previous years has been expired under section 139(1).

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3. Aggregate of TDS in his case is 50k or more, in each of these two previous years.

The above three conditions need to be mutually fulfilled if any of condition breaks then Section-206AB will not apply.

Note: Specified person shall not include a Non-Resident, who doesn’t have a permanent establishment in India