- Date : 29/01/2020
- Read: 3 mins
The existing provision regarding higher TDS deduction in case of non-declaration of PAN is now amended. CBDT includes Aadhaar as an alternate declaration option.
In its latest TDS circular, the Central Board of Direct Taxes has declared that employees, who are subject to Tax Deducted at Source (TDS), have to share their Permanent Account Number (PAN) or their Aadhaar cards. Failing to do so will attract a 20% deduction of their salary. Thus, the rule now effectively allows employees without PAN to quote their Aadhaar instead. Until now the 20% was deducted in case the employee failed to share their PAN. PAN and Aadhaar are now interoperable, and in case someone without PAN share their Aadhaar, the department will automatically generate a PAN against it. The government approved this interoperability in the last Union budget.
Regarding the deduction itself, the circular instructed that the tax deductor will determine the tax based on all three applicable conditions and deduct at the higher tax rate. If the income of the employee is above the taxable limit, the employer will calculate the tax amount and the average rate of tax based on Section 192 of the Income Tax Act. No TDS will be deducted if the income of the employee falls below the taxable limit.
Related: Taxpayers can heave a sigh of relief with higher tax deduction limit.
What did the Income Tax Act say earlier about TDS in the absence of PAN?
Section 206AA covers the TDS provisions in the absence of PAN. Introduced in FY 2010-11, this section says that a resident or non-resident receiving a payment, including salary, must share their PAN for the TDS deduction purpose. In case they fail to do so, or provide an incorrect PAN, they will face TDS at 20% or higher. The three conditions laid down for this calculation are:
- The rate specified in the Act itself.
- The rate presently brought to force by the Finance Act of the particular financial year.
- At 20%.
As per Section 206AA, TDS will be deducted at the highest of these three rates.
When can a PAN be considered incorrect?
A PAN is considered as incorrect if either the PAN is structurally invalid, the PAN is not in the department database or the PAN doesn’t match the name of the recipient, i.e. the recipient provides someone else’s PAN. In these situations, the PAN will be considered as absent, and the provisions of Section 206AA will be attracted.
Related: Are you an NRI? Here’s how you can claim a TDS refund
How is the Aadhaar PAN interoperability implemented?
The CBDT has amended over 100 forms in order to accommodate Aadhaar into them and implement the interchangeability. For example, while opening a bank account, an individual can use his/her Aadhaar instead of PAN. However, PAN will be required at a later stage while fulfilling the bank KYC. Similarly, employees can now quote their landlord’s Aadhaar in order to claim the house rent allowance. However, the landlord must have linked his/her Aadhaar with PAN, or not have a PAN at all. Now, individuals and senior citizens can share their Aadhaar to the banks in order to avoid a higher rate of TDS against their fixed deposit interest income. Aadhaar can also be quoted in the investment declaration form. These are some scenarios where Aadhaar can be used in lieu of PAN.
To get a clearer idea about how to avoid TDS on income tax, take a look at how to submit form 15G and 15H.
In its latest TDS circular, the Central Board of Direct Taxes has declared that employees, who are subject to Tax Deducted at Source (TDS), have to share their Permanent Account Number (PAN) or their Aadhaar cards. Failing to do so will attract a 20% deduction of their salary. Thus, the rule now effectively allows employees without PAN to quote their Aadhaar instead. Until now the 20% was deducted in case the employee failed to share their PAN. PAN and Aadhaar are now interoperable, and in case someone without PAN share their Aadhaar, the department will automatically generate a PAN against it. The government approved this interoperability in the last Union budget.
Regarding the deduction itself, the circular instructed that the tax deductor will determine the tax based on all three applicable conditions and deduct at the higher tax rate. If the income of the employee is above the taxable limit, the employer will calculate the tax amount and the average rate of tax based on Section 192 of the Income Tax Act. No TDS will be deducted if the income of the employee falls below the taxable limit.
Related: Taxpayers can heave a sigh of relief with higher tax deduction limit.
What did the Income Tax Act say earlier about TDS in the absence of PAN?
Section 206AA covers the TDS provisions in the absence of PAN. Introduced in FY 2010-11, this section says that a resident or non-resident receiving a payment, including salary, must share their PAN for the TDS deduction purpose. In case they fail to do so, or provide an incorrect PAN, they will face TDS at 20% or higher. The three conditions laid down for this calculation are:
- The rate specified in the Act itself.
- The rate presently brought to force by the Finance Act of the particular financial year.
- At 20%.
As per Section 206AA, TDS will be deducted at the highest of these three rates.
When can a PAN be considered incorrect?
A PAN is considered as incorrect if either the PAN is structurally invalid, the PAN is not in the department database or the PAN doesn’t match the name of the recipient, i.e. the recipient provides someone else’s PAN. In these situations, the PAN will be considered as absent, and the provisions of Section 206AA will be attracted.
Related: Are you an NRI? Here’s how you can claim a TDS refund
How is the Aadhaar PAN interoperability implemented?
The CBDT has amended over 100 forms in order to accommodate Aadhaar into them and implement the interchangeability. For example, while opening a bank account, an individual can use his/her Aadhaar instead of PAN. However, PAN will be required at a later stage while fulfilling the bank KYC. Similarly, employees can now quote their landlord’s Aadhaar in order to claim the house rent allowance. However, the landlord must have linked his/her Aadhaar with PAN, or not have a PAN at all. Now, individuals and senior citizens can share their Aadhaar to the banks in order to avoid a higher rate of TDS against their fixed deposit interest income. Aadhaar can also be quoted in the investment declaration form. These are some scenarios where Aadhaar can be used in lieu of PAN.
To get a clearer idea about how to avoid TDS on income tax, take a look at how to submit form 15G and 15H.
