Section 206AB, Section 206CCA TDS: Income Tax Applicability, 206AB declaration, notification and format

Have you recently received a communication from your bank or organisation mentioning they will deduct TDS at a higher rate from 1 July 2021? This article will discuss how to identify whether Section 206AB applies to you, and how you can avoid paying higher TDS.

New TDSTCS Rules in India

Recently, you may have received a communication from your bank regarding a higher TDS deduction from 1 July 2021 if you haven’t complied with the provisions of Section 206AB. So what are the provisions of Section 206AB, and how can you avoid deduction of higher TDS? We shall address the issue in this article.

From 1 July 2021, the Government has introduced Section 206AB and Section 206CCA. Before we get into the details of these sections, let us understand the rationale behind why the Government has introduced these two new sections.

Why has the Government introduced Section 206AB and Section 206CCA?

There are many cases in which Tax Deducted at Source (TDS) is applied on people’s taxable income. In some cases, the amount is substantial, yet these people don't file their income tax returns. The Government wants to bring these people under the tax net and make them file their income tax returns. Hence, the Government has introduced these two new sections.

Provisions of Section 206AB and Section 206CCA

Having understood the rationale behind the introduction of Section 206AB and Section 206CCA, let us look at the provisions of these sections.

1) Section 206AB

This section specifies provisions for deduction of tax at source (TDS) for non-filers of income tax returns. Wherever TDS is applicable on income payable to a specified person, the deductor shall deduct tax at the higher of the following options:

a) At twice the rate specified in the relevant provisions of the Act; or
b) At twice the rate or rates in force; or
c) At the rate of 5%

A specified person is someone who has not filed income tax returns for the last two financial years in which the aggregate of TDS was Rs 50,000 or more in each of these years, and the last date of filing income tax returns has expired.

For example, as of July 2021, for Financial Year 2020-21, the last date for filing income tax returns is 30 September 2021, which has still NOT expired. So, the last two financial years that will be considered for applying the provisions of Section 206AB are FY2019-20 and FY2018-19.

For any individual, if the total TDS was Rs 50,000 or more in each of these years (FY2019-20 and FY2018-19) and the person has not filed income tax returns for these financial years, they will be classified as a specified person. In that case, the provisions of Section 206AB for deducting TDS at a higher rate will apply.

Once the deadline of 30 September 2021 expires for filing returns for FY2020-21, the financial years for identifying specified persons will be FY2020-21 and FY2019-20.

PAN requirement:
The person receiving the payment (deductee) has to furnish their PAN to the person deducting the tax (deductor). If the PAN is not furnished, TDS will be deducted at the higher of the two rates provided in Section 206AB and Section 206AA.

For example, Ajay needs to make a payment of Rs. 5 lakh to Karan for consultancy work done by Karan. In this case, Karan (deductee) has to furnish his PAN to Ajay (deductor). If Karan submits his PAN to Ajay, then Ajay will have to apply provisions of Section 206AB and deduct TDS (if applicable) accordingly. If Karan does not submit his PAN to Ajay, then Ajay will have to apply provisions of Section 206AB as well as Section 206AA, and deduct TDS at higher of the two rates provided in the sections.

2) Section 206CCA

This specifies provisions for collection of tax at source (TCS) for non-filers of income tax returns. Wherever TCS is applicable on amount collected from a specified person, tax shall be collected at the higher of the following rates:

a) At twice the rate specified in the relevant provisions of the Act; or
b) At the rate of 5%

The concept of ‘specified person’ remains the same as earlier. The only difference is that Section 206CCA deals with TCS, while Section 206AB deals with TDS.

PAN requirement: The person making the payment (collectee) has to furnish their PAN to the person responsible for collecting the tax (collector).

For example, Priya is going abroad for higher education. She buys 25,000 US Dollars from Ravi (Forex Dealer). In this case, the buyer - Priya (collectee) will have to submit her PAN to the seller - Ravi (collector). Ravi will be responsible for collecting the tax at source. If the PAN is not furnished, TCS has to be collected at the higher of the two rates provided in Section 206CCA and Section 206CC.

Table: Section 206AB and Section 206CCA at a glance

Provision

Section 206AB

Section 206CCA

Who shall apply the provision

TDS deductor or the person deducting the tax

TCS collector or the person collecting the tax

Tax rate

Twice the rate specified in the relevant provisions of the Act; or at twice the rate(s) in force; or @ 5%

Twice the rate specified in the relevant provisions of the Act; or @ 5%

Exclusions under Section 206AB and Section 206CCA

Provisions of both the sections do not apply to a specified person who is a non-resident and does not have a permanent establishment in India.

Additional exclusions under Section 206AB

The provisions of Section 206AB are not applicable for any tax deducted at source under the provisions of the following sections:

a) Section 192 that deals with salary
b) Section 192A that deals with payment of the accumulated balance due to an employee
c) Section 194B that deals with winnings from lotteries or crossword puzzles
d) Section 194BB that deals with winnings from horse-racing
e) Section 194LBC that deals with income in respect of investment in securitisation trust
f) Section 194N that deals with the payment of certain amounts in cash

Compliance with provisions of Section 206AB and Section 206CCA

In case you are collecting/deducting tax on the income paid to an individual, you need to check whether the receiving individual is a specified person or not. The Tax Department has developed a functionality ‘Compliance Check for Section 206AB and 206CCA’ to assist you in doing that.

The functionality has been made available on the Reporting Portal (https://report.insight.gov.in/) of the Income Tax Department.

The Income Tax Department has made a list of specified persons as of the start of Financial Year 2021-22, taking 2018-19 and 2019-20 as the two relevant previous years. If you have to deduct or collect tax from an individual, check this list to identify whether the individual is a specified person and deduct/collect the tax accordingly.

If the individual is not a specified person, you need not check their name in the list again for the remainder of the financial year. The IT Department will make a fresh list of specified persons at the start of each Financial Year.

How do the new sections 206AB and 206CCA impact you?

Does your name appear in the specified person list? If yes, it means you have not filed income tax returns either for both previous years or one of the previous years. It will result in your tax getting deducted/collected at a higher rate than usual.

How should you make a compliance declaration?

Are you working as a vendor for an organisation? In that case, you may have got a request from the organisation regarding making a declaration whether or not you are a specified person. If you have got any such request, you may fill the declaration with the relevant details mentioning whether or not you are a specified person. This will ensure that your tax is deducted/collected at the appropriate rate.

What should you do to avoid tax deduction/collection at a higher rate?

If your name is appearing in the specified person list, you should check whether you have failed to file income tax returns for both previous years or one of the two previous years. Accordingly, you should file income tax returns for both previous years or the year you have not filed returns. It will ensure that your name is removed from the specified person list and that your tax is not deducted/collected at a higher rate.

How can homemakers or retired people avoid getting into the specified person list?

There are many homemakers or retired persons earning interest income from fixed-income securities. If you are one of them, you should check if your gross total income is less than Rs. 2,50,000. In such cases, you should submit Form 15H (if you are a senior citizen) or 15G (other individuals). It will ensure that no TDS is deducted. Even if your income is more than Rs. 2,50,000, you can still submit Form 15G or 15H so that TDS is not deducted. However, you will still have to add the interest income in your overall income at the time of filing returns and pay tax as per your tax slab. Please note that even if you don't have any taxable income, you may still have to file income tax returns, if you meet certain conditions laid down by the IT Department. When you file your income tax returns, your name will not get into the specified person list. 

Make it a practice to file IT returns every year

We have discussed the provisions of Section 206AB and 206CCA and how they apply to specified persons. If your name appears in the specified persons list, we have outlined the steps that you will need to take.

Ultimately, make it a practice to file your IT returns on time every year. It will ensure that you are always in compliance with the provisions of Section 206AB and 206CCA. As a result, the deductor/collector will not deduct/collect your TDS/TCS at higher rates.

Frequently asked questions (FAQs)

Q1) From when are Section 206AB and 206CCA applicable?
Both the sections are applicable from 1st July 2021

Q2) To whom are the provisions of Section 206AB and 206CCA applicable?
The provisions of both the sections are applicable to specified persons. An individual who has not filed IT returns in the last 2 financial years (where last date of filing has expired) and where the TDS/TCS is more than Rs. 50,000 in each of the years will be classified as a specified person. For more details on specified person refer the specified person content above.

Q3) What will be the TDS applicable under Section 206AB?
In case of a specified person, the deductor shall deduct tax at the higher of the following options:

a) At twice the rate specified in the relevant provisions of the Act; or
b) At twice the rate or rates in force; or
c) At the rate of 5%

Q4) What will be the TCS applicable under Section 206CCA?
In case of a specified person, the collector shall collect tax at the higher of the following options:
a) At twice the rate specified in the relevant provisions of the Act; or
b) At the rate of 5%

Q5) How can a deductor/collector identify whether the deductee/collectee is a specified person or not?
The Tax Department has developed a functionality ‘Compliance Check for Section 206AB and 206CCA’ to assist the deductors/collectors in identifying specified persons. The functionality has been made available on the Reporting Portal (https://report.insight.gov.in/) of the Income Tax Department.

Q6) Are there any exclusions under Section 206AB and Section 206CCA?
Provisions of both the sections do not apply to a specified person who is a non-resident and does not have a permanent establishment in India.

There are some additional exclusions under Section 206AB. The provisions of Section 206AB are not applicable for any tax deducted at source under the provisions of Sections 192, 192A, 194B, 194BB, 194LBC, and 194N

Related Article