Section 206AB Of Income Tax Act: Eligibility, TDS Rate And More

For many of us, earning a good income from a reputed company by doing something we love is a lifelong dream. It’s like baking a cake - you put in your time, effort and the required ingredients to cook something delicious. But, just as every baker follows a recipe, there are certain rules and regulations that need to be followed by a taxpayer as per Income Tax Act.
 

Income Tax Act

The Income Tax Act is an important act in the Indian constitution that ensures fair taxation for everyone. It consists of tax slabs as per the individuals’ total income.

Today, in this guide, we will walk you through an important section of Income Tax Act- Section 206AB

To start things of, let’s uncover the basics of Section 206AB-

Section 206AB is a provision designed to ensure that certain individuals, like non-filers of income tax returns, fulfil their tax obligations correctly. To ensure tax compliance, individuals in certain categories face higher rates of Tax Deducted at Source (TDS). This serves as a mechanism to reinforce adherence to tax regulations.

Understanding the intricacies of the Income Tax Act and its sections, like 206AB, is vital for taxpayers to save their hard-earned money.

In this article, we will delve into the eligibility criteria and TDS rates outlined in Section 206AB, providing all the essential information you need to comply with tax regulations.
 

What Is Section 206AB?

Section 206AB comes under the Income Tax Act and was added by the government in the recent Finance Bill 2021. It came into effect on July 1st, 2021.

Section 206AB aims to ensure that certain individuals who have not filed their income tax returns for the past two years comply with the filing process. This is especially true if they have had a significant amount of tax deducted or collected at the source.

Here's how it works - if you are paying or crediting money to any of those specified individuals, you will need to deduct tax at a higher rate than the usual one mentioned in the Act. The higher rate is either double the normal rate or 5%, whichever is higher. This applies to most payments subject to Tax Deducted at Source (TDS), except those covered under sections 192, 192A, 194B, 194BB, 194LBC, and 194N of the Act.
 

Applicability Of Section 206AB Of the Income Tax Act

Section 206AB of the Income Tax Act brings in a higher rate of Tax Deducted at Source (TDS) for certain transactions like contract payments, professional charges, and rent. However, the following payments are exempt from this rule -

• Salary (Section 192)
• Winnings from lotteries, card games, or crossword puzzles (Section 194B)
• Early withdrawal of EPF (Section 192A)
• Winnings from horse races (Section 194BB)
• Winnings from online games (Section 194BA)
• Cash withdrawals (Section 194N)
• Income from investment in securitisation trusts (Section 194LBC)
• Non-residents without a permanent establishment in India

The Union Budget 2022 specifies more transactions where higher TDS will not apply, including -

• Selling immovable property where consideration exceeds a specific limit (Section 194-IA)
• Paying rent to landlords exceeding Rs 50,000 (Section 194-IB)
• Paying for contractual or professional services above Rs 50 lakh (Section 194M)
• Transferring virtual digital assets (Section 194S) to -
  • Individuals or HUFs with a business turnover of less than Rs 1 crore or receipts from professions less than Rs 50 lakhs during the previous financial year.
  • Individuals/HUFs without income from business or profession.
     

Non-Applicability Of Section 206AB Of Income Tax Act

Section 206AB of the Income Tax Act requires a higher TDS rate on many transactions. However, the following  TDS  on the following transactions are exempt from this rule-

1. Salaries (Section 192)
2. Winnings from the lottery (Section 194B)
3. Income earned from investment in securitisation trusts (Section 194LBC)
4. Accumulated balance that is due to an employee (Section 192A)
5. Winnings from horse races (Section 194BB)
6. Payment of certain amounts in cash (Section 194N)
    

File Your ITR On Time

Filing your income tax return (ITR) is very important for getting your tax obligations right. It is the only way to know if you owe more or less tax than what has already been deducted via TDS. And you should keep in mind that not filing your taxes can lead to penalties.

Your tax rates are determined by your prior filing history and whether you've furnished your PAN to the contractor. Failure to file or provide your PAN could result in higher tax rates, aiming to foster compliance. Also, filing your returns regularly is a smart move. It shows that you are following the rules and being a responsible citizen.

The income tax slabs for the financial year 2023-24 offer different rates based on the tax regime you pick. In India, you have two choices - the old tax regime and the new tax regime. With the old tax regime, you can claim various deductions and exemptions to lower your taxable income.
 

TDS Rate Under Section 206AB

If you have not filed your Income Tax Return (ITR) for the last two years and the Tax Deducted at Source (TDS) each year was Rs. 50,000 or more, you will either pay -

• 5% TDS, or
• Double the current rate, or
• Double the rate mentioned in the relevant TDS sections, whichever is more.
   

How Is TCS Collected Under Section 206AB?

Section 206AB also affects Tax Collected at Source (TCS) similarly to the newly enhanced TDS rules. As mentioned earlier, for specified individuals, the TCS rate is either 5%, double the current rate, or double the rate mentioned in the relevant TCS sections, whichever is more. This higher TCS rate is applicable to those taxpayers who have not filed their ITRs for the last two financial years, and the total TDS and TCS each year is Rs. 50,000 or more. The goal is to motivate people to meet their income tax filing duties.
 

Who Is A Specified Person Under Section 206AB?

Under Section 206AB, a specified person is any individual who falls into any of the following categories  -

• Someone who did not file their Income Tax Return (ITR) for the previous year.
• Someone who should have filed their ITR by the deadline.
• Someone whose total TDS and TCS amount in the last financial year is Rs. 50,000 or more.

These rules ensure people fulfil their tax filing duties by imposing higher TDS rates on specified persons.
 

How To Calculate TDS Under Section 206AB?

Calculating TDS under Section 206AB is simple and helps you manage your income while dealing with pending ITR filings.

Let’s understand this better with an example -

• Kailash paid Leo Rs. 5 lakhs for professional consulting on July 1st, 2021, under section 194J.
• Say  Leo did not file his ITR for the past financial year 2017-2018 - this means that Section 206AB applies.
• The TDS rate under section 194J is 10%.
• The next step is to determine the higher rate between twice the 194J rate (which is 20% (10% * 2) and the 5% TDS rate.
• Since 20% is higher, the applicable TDS rate is 20%. This results in a deducted amount of Rs. 1 lakh (Rs. 5 lakhs * 20%).
   

To Conclude,

Section 206AB of the Income Tax Act ensures tax compliance by imposing higher TDS rates on specified individuals who have not filed their ITRs for the last two years or have significant TDS/TCS amounts. This provision encourages the timely filing of income tax returns and discourages tax evasion.

By understanding and adhering to the guidelines of Section 206AB, taxpayers can navigate their tax obligations efficiently while contributing to a fair and transparent tax system.

FAQs