206ab of income tax act: Impact on Tax Deduction at Source

Section 206 AB requires TDS to be deducted at rates higher than the regular allowed rates if you don’t file your income tax return. This section, which encourages people to file taxes, was introduced in 2021. The Income Tax Act’s Section 206 AB is introduced after Section 206 AA. The latter stipulates that those who fail to give or supply their Permanent Account Number will have TDS deducted at higher rates (PAN).

Table of Contents

What does Section 206 AB of Income Tax mean?

Section 206 AB permits TDS to be used for payments made to or money collected from individuals who haven’t filed their income tax returns at rates more significant than those permitted under the Act. Following Section 206 AB of the Income Tax Act, the tax must be withheld at source at the following higher rates on any sum, income, or amount of money paid to, payable to, or credited by a person (deductee) to the named person:

At a rate that is double what is specified in the applicable statutory provision,
At two times the rate or rates in effect,
5% every year.

206 AB of Income Tax: Application

You should file your income tax return for one assessment year connected to the year before the year in which tax is to be deducted.
For those one year, the deadline to file an ITR has gone.
The total TDS during those one year exceeds Rs 50,000.

For instance, if the current fiscal year (FY) is 2021–2022, we must determine whether the deadline for filing the income tax return for FY 2020–2021 has passed. If so, you should consider FY 2019–2020 and FY 2020–21. If it hasn’t already, you must consider the fiscal years 2018–2019 and 2019–2020 if their combined TCS and TDS totals exceed 50,000.

Who is a specified person under this section?

The person specified is the one who:

Has not submitted an income tax return (ITR) for the prior fiscal year (FY), and the ITR filing deadline has passed, and
At least Rs 50,000 worth of tax was claimed or received overall (including TDS and TCS) during the most preceding FY.
A non-resident who has no permanent establishment in India is exempt from it. For this reason, a fixed location of business where the enterprise’s operations are conducted entirely or in part qualifies as a permanent establishment.

How does IT department recognise individuals listed in this section?

Data of “specified persons” is circulated at the start of the fiscal year. For instance, a list of individuals who haven’t filed their PY 2020–21 returns or paid TDS/TCS of at least Rs 50,000 in PY 2020–21 is created at the beginning of FY 2022–23. There are no more names added to the list. However, their names will be crossed off the list on the return filing date if the identified individual files his return for PY 2020–21.

The system would delete their names from the list of designated persons if the combined TDS and TCS for the PY 2021–22 were less than Rs 50,000. It would be done on July 31, 2022, the first return filing deadline for the fiscal year 2022–23. The system will add names to the list of specified persons in revised and belated TCS/TDS forms submitted during the financial year; the system will also take 2022–2023 into consideration.

206 AB of Income Tax: Usage

On every sort of transaction, such as contract payments, professional fees, rent, etc., a higher amount of TDS must be withheld, but not on the following types of payments:

Salary (Section 192) (Section 192)
Premature EPF withdrawal (Section 192 A)
Any lottery, card game, or crossword puzzle winnings (Section 194 B)
Any winnings from horse racing (Section 194 BB)
Income from a securitisation trust investment (Section 194 LBC)
Withdrawals of cash (Section 194 N)
Individuals who are not Indian citizens and do not have a PE there.

Additional transactions on which you cannot deduct higher TDS are included in the Union Budget 2022 as follows: –

Amount received as compensation for the sale of real estate (Section 194-I A)
Rent exceeding Rs. 50,000 is paid to the landlord (Section 194-I B)
Payment for professional or contractual services exceeding Rs 50 lakh (Section 194 M)
Providing virtual digital properties (Section 194 S) to an individual or HUF:
- whose gross business turnover during the previous fiscal year was less than one crore
- whose gross professional receipts were less than Fifty lakhs; or
- an individual or HUF who did not have “income from business or profession.”

206 AB of Income Tax: Non-applicability

A non-resident who does not possess a permanent establishment in India is not subject to Section 206 AB. In India, a fixed location of business through which a non-resident taxpayer may conduct their business either wholly or partially qualifies as a permanent establishment. Any payment of a sum on which one of the following TDS sections applies does not fall under Section 206 AB:

Payment of wages under section 192
Cost of an employer’s arrears owed to an employee under section 192 A
Lottery or crossword puzzle winnings following section 194 B
Winnings from horse races following 194 BB
Income from a securitisation trust investment as defined under Section 194 LBC
Payments in cash that exceed the threshold outlined in section 194 N

206 AB of Income Tax: How can I register for the compliance check facility?

The deductor must register for Section 206 AB on the income tax department’s reporting online. Let’s look at the registration procedure for using the compliance check facilities step by step.

Take these actions:

To access the new income tax login page, go to https://report.insight.gov.in.
Click the register button in the new user portal.
Users must select the login option once their registration has been successful.
Following the “Register” button, click the login link on the electronic filing site.
Log in by providing the user ID and password.
The following page will appear after entering the TAN (user ID) and password.
Select report from the pending actions menu.
The portal will send the user to the reporting site after registering to utilise the Compliance tool functionality.
Click “Next” after selecting “New Registration.”
The portal took you to a different page. Select Conformity Check from the option for Form Type.
“Entity Name” and “Entity PAN” are pre-filled and editable fields in the form. Enter the organisation’s address here.
On the page, fill out the company information and click Add Primary Owner. Include the relevant details.
Enter the officer’s details on the Principal Officer Details page.
Similar to that, if necessary, register Node Officer, Deputy Officer, Deputy Node Officer Details, and Other Users.
To examine the executive and entity details, select the Preview option.
To continue submitting your registration request, select the Submit option.
Following the registration request submission, you will also get it through email.
You will get a confirmation email if the Income Tax Office confirms your registration application.

206 AB of Income Tax: How should TDS be calculated?

Example: If section 206 AB is relevant

On October 25, 2022, Indhu gave Karthik a payment of Rs 1,000,000 as business consulting fees. The Income Tax Act of 1961’s section 194 J applies to this payment type. For the two most recent fiscal years, namely FY 2020-2021 and FY 2021-2022, Karthik failed to file his income tax return. He should have filed his income tax returns; thus, section 206 AB applies. Under section 194 J, the TDS rate for professional services is 10%.

The higher of the following TDS rates will apply

20%, which is twice the rate allowed by section 194 J.
TDS rate of 5%.
Hence, a 20% TDS rate is applicable. (Rs 10,00,000 * 20%) = Rs 2,00,000 in TDS.

206 AB of Income Tax: ITR filings

By submitting your ITR, you may know your tax debts have been paid. Only ITR can make it specific and prevent fines regardless of whether you owe the government more than the TDS or less.
Different tax rates may be applicable depending on whether you’ve submitted IT returns in the past and provided your PAN to the contractor with whom you worked.
Tax rates will increase if tax returns are not filed and PAN is not provided, which is a deterrent in and of itself.
Additionally, paying taxes on time and obeying the law are always wise practices.

How to keep track of increased TDS rate?

Utilising the TDS summary report, you may monitor the higher TDS rate. The following values, which relate to the reasons for which they were applied to the transaction, can be found in a new column called Reason for Higher Deduction.

Value C: PAN not furnished
Value U: Failure to file an Income Tax Return

If the TDS is withheld at a higher rate following Section 206 AB, the value in this column will be U.

FAQs

Who is obligated by Section 206 AB to deduct tax?

Any person who owes money receives income, has paid money, has cash credit, or is owed money must deduct the TDS required by Section 206 AB.

What is the higher tax rate subject to Section 206 AB deduction requirement?

Double the given rate or 5%, whichever is higher, constitutes the higher rate. The current rate of 20% or the rates applicable under this section, whichever is greater, will be imposed without a PAN.

Does 206 AB apply to employees who are paid a salary?

No. Salaried employees are not subject to higher TDS deductions under Section 206 AB.

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