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TDS Rates on Non-filing of Income Tax Returns Under Section 206AB

Steer clear of higher TDS rates under Section 206AB by filing your ITR on time!

Section 206AB of the Income Tax Act, 1961, related to Tax Deducted at Source (TDS) was introduced in 2021. It mandates a higher tax deduction than applicable TDS rates under other sections. So, when you make any payment involving TDS deductions, it is deducted at higher rates.

This new provision of Section 206AB is applicable only when you fail to file your income tax returns. It is not a separate new section but a new provision implemented in the existing Income Tax Act.

TDS Under Section 206AB

Here is how TDS is deducted under Section 206AB:

Two times more than the rate prescribed in the relevant section of the Finance Act or Income Tax Act
20% or as per the section if PAN details are not furnished

5% TDS rate

Depending on which is higher, one of the rates will be applicable. These rates apply if you have not filed your returns for the last two assessment years. In this case, the TDS must be ₹50,000 or above each year.

Applicability and Non-applicability of Section 206AB

Learning the various conditions when Section 206AB can be applicable is crucial. Here are a few parameters to find out whether Section 206AB applies to you:

Check if you have missed filing ITR for the last two assessment years
Assess if the due date for filing your returns for the previous financial year is over
Review if the cumulative TDS in those two assessment years exceeds ₹50,000

The TDS deduction provision under Section 206AB does not apply to:

Section 192: TDS on salary income
Section 192A: TDS on early EPF withdrawal
Section 194B: TDS on lottery winnings
Section 194BB: TDS on horse race winnings
Section 194LBC: TDS on income in respect of investment in securitisation trust
Section 194N: TDS on withdrawal of cash
Section 194-IA: Consideration payments made for the sale of an immovable property
Section 194-IB: Rent payment above ₹50,000 to a landlord
Section 194M: Payment for contractual or professional services of over ₹50 Lakhs
Section 194S: Digital asset transfers made to individuals/HUFs with a business turnover is under ₹1 Crore

Section 206AB - Explaining with Example

To understand how to calculate TDS, consider the following examples:

Illustration 1

Assume you pay around ₹8 Lakhs as consultancy fees to an organisation. This payment is applicable under the Income Tax Act. But the person you have paid has not filed Income Tax Returns (ITR) for the last two assessment years.

In such a case, he/she qualifies for Section 206AB.

Under Section 194J, the TDS rate for payments toward professional or technical courses is 10%. Hence, you can calculate TDS in either of the following ways, depending on which is higher:

5% of the applicable TDS rate
Twice the TDS rate mentioned in Section 194J

In this case, the TDS rate is 20%. This is arrived at by multiplying 10 into 2 because the ITR has not been filed for two assessment years. You get the TDS amount as ₹1.6 Lakhs, which is calculated as:

TDS Amount = ₹8 Lakhs / 20% (or 0.2)

Illustration 2

You pay ₹5 Lakhs as contractual agreement fees to an individual. This person has not filed ITR for the last two assessment years. Furthermore, the concerned individual has not submitted their PAN details. Both sections become applicable here.

Under Section 194C, the TDS rate is 1% if you are an individual taxpayer. As per Section 206AA, the tax rate is calculated at 20% and 1% based on 194C, whichever is higher. According to 206AB, either 5% of the TDS rate or twice the rate at 20% is applicable, depending on which is higher.

Here, the final applicable TDS rate will be 20% as Section 206AA is higher than the latter. Thus, the final TDS amount is ₹1 Lakh, which is calculated as:

TDS Amount = ₹5 Lakhs / 20% (or 0.2)

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How to Identify a Specified Person u/s 206AB

The Income Tax Department has introduced user-friendly tools to aid with this. They help taxpayers identify individuals who may not be complying with tax regulations. This ensures that those deducting taxes can pinpoint defaulting payees. It allows them to apply the correct TDS rates under Section 206AB.

This feature enables taxpayers to identify defaulters by conducting individual searches using their PAN. You need to provide details such as PAN, PAN allotment number, and PAN-Aadhaar link status .

The tool also facilitates bulk searches by enabling users to upload a CSV file. It must contain details of many PANs for various taxpayers in the specified format.

Frequently Asked Questions

Does Section 206AB apply to salaried employees?

No. In the case of salaried employees, there will be no higher deduction of TDS.

Who is eligible for sections 206AA and 206AB?

These sections are applicable if you missed filing ITR for the last two assessment years. Or if the due date for filing the ITR has expired. Also, it is applicable if the cumulative TDS in those two assessment years exceeds ₹50,000.

Does Section 206AB apply to NRIs?

All NRIs without a permanent establishment in India are exempted from Section 206AB.

Is there a way to check if Section 206AB is applicable?

You can use the compliance check functionality introduced by the Income Tax Department. It helps you identify defaulters by searching their individual PAN.

What is Section 206AB?

Section 206AB mandates higher TDS rates as compared to standard prescribed rates. This is if you fail to file ITR.

Who is a specified person according to Section 206AB?

A specified person refers to any person or entity to whom Section 206AB is applicable.

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