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Any taxpayer who receives an amount that is eligible for TDS has to provide his/her PAN to the person making the payment. Every payer is required to deduct tax at the rates specified in the Income Tax Act. However, there can be certain situations where the person receiving the amount might not have a PAN card. In such situations, the provisions of section 206AA apply, and TDS is deducted at higher rates. This guide covers every nitty-gritty of section 206AA, its applicability, non-applicability, scope, and rates.
This section was first introduced in the year 2020-11. Under this section, the taxpayer is required to provide their PAN to the person making the payment. This section is applicable to both non-resident and resident individuals. While the income received by non-residents includes all the income that is taxable in India, the income received by residents includes rent, salary, and professional fees.
Section 206AA of the Income Tax Act is not applicable to the following types of transactions -
It is not applicable on interest income on long-term bonds u/s 194LC to a non-resident taxpayer.
It does not apply to payments like fees for technical services, royalties, interest, and payment on transferring capital assets. This payment has to be made to a non-resident, non-corporate, or foreign company not having a PAN number.
The payee taxpayer must furnish the following to the payer.
A payee or recipient who does not furnish PAN to the payer will have to pay a higher TDS (applicable tax rate as per section 206AA). In simple words, if the person receiving the amount (payee) fails to provide his/her PAN to the payer, then the payer will deduct TDS at a higher rate before making the payment.
Mentioned below are the higher rates of TDS -
Higher of the above will be applicable
For example, Miss Arti has to pay Rs.1,00,000 as professional fees to Miss Sonia under section 194J. However, if Miss Sonia fails to furnish the PAN number, then Miss Arti will have to deduct TDS @20% instead of @10%.
If the payment being made is covered under section 194O or 194Q, then the TDS is deducted at different rates. While section 194Q deals with TDS deduction for payments made to e-commerce participants, section 194Q is for deduction of TDS on payment of a certain sum for purchasing goods.
In such a case, the following rates will apply -
A TDS rate higher of the above is applicable.
The recipient of the money can also furnish a declaration under section 197A to the payer. It includes furnishing Form 15G and 15H as proof that the annual income is below the threshold and, therefore, no TDS should be deducted from the amount. While Form 15G can be submitted by the payee who is below 60 years of age, Form 15H is relevant to people above 60 years of age.
As provided by section 206AA of the Income Tax Act, any declaration in which the payee fails to furnish a PAN is considered invalid. If no PAN is furnished, the n TDS is deducted at the following rates -
TDS at a rate higher of the above will be deducted
Hope this guide helped you understand section 206AA and its relevance. If you are still confused about TDS and the applicability of section 206AA, you can consider seeking professional help.
If the PAN details provided are correct and the payee has furnished the PAN, then TDS will be deducted at the normal rate provided in the Income Tax Act. Otherwise, the tax is deducted at a higher of @20% or the rate provided.
The taxpayer can furnish Form 15G or 15H under section 197 or 197A, requesting a nil or lower tax deduction. However, at the time of filing ITR, if the total tax liability turns out to be lesser than the tax already paid by him/her, then he/she can claim a refund of the excess amount.
Section 194C of the Income Tax Act provides that the tax is deducted @1% for individual taxpayers. Under section 206AA, tax is calculated at @20%, whichever is higher. Under section 206AB, TDS is deducted at twice the TDS rate, i.e., % or 5%, whichever is higher.
