Section 206AB of Income Tax Act Explained

What is Section 206AB of Income Tax Act?

Section 206AB of the Income Tax Act is a new provision introduced by the Finance Act 2021 and came into effect on 1st July 2021. It aims to ensure compliance with filing income tax returns by specified persons who have not filed their returns for the previous two assessment years and have a high amount of tax deducted or collected at source. According to this section, any person who pays or credits any sum to such a specified person must deduct tax at source at a higher rate than the normal rate prescribed under the relevant section of the Act. The higher rate is either twice the normal rate or 5%, whichever is higher. This section applies to all payments or credits that are subject to TDS, except for those covered under sections 192, 192A, 194B, 194BB, 194LBC, and 194N of the Act.

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How is TDS deducted under section 206AB?

Any payment made to a specified person mentioned in Section 206AB, TDS shall be deducted at a higher rate:

• 5%
• Two times the rate the Finance Act or the Income Tax Act gives.
• The tax shall be deducted at 20% or the rate applicable as per the section, whichever is higher if the certain person does not provide a PAN.

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How is TCS collected under section 206AB?

Any payment made to a specified person mentioned in Section 206AB, TCS shall be collected at a higher rate:

• 5%
• Two times the rate the Finance Act or the Income Tax Act gives.
• The tax shall be deducted at 20% or the rate applicable as per the section, whichever is higher if the certain person does not provide a PAN.

Illustration:

Suppose A is a specified person who has not filed his income tax returns for the past two years and has a turnover of more than 50 lakhs in the previous year. He receives a payment of 1 lakh from B, who is liable to deduct TDS under any provision of the Income Tax Act.

According to Section 206AB, B has to deduct TDS at a higher rate from A's payment. The higher rate is the highest of the following:

• 5%
• Two times the rate specified in the relevant provision of the Income Tax Act or the Finance Act
• 20% or the rate applicable as per the section, whichever is higher, if A does not provide a PAN

Let us assume that the normal rate of TDS for A's payment is 1% as per the Income Tax Act, and there is no change in the rate by the Finance Act. In this case, the higher rate will be:

• 5%
• Two times of rate 1% determined in the Act, i.e., 2%
• 20% (since A does not have a PAN)

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Who is the specified person U/S Section 206AB?

A specified person under section 206AB of the Income Tax Act, 1961:

• Any person who has not filed the ITR for the preceding year.
• Any person who has not filed the ITR on or before the due date
• The total amount of TDS and TCS in the last financial year is ₹ 50,000 or more

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What are the Exclusions under Section 206AB?

Provision for TDS deduction under section 206AB does not apply to:

*** As per Section 194S, the Transfer of virtual assets to the following is excluded from the TDS deduction:

• HUF or Individual not having ‘Income from Business and Profession.”
• HUF/Individual (Gross turnover is less than ₹ 1 crore) or (Gross receipts from any profession is less than ₹ 50 Lakh) during the previous financial year.

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