Section 206AB: Special Provision for Higher TDS on Non-Filers of ITR

1. Overview

• Introduced: Finance Act 2021 (effective from 1st July 2021) .
• Purpose: Encourage tax compliance by imposing higher TDS rateson individuals/businesses who fail to file income tax returns (ITRs) despite significant TDS/TCS deductions.
• Budget 2025 Update: Proposed for omission(effective 1st April 2025) to reduce compliance burdens.

2. Key Provisions

A.  Applicability

• Applies to “Specified Persons”:
  • Non-filers: Failed to file ITR for both of the last two financial years(e.g., FY 2023-24 and FY 2022-23 for deductions in FY 2024-25).
  • Threshold: Aggregate TDS/TCS in eachof those years was ₹50,000 or more.
• Transactions Covered:
  • Rent, professional fees, contractor payments, interest (excluding salaries, EPF withdrawals, lottery winnings, etc.).

B.  Exemptions

• Payments Excluded:
  • Salaries (Section 192)
  • EPF withdrawals (Section 192A)
  • Lottery/horse race winnings (Sections 194B, 194BB)
  • Cash withdrawals (Section 194N)
  • Non-residents withouta permanent establishment in India.

C. TDS Rates

• Higher of:
  1. Twice the normal rateunder the relevant section, or
  2. 5%.
• PAN Not Provided: TDS defaults to 20%(as per Section 206AA).

Example:

• Normal TDS on professional fees (Section 194J): 10%
• Under Section 206AB: 20%(2×10%) or 5% → 20% applies.

3. Compliance & Penalties

• Deductor’s Duty:
  • Verify non-filer status using the ITD’s compliance check tool(bulk PAN search).
  • Deduct higher TDS and report in Form 26Q/27Q.
• Consequences for Default:
  • Disallowance of expenses(Section 40(a)(ia)) if TDS not deducted.
  • Interest/Penalties: 1% monthly interest for late deduction; ₹10,000–₹1 lakh for incorrect filings.

4. Recent Changes & Relief Measures

• Budget 2023: Excluded non-residents without PEand individuals not required to file ITR from “specified persons”.
• Budget 2025: Proposed removal of Section 206ABto simplify compliance.

5. Practical Implications

• For Deductors:
  • Maintain records of payees’ ITR status.
  • Use the TRACES portalfor corrections.
• For Payees:
  • File pending ITRs to avoid higher TDS.
  • Reconcile TDS credits via Form 26AS/AIS.

Pro Tip: NRIs without Indian business income are exempt but must submit Tax Residency Certificates (TRCs) to avoid higher TDS.