Income Tax Act 1961 Section 206AB

Section 206AB of the Income Tax Act 1961 is legal and enforced in India. It requires deductors to apply higher Tax Deducted at Source (TDS) rates on certain specified persons who have not filed their income tax returns.

This provision aims to encourage timely filing of income tax returns and improve tax compliance. You must understand when and how this section applies to avoid higher TDS deductions.

Understanding Section 206AB of the Income Tax Act 1961

Section 206AB was introduced to target taxpayers who have not filed their income tax returns for the previous two years but have been subject to TDS or TCS in those years. It ensures that such non-compliant taxpayers face higher TDS rates on specified payments.

This section applies in addition to other TDS provisions and is meant to improve tax compliance by penalizing defaulters.

• Section 206AB mandates higher TDS rates on specified persons who have not filed income tax returns for the two preceding financial years.

• It applies only if the aggregate TDS or TCS in both years was Rs. 50,000 or more, indicating significant taxable transactions.

• The higher TDS rate is the higher of twice the normal rate or 5%, whichever is higher, on specified payments.

• This section applies to all deductors responsible for deducting TDS on payments like salary, interest, commission, rent, and professional fees.

Understanding these basics helps you know when Section 206AB impacts your tax deductions.

Who Are 'Specified Persons' Under Section 206AB?

Specified persons are those taxpayers who meet certain conditions related to non-filing of income tax returns and significant TDS or TCS transactions. Identifying such persons is crucial for deductors to comply with Section 206AB.

Not all non-filers are covered; only those meeting the criteria of prior TDS/TCS and non-filing are affected.

• A specified person is someone who has not filed income tax returns for both of the two financial years immediately preceding the year of deduction.

• The person must have had TDS or TCS of Rs. 50,000 or more in each of those two years.

• Specified persons exclude those who have filed returns for either of the two preceding years or have TDS/TCS below the threshold.

• Government deductors and certain notified persons are exempted from applying Section 206AB.

Knowing who qualifies as a specified person helps you determine if higher TDS rates apply.

Payments Covered Under Section 206AB

Section 206AB applies to various types of payments where TDS is deducted. It is important to know which payments attract this provision to ensure correct TDS deduction.

These payments are common in business and professional transactions, so you must be careful while deducting tax.

• Payments of salary, interest other than interest on securities, and commission or brokerage are covered under Section 206AB.

• Rent payments for land, building, furniture, or fittings are subject to higher TDS if paid to specified persons.

• Professional fees, technical fees, and payments for contract work also attract Section 206AB.

• Any other sum on which TDS is deductible under the Income Tax Act may be covered, except where specifically exempted.

Being aware of these payment types helps you apply Section 206AB correctly.

Consequences of Non-Compliance with Section 206AB

If you are a deductor and fail to apply Section 206AB when required, you may face penalties and legal consequences. Similarly, specified persons may face higher tax deductions affecting their cash flow.

Understanding these consequences encourages compliance and proper tax deduction.

• Deductors who fail to deduct TDS at higher rates as per Section 206AB may be liable for interest and penalties under the Income Tax Act.

• Specified persons will face higher TDS deductions, reducing their immediate income or payment amounts.

• Non-compliance may trigger scrutiny by tax authorities and affect your tax records.

• Repeated failure to comply can lead to prosecution or further legal action under tax laws.

Timely compliance protects you from these risks and ensures smooth tax administration.

How to Comply with Section 206AB as a Deductor

As a deductor, you must identify specified persons and apply the higher TDS rates correctly. This requires checking the income tax filing status and TDS history of payees before making payments.

Proper procedures and record-keeping help you avoid mistakes and penalties.

• Verify the income tax return filing status of payees for the two preceding financial years using Form 26AS or the income tax portal.

• Check if the payee’s TDS or TCS in those years was Rs. 50,000 or more to determine if Section 206AB applies.

• Deduct TDS at the higher rate specified by Section 206AB on payments to specified persons.

• Maintain records of due diligence and TDS deductions to demonstrate compliance during assessments or audits.

Following these steps ensures you meet your legal obligations under Section 206AB.

Common Mistakes and How to Avoid Them

Many deductors make errors when applying Section 206AB, leading to penalties or disputes. Awareness of common mistakes helps you avoid these issues.

Simple checks and understanding the law reduce errors significantly.

• Failing to check the payee’s filing status and TDS history before deducting tax is a common mistake leading to incorrect TDS rates.

• Applying Section 206AB to exempt persons or payments not covered under the section causes unnecessary higher deductions.

• Ignoring updates or changes in payee status during the financial year may result in wrong TDS application.

• Not maintaining proper documentation of checks and deductions can cause difficulties during tax audits or assessments.

Being vigilant and systematic helps you comply accurately with Section 206AB.

Recent Amendments and Judicial Interpretations

Section 206AB has seen clarifications and judicial scrutiny since its introduction. Staying updated with these changes helps you understand its correct application.

Courts have emphasized the importance of due diligence and clarified exceptions under this section.

• The Finance Act 2021 introduced Section 206AB to enhance tax compliance by penalizing non-filers with higher TDS.

• Recent circulars from the Central Board of Direct Taxes (CBDT) provide guidance on identifying specified persons and exemptions.

• High Courts have ruled that Section 206AB applies only to non-filers meeting the specified criteria, protecting compliant taxpayers.

• Judicial interpretations stress that deductors must exercise reasonable care and verify payee status before applying higher TDS rates.

Keeping track of these developments ensures you apply Section 206AB lawfully and effectively.

Conclusion

Section 206AB of the Income Tax Act 1961 is a legal provision designed to improve tax compliance by imposing higher TDS rates on specified non-filers. It applies to various payments and requires deductors to verify payee status carefully.

Understanding who qualifies as a specified person, the payments covered, and the consequences of non-compliance helps you stay compliant and avoid penalties. Regularly updating yourself on amendments and judicial views further ensures proper application of this section.

FAQs

Who is considered a specified person under Section 206AB?

A specified person is one who has not filed income tax returns for the two preceding years and has had TDS or TCS of Rs. 50,000 or more in each of those years.

What payments attract higher TDS under Section 206AB?

Payments like salary, interest, commission, rent, professional fees, and contract payments attract higher TDS if paid to specified persons.

Can a deductor avoid applying Section 206AB?

No, if the payee qualifies as a specified person, the deductor must apply higher TDS rates or face penalties.

What happens if a specified person files returns later?

If the specified person files returns for the relevant years, Section 206AB does not apply, and normal TDS rates can be used.

Are government deductors exempt from Section 206AB?

Yes, government deductors and certain notified persons are exempted from applying Section 206AB as per the Income Tax Act.