Income Tax Act 1961 Section 206AD

Section 206AD of the Income Tax Act 1961 is legal in India. It requires deductors to apply a higher rate of Tax Deducted at Source (TDS) on payments to persons who have not filed their income tax returns for the previous two years. This provision aims to encourage timely tax filing and improve compliance.

You should understand how this section works, who it applies to, and what consequences it has if you do not file your returns on time. This article explains the key aspects of Section 206AD and how it affects taxpayers and deductors.

Understanding Section 206AD of Income Tax Act 1961

Section 206AD was introduced to target non-filers of income tax returns. It imposes a higher TDS rate on certain payments to such non-filers. The goal is to improve tax compliance by incentivizing timely filing of returns.

This section applies specifically to specified payments and persons who have not filed returns for the two preceding financial years. It is a legal tool used by the government to widen the tax base.

• Section 206AD mandates a higher TDS rate of 20% on specified payments to non-filers of income tax returns for the last two years.

• The section applies only if the aggregate TDS on such payments exceeds Rs. 50,000 in each of the two previous years.

• Specified payments include dividends, interest, rent, commission, brokerage, professional fees, and others as notified.

• The deductor must verify the non-filer status using the PAN and Form 26AS before deducting TDS at the higher rate.

This section is a legal requirement, and failure to comply may result in penalties for the deductor. It also encourages taxpayers to file returns timely to avoid higher TDS deductions.

Who Is Covered Under Section 206AD?

Section 206AD targets persons who have not filed income tax returns for the two financial years immediately preceding the year in which the specified payment is made. It is important to know who falls under this category.

Not all non-filers are covered; only those whose TDS on specified payments exceeded Rs. 50,000 in each of those two years are included. This ensures the provision targets significant non-compliance.

• Individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities can be covered if they meet the non-filing and TDS threshold criteria.

• Non-filers whose aggregate TDS on specified payments was below Rs. 50,000 in either of the two previous years are exempt from Section 206AD.

• The section applies only if the PAN of the payee is available to the deductor.

• Entities that have filed their returns for the previous two years are not subject to higher TDS under this section.

Understanding who is covered helps you know if you or your payees are affected. Filing returns timely can help avoid the higher TDS deduction.

Specified Payments Under Section 206AD

The law specifies certain types of payments on which higher TDS applies if the payee is a non-filer. Knowing these payments helps you identify when Section 206AD is triggered.

These payments are common in business and investment transactions. The government focuses on these to improve tax compliance among recipients.

• Dividends paid by companies or mutual funds to shareholders or unit holders are covered.

• Interest payments by banks, financial institutions, or others to depositors or lenders fall under this section.

• Rent payments for land, building, furniture, or machinery are included as specified payments.

• Commission, brokerage, professional fees, and contract payments are also specified for higher TDS deduction.

Being aware of these payments helps you comply with the law and avoid unexpected higher TDS deductions.

Compliance Requirements for Deductors

Deductors have specific responsibilities under Section 206AD. They must verify the non-filer status before deducting TDS at the higher rate.

Failure to comply can lead to penalties and disallowance of TDS credit for the payee. Deductors must follow due diligence to avoid legal issues.

• Deductors must check the PAN status and Form 26AS of the payee to confirm non-filing of returns for the last two years.

• If the payee is a non-filer and meets the threshold, deductors must deduct TDS at 20% instead of the normal rate.

• Deductors must deposit the deducted TDS with the government within the prescribed time to avoid interest and penalties.

• Proper documentation and records of verification and TDS deduction must be maintained for audit and compliance purposes.

Deductors should stay updated with government notifications and circulars related to Section 206AD to ensure full compliance.

Consequences of Non-Compliance

Non-compliance with Section 206AD can lead to legal and financial consequences for both deductors and deductees. Understanding these helps you avoid penalties and disputes.

The government enforces this provision strictly to promote tax discipline and timely filing of returns.

• Deductors who fail to deduct TDS at the higher rate when required may face penalties and interest under the Income Tax Act.

• Non-deduction or short deduction of TDS can lead to disallowance of expenses for the deductor in their income tax return.

• Payees may face higher tax liability or difficulty in claiming TDS credit if deductors do not comply properly.

• Repeated non-compliance may attract scrutiny and audits by the Income Tax Department, leading to further legal complications.

Both deductors and deductees should ensure compliance to avoid these consequences and maintain smooth tax operations.

Common Mistakes and How to Avoid Them

Many taxpayers and deductors make errors related to Section 206AD due to lack of awareness or improper procedures. Knowing common mistakes helps you avoid them.

Simple steps can ensure compliance and prevent unnecessary financial loss or legal trouble.

• Failing to verify the non-filer status of payees before deducting TDS leads to incorrect TDS rates being applied.

• Ignoring the Rs. 50,000 TDS threshold for the previous two years causes unnecessary higher TDS deductions.

• Not updating or checking Form 26AS regularly results in missing the correct filing status of the payee.

• Delaying deposit of deducted TDS or improper documentation can attract penalties and complicate tax filings.

By following due diligence, regularly checking compliance status, and maintaining records, you can avoid these common pitfalls.

How to Check If You Are a Non-Filer Under Section 206AD

You can easily verify your filing status to know if Section 206AD applies to you. This helps you plan your tax filings and avoid higher TDS deductions.

The government provides tools and statements to check your tax return filing history and TDS details.

• Check your Form 26AS on the Income Tax Department’s e-filing portal to see TDS deducted and filed returns status.

• Verify if your PAN is linked with filed income tax returns for the last two financial years.

• Use the income tax e-filing portal’s 'View Filed Returns' option to confirm your filing history.

• If you find you are a non-filer, file your pending returns as soon as possible to avoid higher TDS deductions in future payments.

Regularly monitoring your tax compliance status helps you stay informed and avoid surprises under Section 206AD.

Conclusion

Section 206AD of the Income Tax Act 1961 is a legal provision designed to encourage timely filing of income tax returns by imposing a higher TDS rate on non-filers. It targets specified payments and requires deductors to verify the payee’s filing status.

You should understand who is covered, what payments are specified, and the compliance requirements to avoid penalties and higher tax deductions. Timely filing of returns is the best way to prevent Section 206AD from affecting your transactions.

FAQs

Who has to deduct TDS under Section 206AD?

Any person responsible for making specified payments must deduct TDS at the higher rate if the payee is a non-filer as defined under Section 206AD.

What is the higher TDS rate under Section 206AD?

The higher TDS rate is 20% on specified payments made to non-filers of income tax returns for the previous two years.

Can a non-filer avoid higher TDS deduction?

Yes, by filing income tax returns for the previous two years before the payment is made, a non-filer can avoid the higher TDS rate.

Does Section 206AD apply if PAN is not available?

No, Section 206AD applies only if the deductor has the PAN of the payee. Without PAN, different TDS provisions apply.

What happens if deductor fails to deduct TDS under Section 206AD?

The deductor may face penalties, interest, and disallowance of expenses for failing to deduct TDS at the prescribed higher rate under Section 206AD.