Contents
Introduction: Understanding Section 206AB of the Income Tax Act
Section 206AB of the Income Tax Act, 1961, was a provision that was introduced to ensure tax compliance among individuals who had not filed their income tax returns despite having significant tax deducted or collected at source. This section mandated the deduction of Tax Deducted at Source (TDS) at a higher rate for such specified persons.
The primary objective of Section 206AB was to encourage timely filing of Income Tax Returns (ITR) and deter tax evasion.
By imposing stricter tax deduction norms, Section 206AB aimed to ensure that non-filers contributed fairly to the tax system and promoted greater financial transparency.
Applicability and Conditions of Section 206AB
Section 206AB was applicable to a "specified person" when a payment or credit was made to them, triggering TDS provisions under various sections of the Income Tax Act.
A person was considered a "specified person" if they met the following conditions:
- They had not filed the income tax returns for both of the two financial years immediately preceding the financial year in which tax was required to be deducted or collected.
- The due date for filing the income tax return (excluding belated returns) for those two previous years had expired.
- The total TDS and TCS amount in each of these two years was ₹50,000 or more.
However, Section 206AB did not apply in certain cases, including:
- Non-residents who did not have a permanent establishment in India.
- Salaried employees subject to TDS under Section 192.
- Payments covered under Sections 192A, 194B, 194BB, 194LBC, and 194N of the Act.
- Individuals or HUFs with a business turnover below ₹1 crore or professional receipts under ₹50 lakh in the previous financial year, in case of transfer of virtual digital assets under Section 194S.
- Individuals/HUFs without income from business or profession, in case of transfer of virtual digital assets under Section 194S.
Higher TDS Rates under Section 206AB
When Section 206AB was applicable, the tax was deducted at the higher of the following rates:
- Twice the rate specified in the relevant provision of the Income Tax Act.
- A flat rate of 5%.
If the specified person failed to provide a PAN, the TDS rate was the highest among the rates prescribed under Section 206AB or Section 206AA of the Income Tax Act.
Section 206CCA: Higher TCS for Non-Filers
Similar to Section 206AB for TDS, Section 206CCA was introduced for the collection of Tax Collected at Source (TCS) at higher rates from specified persons who had not filed their income tax returns.
The conditions for applicability of Section 206CCA were similar to Section 206AB, focusing on non-filing of ITR for the preceding two years and a threshold of ₹50,000 or more of total TDS and TCS in each of those years.
The applicable TCS rate under Section 206CCA was the higher of:
- Twice the rate specified in the relevant provision of the Income Tax Act or Finance Act.
- A flat rate of 5%.
If Section 206CC (for non-furnishing of PAN) and Section 206CCA both applied, the higher of the rates under these two sections was applicable for TCS.
Related Sections and Rules
Section 206AB and 206CCA interacted with other sections of the Income Tax Act, particularly those related to TDS and TCS. One important related section was Section 206AA, which mandated a higher TDS rate for individuals who failed to provide their PAN to the deductor.
Compliance with Section 206AB and 206CCA required deductors and collectors to identify specified persons. The Income Tax Department provided a compliance check functionality for this purpose, allowing users to check the ITR filing status for single or multiple PANs.
Recent Changes: Omission of Sections 206AB and 206CCA
In a significant development, Budget 2025 proposed and enacted the omission of Sections 206AB and 206CCA.
This change became effective from April 1, 2025.
The removal of these sections aimed to reduce the compliance burden on tax deductors and collectors and simplify tax procedures.
Important: With the omission of these sections from April 1, 2025, businesses and individuals are generally no longer required to check the ITR filing status of the deductee/collectee to determine the applicable TDS/TCS rate under these specific provisions.
Frequently Asked Questions (FAQs) on Section 206AB and 206CCA
What was a specified person under Section 206AB and 206CCA?
A specified person was someone who had not filed their income tax returns for the preceding two financial years where the due date had expired, and the aggregate of TDS and TCS in each of those years was ₹50,000 or more.
What were the higher TDS rates under Section 206AB?
The higher TDS rate was the higher of twice the rate specified in the relevant section of the Act or 5%.
Did Section 206AB apply to salaried employees?
No, Section 206AB did not apply to TDS on salary under Section 192.
How could a deductor identify a specified person?
The Income Tax Department provided a compliance check functionality that allowed deductors to check the ITR filing status of a person based on their PAN.
Did Section 206AB apply to non-residents?
Section 206AB and 206CCA generally applied to non-residents, but not to those who did not have a permanent establishment in India.
What was the purpose of Section 206CCA?
Section 206CCA mandated higher TCS rates for specified persons who had not filed their income tax returns, similar to Section 206AB for TDS.
What happened if both Section 206AA and 206AB were applicable?
If both sections were applicable, the tax was deducted at the higher of the rates prescribed under Section 206AA and Section 206AB.
When were Sections 206AB and 206CCA introduced?
Sections 206AB and 206CCA were introduced by the Finance Act 2021 and became effective from July 1, 2021.
When were Sections 206AB and 206CCA omitted?
Sections 206AB and 206CCA were omitted effective from April 1, 2025, based on the Budget 2025 proposals.
Why were Sections 206AB and 206CCA omitted?
The omission was aimed at reducing the compliance burden on tax deductors and collectors and simplifying tax procedures.
Conclusion: Reflecting on Past Tax Regulations
Sections 206AB and 206CCA were significant provisions in the Income Tax Act aimed at promoting tax compliance by levying higher TDS/TCS on individuals who had not filed their income tax returns. While these sections played a role in encouraging timely filings, their omission effective from April 1, 2025, based on the Budget 2025 proposals, signifies a move towards simplifying tax compliance for deductors and collectors. Understanding these past provisions provides valuable context to the evolution of tax regulations in India.