What is Section 206AA of the Income Tax Act?

All payments covered by the provision for tax deduction at the source must be made following the tax deduction. The TDS provisions require all taxpayers to deduct taxes at the rates listed in the applicable parts of the Income Tax Act. The recipient must provide the person making the payment with their PAN in every case. Nonetheless, there are several situations in which the recipient would not have a PAN. In certain situations, the payer must implement Section 206AA's rules and increase the recipient's tax deduction rate. We will go over the significance and extent of Section 206AA in this detailed article.

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Table of Contents

Scope of Section 206AA

Exemption Under Section 206AA

Submission Of PAN

TDS Rate under Section 206AA

Exceptions on TDS Rate Under Section 206AA

Applicability of Section 206AA in Form 15G and Form 15H

Applicability In Case of Lower Deduction Under Section 197

Section 206AA for NRIs

Section 206AA vs. Section 206AB

Conclusion

Most Asked Questions

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Scope of Section 206AA

Section 206AA was launched in FY 2010–11, bringing a significant change for many taxpayers. Every taxpayer who receives taxable income is required to provide their PAN to the person who pays it as per this section. Both residents and non-residents are covered by this requirement. Salary, rent, professional receipts, contractual receipts, and other payments would be considered payments for residents. These would include all receipts that are subject to Indian taxation for non-residents.

Exemption Under Section 206AA

Payments given to non-residents listed below would not be covered under Section 206AA: 

1. Regarding interest payments made to a non-resident under section 194LC on long-term bonds.

2. Section 206AA's application to payments made to non-residents in the form of interest, royalties, fees for technical services, and payments upon the transfer of any capital asset was loosened by the Finance Act of 2016. If the following information and supporting documentation are provided to the payer (Rule 37BC introduced via Notification No. 53/2016), Section 206AA will not apply to such a non-resident recipient:

3. Name, phone number, and email address;

4. Address in the nation or designated area outside of India where the deductee resides;

5. Proof proving his residency in any nation or designated territory outside of India, issued by the government of that nation or territory if the legislation of that nation or territory permits to do so;

6. The deductee's tax identification number is in the nation or designated territory where he resides. If such a number is unavailable, the government of the nation or designated region where the deductee claims to reside will use a unique number to identify him.

Submission Of PAN

A PAN must be provided by the recipient of taxable income in order to comply with the Income Tax Act's TDS provisions. Payments made to the recipient after the PAN is provided will be subject to taxation at the TDS rate determined by the various TDS provisions of the Income Tax Act. TDS would be applied at the higher rates outlined in Section 206AA to a receiver who fails to provide PAN. Additionally, the recipient must provide the payer with his PAN, and both parties must note this in all letters, invoices, vouchers, and other papers sent back and forth.

TDS Rate under Section 206AA

If a recipient does not provide their PAN to the payer, they will be charged TDS at the larger of the following rates: 

• At the rate indicated in the applicable Act provision

• At the rate or rates that are now in effect, that is, the rate specified in the Finance Act

• 20% (or 5% in the case of clauses 194-O and 194Q)

Exceptions on TDS Rate Under Section 206AA

TDS is withheld at varying rates depending on whether the payment is covered by section 194O or 194Q. Section 194Q is for the deduction of TDS on payments of a specific amount for the purchase of goods, whereas section 194Q deals with TDS deduction on payments made to e-commerce participants. 

The following rates will be applicable in this situation: 

• At the rate outlined in the Income Tax Act's requirements.

• At 5% (the applicable tax rate according to section 206AA)

A TDS rate that is higher than the previous one is relevant.

Applicability of Section 206AA in Form 15G and Form 15H

Under section 197A, the money's recipient may also provide the payer with a declaration. In order to demonstrate that the yearly income is below the threshold and that no TDS should be withheld from it, Forms 15G and 15H must be provided. Form 15H is applicable to individuals over 60, although Form 15G can be submitted by the payee who is under 60. 

Section 206AA of the Income Tax Act states that a declaration is deemed void if the payee does not submit a PAN. TDS is withheld at the following rates in the event that no PAN is provided:

• At the rates outlined in the applicable act's provisions (section 206AA's applicable tax rates).

• At 20%

TDS will be subtracted at a rate greater than the one mentioned above.

Applicability In Case of Lower Deduction Under Section 197

Under Section 197, a recipient of a taxable payment may apply for a smaller deduction or no deduction of tax (TDS). TDS will be performed at the rates specified in the certificate provided by the assessing officer under Section 197 in such situations. Usually, the certificate is valid for a predetermined amount of time. A certificate issued under section 197 is void unless the beneficiary provides their PAN to the assessing officer at the time of application, according to section 206AA.

Section 206AA for NRIs

Section 206AA will not apply to the following payments paid by non-residents in specific situations. Regarding interest payments, royalties, technical service fees, any capital asset, and long-term bond interest under Section 194LC. When the required NRI data is provided to the IT, as indicated below:

• The taxpayer's name, phone number, and mailing address

• Address and country of residency outside of India

• The deductee's Tax Identification Number (TIN) in the nation where they reside 

• The Resident Country's Tax Certificate 

Section 206AA vs. Section 206AB

As a taxpayer, you must understand the difference between Section 206AA and Section 206AB of the Income Tax Act. The following table shows a comparison between these sections:

206AA	206AB
Applicable when a PAN is not provided by the deductee, when it is invalid, or when it is not the deductee's PAN	Applicable when the total amount of tax received or deducted during the financial year above Rs. 50,000 and a deductee has not submitted their income tax return in the previous year
Higher of:  Rate mentioned in the relevant provision; or  Rate/rates in force; or 20%.	Higher of:  Twice the rate mentioned in the relevant provision; Twice the rate/rates in force; 5%

Conclusion

The TDS and its accompanying duty to deposit the tax amount with the government are covered by Section 206 of the Income Tax Act. It describes how the TDS applies to residents' salary, interest, dividends, and rent, as well as to non-resident Indians' (NRIs') income that is taxable in India. The deduction rates and the processes for submitting returns and providing certificates to deductees are also outlined. 

FAQ

Q1. What is the tax rate if provisions of Section 206AA are applicable?

According to Section 206AA, the tax will be withheld at the highest of the following rates if the recipient does not provide the deductor with his PAN: 

a) At the rates which are highlighted in the applicable Income-tax Act provisions, 

b) At the rate or rates which are in effect, or 

c) At the rate of 20%. 

Q2. What is the TDS rate applicable to a taxpayer if the PAN is not available?

TDS will be withheld at the standard rate specified in the Income Tax Act if the payee has submitted the PAN and the PAN information is accurate. If not, the tax is subtracted at the particular rate or at a higher cost of 20%.

Q3. What happens if TDS is deducted at a lower rate?

In order to request a zero or lesser tax deduction, the taxpayer may submit Form 15G or 15H under section 197 or 197A. He or she may, however, request a refund of the excess amount if, at the time of submitting the ITR, the total tax liability is found to be less than the tax already paid.

Q4. Is any exemption available to a person from Section 206AA?

Rule 37BC relaxes laws pertaining to interest, royalties, technical service fees, dividends, and payments on capital asset transfers for non-corporate non-residents or foreign companies without a PAN in order to lessen the burden of compliance. However, the deductee must provide specific information.

Q5. How does Section 206AA affect foreign corporations doing business transactions with Indian entities?

Section 206AA, which requires the PAN to be furnished in order to assure compliance with the TDS laws, must be followed by foreign firms doing business with Indian entities.

Q6. How to check the return filing status for deduction of tax at source as per Section 206AB?

To verify the deductee's IT return filing status, the Income-tax Department has launched a new feature called "Compliance Check for section 206AB & 206CCA" on https://report.insight.gov.in. If a person is a defined person for the purposes of section 206AB, the tax deductor can enter their single PAN or multiple PANs and receive a response from the functionality.

Q7. What is the procedure for applying for a lower TDS rate under Section 197 for non-residents for whom Section 206AA is applicable?

In accordance with the guidelines set forth in the Income Tax Act, non-residents who are impacted by the provisions of Section 206AA may apply for a reduced TDS rate under Section 197 by delivering the required paperwork and application to the Assessing Officer.

Q8. What is the difference between Section 206AA and Section 206AB?

TDS may be withheld at higher rates as stated by Section 206AA in cases where the recipient of the payment on which tax is to be withheld at the source has failed to provide the PAN. If an individual provides their PAN but has not yet filed their return for the prior assessment year, the filing deadline has passed, and the total cost of TDS or TCS in their instance exceeds Rs. 50,000, higher rates as stated under Section 206AB would be applicable.