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Section 206AA : Higher Rate of TDS

Section 206AA

Introduction

Section 206AA was introduced in the Income Tax Act during the financial year 2010-11. It has significant implications for Tax Deducted at Source (TDS) on payments made to both residents and non-residents.

Section 206AA  provides that where any person is entitled to receive any income on which tax is deductible at source, he is required to furnish his PAN to the deductor. In case the PAN is not furnished, the tax shall be deducted at a higher rate under section 206AA.​

Let’s explore its scope and key provisions:

 

Applicability to Taxpayers:

    • Residents: Section 206AA applies to residents who receive taxable income. This includes various payment types such as salary, rent, professional receipts, and contractual receipts.
    • Non-Residents: The scope extends to non-residents as well. For them, it covers all receipts that are taxable in India.

 

PAN Requirement:

    • Every taxpayer receiving taxable income must furnish their Permanent Account Number (PAN) to the payer.
    • Upon providing PAN, payments to the recipient are taxed at the regular TDS rates specified in various provisions.

 

Higher TDS Rate Under 206-AA

    • If the recipient fails to furnish PAN, TDS is deducted at a higher rate.
    • The higher rate can be one of the following:
      • The rate specified in the relevant provision of the Act.
      • The rate prescribed in the Finance Act (usually the rate for the financial year).
      • A flat rate of 20%.

 

Applicability with Lower Deduction:

    • Recipients can seek an application for lower deduction or nil deduction of TDS under Section 197.
    • However, a certificate issued by the assessing officer under Section 197 is not valid unless the recipient furnishes their PAN during the application process.

 

Specific Exemptions:

Certain categories of payments to non-residents are exempt from the provisions of Section 206AA. These include interest on long-term bonds (as per Section 194LC), payments for interest, royalties, or fees for technical services, and payments on the transfer of capital assets.

 

Exception to the higher rate under section 206AA?

The rate of 20% shall be reduced to 5% in the case where:

a) Tax is required to be deducted by an e-commerce operator under ​​​​section 194-O; or

b) Tax is required to be deducted by a buyer under section 194Q.​

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