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Section 206AA – TDS On Payments Made To Non-Residents And Residents Not Having PAN

By Mohammed S Chokhawala

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Updated on: Jul 10th, 2024

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3 min read

Every payment covered under the tax deduction at source provision must be made after tax has been deducted. Every payer is bound by the TDS provisions to deduct taxes at the rates specified in the relevant sections of the Income Tax Act.

In all situations, the recipient is required to furnish their PAN to the person making the payment. However, there are certain circumstances where the recipient would not have PAN. In such circumstances, the payer is required to adopt the provisions of Section 206AA and deduct tax at a higher rate for the recipient. We discuss the scope and implications of Section 206AA below.

Scope Of Section 206AA

Section 206AA was introduced in FY 2010-11. It requires every taxpayer who receives taxable income to furnish their PAN to the payer of such income. This applies to both resident and non-resident recipients. The payments for residents would include salary, rent, professional receipts, contractual receipts, and so on. For non-residents, these would include all receipts that are taxable in India.

Rate Of TDS

A recipient who fails to furnish PAN to the person making a payment would receive TDS at the higher of the rates mentioned below:

  • At the rate specified in the relevant provision of the Act
  • At the rate or rates in force, i.e., the rate prescribed in the Finance Act
  • At the rate of 20% (5%, in case sections 194-O and 194Q)

Submission Of PAN

A recipient of taxable income should furnish PAN to comply with the provision of TDS under the Income Tax Act. Upon furnishing of the PAN, payments made to the recipient would be taxed at the rate of TDS specified under the various TDS provisions of the Income Tax Act. A recipient who does not furnish PAN would suffer TDS at the higher rates specified in Section 206AA. The recipient is also required to furnish his PAN to the payer and both of them are required to indicate the same in all correspondence, bills, vouchers and other documents which are sent to each other.

Applicability In Case Of Lower Deduction Under Section 197

A recipient of taxable payment can seek an application for a lower deduction or nil deduction of tax (TDS) under Section 197. In such cases where the assessing officer has issued a certificate under Section 197, TDS shall be done at the rates mentioned therein. The certificate is generally issued for a specified period. Section 206AA states that a certificate under section 197 is not valid unless the recipient furnishes their PAN at the time of making an application to the assessing officer.

Applicability In Case Of Form 15H & 15G

A recipient is also entitled to submit a declaration under Section 197A to the person making the payment. A declaration under 197A includes a declaration made under Form 15G and Form 15H for a nil tax deduction. A declaration under Form 15G can be submitted by a recipient who is less than 60 years of age, and a declaration under Form 15H can be submitted by a recipient who is 60 years of age and above.

As per Section 206AA, the declaration would not be valid if it does not contain the PAN of the person making the declaration. If the recipient makes a declaration without their PAN, then TDS or tax is to be deducted at higher following rates:

  • At the rate specified in the relevant provision of the Act.
  • At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
  • At the rate of 20%.

Exemption Under Section 206AA

Section 206AA would not apply to the below payments made to non-residents:

  • In respect of payment of interest on long-term bonds to a non-resident under section 194LC.
  • The Finance Act 2016 relaxed the applicability of Section 206AA in case of payments made to non-residents in the nature of interest, royalties, fees for technical services and payments on the transfer of any capital asset. Section 206AA will not apply to such non-resident recipient if the following details and documents are furnished to the payer (Rule 37BC inserted vide Notification No. 53/2016):
    • Name, email ID, contact number;
    • Address in the country or specified territory outside India of which the deductee is a resident;
    • Certificate of his being resident in any country or specified territory outside India from the government of that country or specified territory if the law of that country or specified territory provides for the issuance of such certificate;
    • Tax Identification Number of the deductee in the country or specified territory of his residence. In case no such number is available, then a unique number on the basis of which the deductee is identified by the government of that country or specified territory of which he claims to be a resident.

Section 206AA vs. Section 206AB

A comparison between Section 206AA and 206AB has been enumerated in the below table:

 

206AA

206AB

Scope

When a deductee fails to furnish his PAN, When the PAN provided is invalid, or when the PAN doesn’t belong to the deductee

When a deductee has not filed their income tax return in the last year and the aggregate amount of tax deducted or collected during the FY exceeds Rs.50,000

Higher rate

Higher of: 

  • Rate specified in the relevant provision; or 
  • Rate or rates in force; or
  • 20%.

Higher of: 

  • Twice the rate specified in the relevant provision;
  • Twice the rate or rates in force;
  • 5%
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Frequently Asked Questions

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

As per Section 206AA, if recipient fails to furnish his PAN to the deductor then tax shall be deducted at the highest of the following rates:

a) At the rates specified in the relevant provisions of the Income-tac Act, or

b) At the rate or rates in force, or

c) At the rate of 20%

Is there any exemption available to a person from the provisions of Section 206AA?

For the purpose of reducing the compliance burden, rule 37BC provides for relaxation to a non-corporate non-resident or a foreign company not having PAN in respect of payment in the nature of interest, royalty, fees for technical services, dividends and payments on transfer of capital assets subject to deductee providing certain specified details.

How to check the return filing status of a person for deduction of tax at source under Section 206AB?

The Income-tax Department has issued a new functionality “Compliance Check for section 206AB & 206CCA” on https://report.insight.gov.in to check the IT Return filing status of the deductee. The tax deductor can feed the single PAN or multiple PANs of a person and get a response from the functionality if such a person is a specified person for the purpose of section 206AB.

How does Section 206AA impact foreign corporations engaging in business transactions with Indian entities?

Foreign corporations engaging in business transactions with Indian entities need to adhere to the requirements of Section 206AA, which mandates the furnishing of the PAN to ensure compliance with the TDS provisions.

What is the procedure for applying for a lower TDS rate under Section 197 for non-residents affected by the provisions of Section 206AA?

Non-residents affected by the provisions of Section 206AA can apply for a lower TDS rate under Section 197 by submitting the necessary application and documents to the Assessing Officer, as per the prescribed procedures outlined in the Income Tax Act.

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

Where a person receiving the payment on which tax is to be deducted at source has not furnished the PAN, TDS is liable to be deducted at higher rates as prescribed under Section 206AA. 

Higher rates as prescribed under Section 206AB will be applicable if the individual furnishes their PAN but has not yet submitted their return for the previous assessment year, the filing deadline passes, and the total amount of TDS or TCS in their case exceeds Rs.50,000. 

About the Author

I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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Quick Summary

Tax Deduction at Source (TDS) under Section 206AA requires PAN for payments. Rates are higher when PAN not available. Exceptions for non-resident payments include interest, royalties, and fees. Declarations under Form 15G & 15H should include PAN. Section 206AB applies when PAN is invalid or deductee hasn't filed returns.

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