Section 206AA of Income Tax Act sets the Higher Tax Rate (TDS) for a person (whether resident and non-resident), who receives taxable amount without furnishing PAN to payer (TDS deductor).

Payer has the liability to deduct TDS and deposit the same to the government before the due date while making the taxable payment.

If on being asked by the payer (TDS deductor) for submitting PAN, a person refusing to give PAN number than payer can deduct TDS at Higher rate mentioned under section 206AA.

In the following, we have explained all the details under section 206AA:

     

    What is section 206AA of Income Tax Act, 1961?

    As per section 206AA of Income Tax Act every person (whether resident or non-resident) must furnish his Permanent Account Number (PAN) while receiving any payment on which TDS is liable to be deducted.

    Section 206AA - Higher TDS Rate for Non-submission of PAN

    Means if a recipient receives any taxable amount then he has to furnish his PAN to the payer.

    There are various payments on which TDS is applicable where it is the liability of the payer to deduct TDS while making payment and deposit the same to the government every month.

    For deducting TDS, PAN is required. When PAN is furnished to the payer, he deducts the TDS. Both payer and recipient have to mention the PAN Number on bills, vouchers and any other documents.

    Therefore section 206AA required the recipient to submit a PAN for deducting TDS under various sections of TDS.

    If recipients fail to furnish the PAN then the payer (TDS deductor) can deduct TDS at Higher rates mentioned in section 206AA.

    Example:

    Mr. A provides professional services to Mr. B. Mr. B while making payment to Mr. A is liable to deduct TDS under section 194J at the rate of 10%. If Mr. A does not furnish the PAN to Mr. B then TDS should be deducted at higher rates mentioned in section 206AA and not as per the applicable section that is section 194J.

     

    What is the Higher Rate of TDS under section 206AA?

    Recipient of taxable amount must furnish his PAN to the payer for deduction of TDS. In case of failure to furnish PAN then TDS is not deducted as per applicable section instead TDS is deducted at higher rate mentioned under section 206AA.

    In case of non-furnishing of PAN, TDS is to be deducted at Higher of the 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% 

    Means, if PAN is not available then the minimum TDS rate applicable is 20%. i.e. payer has to deduct TDS at 20%.

    Example:

    In the earlier example: If Mr. A not submits into PAN then TDS rate is applicable Higher of the following:

    • TDS rate under section 194J i.e. @10% Or
    • At the rate of 20%

    So, higher tax rate is 20% then TDS is to be deducted on such professional services @20%.

     

    When section 206AA is not applicable?

    Section 206AA is not applicable in respect to following payments made to non-residents. Means if the following payment is received by non-resident then no higher rate is applicable under section 206AA.

    1) If any payment is received by non-resident as interest on long-term bonds under section 194LC.

    2) Payment made to non-resident in the form of interest, royalty fees for technical services and payment transfer of any capital Asset. Such payment is not covered under section 206AA only if payment is made to a non-resident (not to a company or a foreign company) and he has furnished the following documents to the payer (deductor).

    • Name, Email ID, Mobile number
    • Address in which Country non-resident resides.
    • Certificate of being resident in the country, he resides.
    • Tax Identification Number/Unique Number in the country, he resides.

     

    What is the requirement of PAN under section 197 and section 197A (Form 15G / 15H)?

    Section 197 of Income Tax

    Under section 197, every recipient has to furnish his PAN while filling an application for nil / lower deduction of TDS. Recipient can file application and assessing officer issues the certificate under section 197 for nil / lower deduction of TDS. In such a case TDS rate mentioned in the certificate is applicable.

    Therefore submission of PAN is necessary for making such an application to assessing officers.

     

    Section 197A (Form 15G or 15H)

    Recipients can submit declaration under section 197A in the form of 15G/15H for nil deduction of tax. PAN number is required for submission of such declaration. Form 15G is to be filled by a person of age less than 60 years and Form 15H is required for 60 years or above age for those who want not to deduct TDS on payment received.

     

    Summary

    Section 206AA of Income Tax Act requires every person (whether resident and non-resident) to make available the PAN, if he does not want to deduct TDS at a higher rate of 20%. You can save an excessive tax deduction by submitting a PAN number during the payment received.

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