An Understanding of Section 206AB of the Income Tax Act of 1961

An Understanding of Section 206AB of the Income Tax Act of 1961

As part of Budget 2021, the Finance Minister added a special provision for TDS to the Income Tax Act 1961. A new section has been inserted, which shall be effective from 1st July 2021. 206 AB was inserted to ensure taxpayers filed their income tax return without fail. We shall look at Section 206AB of Income Tax Act, 1961 in this article.

The Income Tax Act, Section 206AB: An Overview

In Finance Act 2021[1], this section was inserted after Section 206AA. As Section 206AB begins with the non-observant clause, it overrides all provisions of the IT Act 1961. For those who have not filed income tax returns for the past two years, the provisions of this section will replace the application of the TDS rate with a higher TDS rate, despite the aggregate of taxes deducted and collected in each of those two previous years exceeding 50000 rupees each.

Hence Section 206AB mandates the deductor to deduct tax at a higher rate in order to penalize the specified persons. Therefore, when calculating TDS, the deductor must take into consideration the provisions of this section.

Under Section 206AB, Higher TDS Rates Are Applicable

  • There will be a higher TDS rate applied to the deductees:
  • Unfiling of the income tax return for the two assessment years immediately prior to the previous year where the tax is due;
  • In cases where both assessment years have passed the deadline for filing tax returns under Section 139(1) of the Act;
  • If the TDS amount in each assessment year exceeds 50000 rupees.
  • TDS deduction at higher rates requires all these conditions to be met.

The TDS rate under Section 206AB is higher

  • There will be a higher TDS rate if:
  • If the relevant provision of the Act specifies twice the rate of interest;
  • A rate twice that of the current rate;
  • The rate is 5%.
  • A rate in force means a rate that is in effect at the moment.
  • When a deductee fails to file a return of income for AY 2020-21, the TDS that must be deducted shall be the greater of the following:
  • Double the rate specified in the relevant Act provision – 20%;
  • A 20% increase over the current rates;
  • 5%
  • There will eventually be a 20% TDS deduction.

As a conclusion

The deductee must therefore submit a declaration to apply this section indicating that he has filed his return of income for the previous two assessment years, or that the TDS amount is not equal to or more than 50000 rupees in case of non-filing of his return. As of July 1, 2021, income tax returns and TDS amounts from AY 2020-21 and AY 2019-20 will be considered in determining the TDS deduction rate in FY 2021-22.  For a better understanding of Section 206AB of the Income Tax Act, further clarification would be needed from the government.

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