Reduced TDS Rates for Non-Filers – Sections 206AB & 206CCA

Introduction to Higher TDS Provisions

The Income Tax Department uses TDS and TCS to collect tax at the source of income. To ensure everyone contributes fairly, Sections 206AB and 206CCA introduce higher rates for individuals and entities who do not file their ITRs on time. These measures serve as a deterrent against non-compliance and help improve revenue collection.

Why higher TDS was introduced for non-filers

Higher TDS ensures that tax is collected upfront from individuals who may otherwise avoid filing returns, creating a financial incentive to stay compliant.

Impact on taxpayers and businesses

Taxpayers who delay or skip filing returns face higher deductions or collections, while businesses must verify their vendors’ tax-filing status to avoid  penalties  and deduct the correct amount of tax.

Section 206AB – Higher TDS for Non-Filers

Section 206AB outlines the rules for applying higher TDS rates to specified non-filers. Businesses and individuals making payments must understand this section to avoid non-compliance.

Applicability of Section 206AB

• It applies to “specified persons” who:
• Have not filed income tax returns for the previous financial year despite the due date expiring.
• Have an aggregate TDS or TCS of ₹50,000 or more in that year.

Thresholds and deduction rates

Tax must be deducted at twice the specified rate or 5%, whichever is higher. If the payee also fails to provide PAN, the higher rate from Section 206AA or 206AB applies.

Exceptions to the rule

This section does not apply to payments such as salaries (Section 192), provident fund withdrawals (Section 192A), lottery winnings ( Section 194B ), or TDS on cash withdrawals ( Section 194N ).

Section 206CCA – Higher TCS for Non-Filers

Section 206CCA mirrors Section 206AB but applies to  TCS . It ensures that sellers or collectors levy higher tax on payments received from non-filers.

Applicability of Section 206CCA

Collectors must apply higher TCS when the buyer is a “specified person” who has not filed their ITR and meets the ₹50,000 TCS/TDS threshold.

Impact on transactions covered under TCS

This impacts sales of goods, foreign remittances, and other transactions subject to TCS. Sellers need to collect tax at a higher rate when dealing with such buyers.

Examples of deductions and collections

If a seller normally collects 0.1% TCS on a sale of goods, under Section 206CCA this rate can rise to 5% when dealing with a non-filer.

Reduction or Removal of Higher TDS/TCS Rates

It is possible for taxpayers to reduce or eliminate higher TDS/TCS once they meet compliance requirements. This ensures fairness and encourages timely filing.

Recent updates on 206AB and 206CCA

The Income Tax Department now provides an online utility to check whether a person is a “specified person.” If the pending returns are filed, the higher rate no longer applies for the next financial year.

How it eases compliance for taxpayers

Once compliance is achieved, taxpayers stop facing higher deductions and businesses no longer need to deduct or collect tax at increased rates.

Benefits for individuals and businesses

Timely return filing saves individuals from excess deductions and simplifies accounting for businesses, reducing financial and administrative burdens.

Comparison of Sections 206AB vs 206CCA

Key similarities

• Both target non-filers who meet the ₹50,000 threshold.
• Both require tax to be deducted or collected at the higher of twice the specified rate or 5%.
• Both demand verification of the taxpayer’s filing status.

Major differences

Section 206AB governs TDS (deduction at source), while Section 206CCA governs TCS (collection at source).

Practical implications

Deductors and collectors must confirm the compliance status of their customers or vendors via the Income Tax Department portal before making payments or collecting taxes.

Compliance Steps for Taxpayers

Checking filing status of deductees

Use the Income Tax Department’s “Reporting Portal” or compliance utility to verify if a person is listed as a “specified person.”

How businesses can stay compliant

• Integrate compliance checks into ERP or accounting systems.
• Regularly update vendor and customer records.
• Communicate with all payees about the importance of timely ITR filing.

Official references and notifications

Guidelines and notifications are regularly published on the Income Tax Department’s official website and through CBDT circulars.

Conclusion

Sections 206AB and 206CCA are critical tools for improving tax compliance in India. They impose higher TDS and TCS rates on non-filers, motivating timely ITR filing and ensuring the government collects due taxes efficiently. Businesses must monitor compliance diligently, while individuals should file their returns on time to avoid unnecessary higher deductions.