Section 206AA: Surcharge, Cess & PAN Requirements
Section 206AA of the Income Tax Act plays a critical role in ensuring taxpayers provide their Permanent Account Number (PAN) for all transactions subject to TDS (Tax Deducted at Source). When PAN is missing, higher TDS rates, surcharge, and cess apply, impacting both the payer and the receiver of income. This guide explains the scope, requirements, and practical implications of Section 206AA.
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Scope of Section 206AA
This section sets the groundwork for understanding why PAN submission is mandatory and when these rules apply to taxpayers, including residents and non-residents .
Objective of Introducing Section 206AA
The primary aim is to prevent tax evasion by linking TDS deductions directly to PAN, ensuring proper tracking of all taxable transactions.
Applicability to Residents and Non-Residents
Section 206AA applies to both residents and non-residents receiving income from India unless specific exemptions or DTAA provisions allow lower deductions.
TDS Rates Without PAN
When a PAN is not provided, the Income Tax Department imposes higher TDS rates. This ensures compliance and encourages taxpayers to provide accurate PAN details.
Default Higher Deduction Rate (20%)
If PAN is not furnished, the deductor must deduct TDS at 20% or the prescribed rate, whichever is higher.
Effect of Surcharge and Health & Education Cess
Along with the 20% TDS, surcharge and cess are added, leading to a total deduction that can exceed 22%, significantly impacting cash flow.
PAN Submission Requirements
To avoid higher deductions and penalties, understanding PAN submission rules is crucial for both payers and payees.
When PAN Is Mandatory
PAN is mandatory for all TDS-eligible payments, including salaries, interest, rent , and professional fees.
Impact on Deductee and Deductor
Exceptions and Exemptions
Certain situations allow relief from the stringent provisions of Section 206AA, provided conditions are met.
Applicability in Case of Form 15G/15H
Individuals with income below the taxable limit can use Form 15G/15H to avoid TDS, but these forms must include a valid PAN.
Foreign Remittances & DTAA Relief
Non-residents may benefit from lower DTAA rates if they provide a valid Tax Residency Certificate and required documents.
Exemption Cases Notified by CBDT
CBDT periodically notifies cases where PAN requirements are relaxed for specific transactions.
Interaction with Section 197 (Lower Deduction)
Section 197 allows lower or nil TDS but only when PAN is furnished.
Can Lower/Nil TDS Be Availed Without PAN?
No. Even with a Section 197 certificate, PAN is mandatory to claim a reduced TDS rate.
Practical Compliance Issues
Without PAN, deductors must apply a flat 20% rate and face added reporting responsibilities.
Section 206AA vs. Section 206AB
Sections 206AA and 206AB both impose higher TDS but for different reasons. Knowing the distinction helps in correct application.
Key Differences
- 206AA: Applies when PAN is missing.
- 206AB: Applies when the payee is a non-filer despite having a PAN.
When Higher Rate Under 206AB Applies Instead
If the recipient is a non-filer and lacks PAN, the higher of the two rates (206AA or 206AB) applies.
Compliance Challenges & Penalties
Failure to comply with Section 206AA can lead to significant penalties, making it crucial for businesses and individuals to understand the risks.
Non-Furnishing of PAN Consequences
The payer must deduct TDS at 20% or more, and expenses may be disallowed under Section 40(a)(ia).
Additional Tax Burden Due to Surcharge/Cess
Non-residents without PAN can face TDS rates exceeding 25% after adding surcharge and cess.
Conclusions
Section 206AA enforces strict PAN compliance to ensure seamless tax collection. Failing to provide PAN results in higher TDS rates, creating financial burdens for the deductee and compliance issues for the deductor.
I am a Chartered Accountant with over 20 years of experience and a finance content writer. I focus on educating people about finance and taxation. I have written many blog posts on finance, taxation, trading, and investment on the BUSY website. My goal is to increase financial understanding by making complex concepts easier to grasp and to support educational programs in India.
Frequently Asked Questions
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What happens if PAN is not provided for TDS?
TDS is deducted at 20% or the applicable higher rate.
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Is surcharge and cess applicable when PAN is missing?
Yes, both surcharge and health & education cess apply in addition to the base 20% TDS.
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Are NRIs also covered under Section 206AA?
Yes, unless they provide DTAA documentation to claim lower rates.
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Can Form 15G/15H override Section 206AA?
No. PAN must still be quoted on these forms.
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What is the difference between Section 206AA and 206AB?
Section 206AA deals with missing PAN, while Section 206AB targets non-filers of income tax returns.
