When a person makes payment to another person (salaries, professional fees, payment for a contract, etc.), the payer must deduct tax at source or TDS. TDS is deducted at different rates depending on the nature of the payment. The receiver can claim a TDS deduction while calculating the income tax on his annual income. The receiver provides his Permanent Account Number (PAN) to the payer to ensure that TDS credit is available.
Many taxpayers do not have a PAN (e.g., non-residents or senior citizens having income below the taxable limit). Many others willingly do not procure the PAN to avoid tax liability. Such people take advantage of the tax arbitrage created by low TDS rates compared to the high actual tax rates. The income tax regulation introduced the provisions under sections 206AA and 206AB to plug this loophole. In simple terms, they allow the payer to deduct tax at a higher rate if the receiver does not furnish the PAN.
Any payer making payment of any sum on which TDS must be deducted must obtain PAN from the receiver. If the receiver (resident or non-resident) does not provide the PAN, this section allows the payer to deduct TDS in the following ways:
However, the higher tax rates will not apply in the following circumstances:
The receiver must furnish the correct PAN to the payer to ensure that TDS is not deducted at a higher rate.
Any payer making payment of any sum on which TDS must be deducted to a ‘specified person’ must deduct TDS in the following ways:
A specified person is a receiver (resident or non-resident) who has not:
The payer must obtain a declaration from the receiver that it is not a ‘specified person.’
The higher tax rates will not apply if the receiver is a non-resident who does not have a permanent establishment in India. Further, certain payments like salary, rent to the landlord, winnings from lotteries, games, horse races, etc., cash withdrawals, and consideration on the sale of immovable property will not be covered under this section.
We hope the above information will benefit you with your transactions under sections 206AA and 206AB. To make your life easier, you can opt to subscribe to the KDK Income Tax Software, one of the most used and preferred tools for income tax filing.
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