Reading Time: 3 Minutes
This article discusses the various provisions of Section 206AA of the Income Tax Act.
Every payment which falls under the provisions of Tax Deducted at Source (TDS) has to be after deducting tax in the relevant sections of the Income Tax Act of India. Though furnishing a PAN card is compulsory at the time of making a payment, the recipient might not have one in some instances. This scenario is where Section 206AA comes into the picture.
TDS is a system wherein any party that is liable to pay salaries, commissions, and interest on investments deducts a specific percentage of such an income at source before making such a payment. This percentage of income is known as the ‘Tax Deducted at Source’ or TDS.
TDS primarily serves as a deterrent for tax evasion. This is how it functions –
Long-term financial goals on your mind? Choose DBS Treasures.
Introduced from FY 2010-11, Section 206AA of (the) Income Tax Act requires every taxpayer to furnish their PAN card for receiving taxable income. While in the case of residents, it includes sources like salary, rent, contractual payments, and so on, in the case of NRIs, it corresponds to any income source taxable in India.
Every taxpayer needs to furnish their PAN card to comply with the TDS provisions, and subsequently, the tax is deducted as per the Income Tax Act. In case a recipient cannot furnish a PAN card, the income would attract taxes at a higher rate under Section 206AA. Both the payer and the recipient should indicate the same in all of their correspondence.
The rates of TDS that will be applied to the person who fails to furnish a PAN card are either –
The recipient is also mandated to submit a declaration as per Section 197A to the payer. This declaration is made under Form 15H and Form 15G for nil deduction of payment. While the former is submitted by a person below the age of 60, the latter is submitted by a recipient above 60.
In case of payment to NRIs, there are some exempt under Section 206AA. They are as follows:
Interest earned on NRE savings and FCNR deposits are tax-free; however, interest earned on NRO balances are taxable and attracts a TDS of 30%. NRIs earning income in India must be mindful of the Section 206AA guidelines to avoid getting tax deducted at higher rates at source by providing the relevant documentation upfront.
*Article last updated in April 2021
*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.
The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.