Section 206AB and 206CCA: TDS Rate, Applicability & Recent Changes

Sections 206AB and 206CCA of the Income Tax Act were introduced to ensure tax compliance by imposing higher TDS/TCS u/s Section 206AB on specified individuals who are comes under non filing of income tax return. These provisions aimed to encourage timely tax filings and deter tax evasion by applying stricter tax deductions and collection norms. However, the government has proposed amendments to simplify compliance requirements with the evolving tax framework. In this article, we’ll give detailed information on Section 206AB and Section 206CCA, its TDS rates, applicability and the recent changes made in the Budget 2025 proposals.

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What is Section 206AB? 

Section 206AB of the Income Tax Act, introduced by the Finance Act 2021 and effective from 1st July 2021, mandates higher TDS rates for specified individuals who have not filed their income tax returns for the last two years and have substantial TDS/TCS deductions. This provision aims to enhance tax compliance by encouraging timely ITR filings and deterring tax evasion. By imposing stricter tax deduction norms, Section 206AB ensures that non-filers contribute fairly to the tax system while promoting greater financial transparency.

What is Section 206CCA?

Section 206CCA of the Income Tax Act mandates higher Tax Collection at Source (TCS) rates on amounts received by a specified person who has not filed their income tax returns for a prescribed period. This provision ensures better tax compliance by discouraging non filing of income tax returns. By enforcing elevated TCS rates, Section 206CCA strengthens revenue collection and promotes financial discipline among taxpayers.

Conditions to Deduct TDS or Collect TCS u/s 206AB & Section 206CCA

Tax deduction at source (TDS) under Section 206AB and tax collection at source (TCS) under Section 206CCA apply when payments or collections are made to or from a specified person who meets the following conditions:

• The person has not filed income tax returns for both of the two previous financial years immediately before the financial year in which tax is to be deducted or collected.
• The due date for filing the income tax return (excluding belated returns) has expired.
• The total TDS and TCS amount in each of these two years is ₹50,000 or more.

However, these provisions do not apply to non-residents who do not have a permanent establishment in India. For this purpose, a permanent establishment refers to a fixed place where an enterprise conducts its business, wholly or partially.

Learn about: How to check non filers of income tax return

Rates of TDS/TCS under Section 206AB and 206CCA

The following rates of TDS/TCS are deducted or collected as per Section 206AB & 206CCA,

TDS rate under Section 206AB

Under Section 206AB of the Income Tax Act, tax is deducted at source (TDS) at a higher rate for specified persons who fail to file their income tax returns. The applicable Section 206AB TDS rate is the higher of the following:

• Twice the rate specified in the relevant provisions of the Income Tax Act.
• A flat rate of 5%.

If the specified person fails to provide a PAN, the TDS rate will be the highest among the rates prescribed under this section or Section 206AA of the Income Tax Act. This provision ensures stricter compliance and discourages tax evasion by imposing higher deduction rates on non filers of income tax return.

Learn more: TDS rate chart - A Comprehensive Guide

TCS rate under 206CCA

Under Section 206CCA of the Income Tax Act, Tax Collection at Source (TCS) is levied at a higher rate for specified persons who fail to file their income tax returns. The applicable TCS rate is the higher of the following:

• Twice the rate specified in the relevant provisions of the Income Tax Act.
• A flat rate of 5%.

Furthermore, if the specified person fails to provide a PAN, the TCS rate will be the highest among the rates prescribed under this section or Section 206CC of the Income Tax Act.

Example

A company makes a professional fee payment of Rs. 50 lakhs to Ms. R. The tax is deductible at 10%. However, Ms. R did not file her Income Tax Return (ITR) for the previous year, and the due date for filing has expired.

Therefore, when the company deducts tax in FY 2023-24 and finds that Ms. R has not filed her ITR for the last year, the TDS should be deducted at the higher of the following:

• Twice the rate prescribed in the Act, i.e., 20% (2 * 10%), or
• 5%

Since 20% is higher, the tax should be deducted at 20%.Additionally, if Ms. R does not provide her PAN, then TDS shall be deducted at 20%, which remains unchanged in this case.

Nature of Transactions that do not apply to these Sections

Sections 206AB and 206CCA apply to various transactions but exclude specific cases where higher TDS or TCS rates are not applicable. The following transactions are exempt from these provisions:

• TDS on Salaries (Section 192)
• TDS on Accumulated Balance due to an employee from a recognized provident fund (Section 192A)
• TDS on Winnings from Lottery (Section 194B)
• TDS on Winnings from Horse Races (Section 194BB)
• TDS on Income from Investments in Securitization Trusts (Section 194LBC)
• TDS on Certain Cash Payments (Section 194N)

These exclusions ensure that essential salary payments, winnings, and specific financial transactions remain unaffected by the higher deduction and collection rates under Sections 206AB and 206CCA.

Budget 2025 Update on Section 206AB & 206CCA

In the Union Budget 2025, the government has proposed the removal of higher TDS/TCS rates for non filers of income tax returns by omitting Section 206AB and Section 206CCA of the Income Tax Act. This decision aims to reduce the compliance burden on tax deductors and collectors while simplifying the tax deduction and collection process.

With this amendment, taxpayers will no longer be subject to increased TDS and TCS rates based on their ITR filing status. The proposed change will come into effect from 1st April 2025.

How is it Beneficial to Taxpayers?

The omission of Section 206AB and Section 206CCA is a significant relief for taxpayers, as it reduces the compliance burden on tax deductors and collectors. This move reflects the government’s commitment to fostering a taxpayer-friendly environment by simplifying tax procedures. By eliminating these sections, businesses and individuals will experience smoother transactions, reduced administrative efforts, and improved ease of doing business in India.

Conclusion

In conclusion, the removal of Sections 206AB and 206CCA in Budget 2025 is a significant step toward easing the compliance burden on taxpayers and businesses. By eliminating the higher TDS/TCS rates for non-filers, the government aims to simplify tax processes and promote a more taxpayer-friendly environment. This amendment supports the broader goal of reducing administrative complexities and enhancing the ease of doing business in India.

FAQs

1. What is Section 206AB of the Income Tax Act?

Section 206AB mandates higher TDS rates for individuals who have not filed their income tax returns for the last two financial years and have substantial TDS/TCS deductions.

2. What is Section 206CCA of the Income Tax Act?

Section 206CCA imposes higher Tax Collection at Source (TCS) rates on individuals who have not filed their income tax returns for a prescribed period.

3. Who is considered a ‘specified person’ under Sections 206AB and 206CCA?

A specified person is someone who has not filed income tax returns for the last two years and whose total TDS/TCS deduction exceeds ₹50,000 in each of those years.

4. What is the TDS rate applicable under Section 206AB?

The TDS rate under Section 206AB is the higher of:

• Twice the rate specified in the relevant provisions of the Income Tax Act.
• A flat rate of 5%.

5. What is the TCS rate applicable under Section 206CCA?

The TCS rate under Section 206CCA is the higher of:

• Twice the rate specified in the relevant provisions of the Income Tax Act.
• A flat rate of 5%.

6. Are there any exemptions to Sections 206AB and 206CCA?

Yes, these provisions do not apply to certain transactions such as salary payments, provident fund withdrawals, lottery winnings, and cash payments under Section 194N.

7. Do non-residents need to comply with Sections 206AB and 206CCA?

No, these sections do not apply to non-residents who do not have a permanent establishment in India.

8. What changes were proposed in the Union Budget 2025 regarding these sections?

The Union Budget 2025 has proposed the removal of Sections 206AB and 206CCA, eliminating higher TDS/TCS rates for non-filers.

9. When will the removal of Sections 206AB and 206CCA take effect?

The omission of these sections will be effective from 1st April 2025.

10. How will the removal of Sections 206AB and 206CCA benefit taxpayers?

It will simplify tax compliance, reduce administrative burdens for businesses, and improve the ease of doing business in India.

11. Since when are Sections 206AB and 206CCA applicable?

Sections 206AB and 206CCA have been in effect since 1st July 2021.

12. Is it necessary to provide a declaration every year for updating my ITR filing status?

Yes, taxpayers must submit a declaration annually to update their income tax return filing status.

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