Section 206AA of the Income Tax Act: PAN Requirement and TDS Implications

TDS (Tax Deducted at Source) is usually deducted at a specific rate based on different sections of the Income Tax Act when taxpayers engage in transactions and payments. These sections specify the TDS rates and set the threshold limits and conditions. A key requirement under the Income Tax Act is that the payee must provide their PAN (Permanent Account Number) to the payer.

If the PAN is not provided, the situation is complicated because the TDS deduction won’t be recorded in the payee’s name or appear in Form 26AS. This lack of PAN creates issues for everyone involved—the payee, the payer, and the Income Tax Department. To address this problem, Section 206AA of the Income Tax Act was introduced.

What is Section 206AA?

Section 206AA of the Income Tax Act 1961 requires taxpayers to provide their PAN when they are eligible to receive any amount that qualifies for TDS (Tax Deducted at Source). If someone doesn’t provide their PAN, the TDS will be deducted at a higher rate. This rule applies to both residents and non-residents. Essentially, 206AA ensures that quoting your PAN is essential to avoid extra TDS deductions.

Rate For Goods And Services Covered Under Section 206AA

If you don’t provide your Permanent Account Number (PAN) to the payer, the Tax Deducted at Source (TDS) will be applied at the highest of the following rates:

1. The rate is mentioned in the relevant provision of the Income Tax Act.
2. The rate that’s currently in force, as outlined in the Finance Act (like the Finance Act of 2019 for FY 2019-20).
3. A fixed rate of 20%.

This is specified under Section 206AA of the Income Tax Act. So, if you’re wondering what Section 206AA is, it basically means that failing to provide your PAN results in a higher TDS deduction, according to Section 206AA of the Income Tax Act 1961.

Applicability of Lower Tax Deduction under Section 206AA

Section 197 allows taxpayers to request a lower or even zero TDS (Tax Deducted at Source) deduction. To benefit from this, taxpayers must apply under Section 197, and if approved, the assessing officer issues a certificate that authorises TDS deduction at a reduced rate for a specified period. 

However, if the taxpayer fails to provide their PAN (Permanent Account Number) when applying, Section 206AA of the Income Tax Act kicks in. This means that the certificate issued under Section 197 becomes invalid. In such cases, the standard TDS rates outlined in section 206AA of the Income Tax Act 1961 will apply, and the lower or zero TDS deduction benefits will not be available.

When Section 206AA Does Not Apply?

There are specific situations where Section 206AA of the Income Tax Act does not apply:

1. Interest Income for Non-Residents: Section 206AA does not apply to interest income paid to a non-resident taxpayer on long-term bonds covered under Section 194LC.
2. Payments to Non-Residents Without PAN: Section 206AA of the Income Tax Act does not apply to payments such as royalties, interest, fees for technical services, or capital asset transfers made to non-corporate non-residents or foreign businesses without a PAN. However, the non-resident payee must provide the following details as per Rule 37BC, which was introduced through Notification No. 53/2016:

• The full address of the country or region where they reside.
• Their name, contact details, and email address.
• A tax identification number issued by the country or territory where they reside. If unavailable, they must provide alternate identification information used as a tax ID in their country or territory.
• If required by the laws of their country or territory, a residential certificate to confirm their status.

Exceptions Under Section 206AA of the Income Tax Act

Different rates come into play when the payer makes payments under sections 194O or 194Q. Section 194O covers TDS on payments to e-commerce participants, while Section 194Q deals with TDS on amounts paid for purchasing goods. In such cases, the higher of the following two rates will apply:

• A 5% annual rate; or
• The rate specified in the relevant section of the Income Tax Act.

Applicability of Section 206AA in Form 15G and Form 15H

Section 206AA of the Income Tax Act 1961 kicks in when a payee doesn’t provide their PAN (Permanent Account Number). Even if they submit Form 15G or 15H, which usually exempts them from TDS (Tax Deducted at Source) due to income being below the taxable limit, these forms become invalid without a PAN.

For those wondering what is section 206AA, this provision ensures that if a PAN isn’t furnished, TDS will be deducted at the higher of the following rates:

• The rates are specified under the relevant sections of the Income Tax Act (as per the usual provisions).
• 20%.

In short, whether you’re under 60 or above, including your PAN while submitting Form 15G or 15H is crucial to avoid a hefty 20% TDS.

Exemptions Under Section 206AA For NRIs

To qualify for this exemption under Section 206AA of the Income Tax Act 1961, the non-resident must provide essential details to the Income Tax Department, such as:

• Full name, mobile number, and email address of the taxpayer
• Their residential address is outside of India
• Tax Identification Number (TIN) in their country of residence
• A Tax Certificate from their resident country

Conclusion

Under Section 206AA of the Income Tax Act, whether you’re a resident or not, providing your Permanent Account Number (PAN) is necessary for Tax Deduction at Source (TDS). This rule applies to everyone, including foreign nationals. 

If you don’t provide your PAN, the TDS rate could be higher, especially for non-residents. To stay compliant and possibly reduce your TDS rate, foreign nationals can also submit a Tax Residency Certificate.

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