Section 206AA: TDS on Non-PAN Cases - Higher Rate Rules & Exceptions (FY 2025-26)

Section 206AA of the Income Tax Act mandates higher TDS deduction when the recipient (deductee) fails to furnish their Permanent Account Number (PAN) to the deductor. Instead of the normal TDS rate, tax must be deducted at 20% or the prescribed rate, whichever is higher. This provision applies to all TDS payments including salary, rent, professional fees, contractor payments, interest, and other taxable receipts. Understanding Section 206AA is crucial for both deductors and deductees to ensure compliance and avoid unnecessary tax outflow.

What is Section 206AA?

Section 206AA was introduced in the Income Tax Act with effect from 1 April 2010 (FY 2010-11). The primary objective of this section is to ensure PAN compliance in all TDS transactions and bring transparency to the tax system.

Key Features of Section 206AA

• Mandatory PAN Requirement: Every recipient of taxable income must furnish their PAN to the deductor
• Higher TDS Rate: Non-furnishing of PAN attracts 20% TDS or prescribed rate, whichever is higher
• Universal Application: Applies to both residents and non-residents
• All TDS Sections Covered: Applicable to all payments covered under Chapter XVII-B (TDS provisions)
• Non-Obstante Clause: Section 206AA overrides other TDS provisions in case of non-furnishing of PAN

Who Does Section 206AA Apply To?

Section 206AA applies to:

• Deductees (Recipients): Any person receiving payment subject to TDS - individuals, HUF, companies, firms, trusts, or any other entity
• Residents: Indian residents receiving salary, rent, professional fees, contract payments, interest, commission, etc.
• Non-Residents: Foreign entities or individuals receiving taxable income in India (with certain exceptions)
• All Income Categories: Whether the income is from business, profession, salary, interest, rent, or any other source

When Does Section 206AA Apply?

Section 206AA comes into play in the following situations:

Scenarios Attracting Section 206AA

1. PAN Not Furnished: Recipient fails to provide PAN to the deductor
2. Invalid PAN: PAN provided is incorrect, invalid, or does not exist in Income Tax database
3. PAN Doesn't Match: PAN provided does not belong to the recipient (name mismatch)
4. Fake or Duplicate PAN: PAN is found to be fraudulent or belongs to someone else

When PAN Must Be Furnished

The recipient must furnish PAN:

• Before or at the time of payment
• In all correspondence, bills, vouchers, and documents exchanged with the deductor
• When filing Form 15G or Form 15H for nil TDS
• When applying for TDS certificate under Section 197

TDS Rates Under Section 206AA

Understanding the calculation of TDS rate under Section 206AA is critical for compliance.

Rate Calculation Formula

The deductor must calculate TDS using all three methods and apply the highest rate among them.

Comparison: Normal TDS Rate vs Section 206AA Rate

Understanding the Rate Logic

Exceptions to Section 206AA

Section 206AA does not apply in certain specific cases, particularly for non-resident recipients.

Payments to Non-Residents (Exemptions)

Section 206AA does NOT apply to the following payments made to non-residents:

1. Payment of Interest (Section 195): Interest payments to non-residents under Section 195
2. Royalty Payments: Royalty and fees for technical services to non-residents
3. Dividends: Dividend payments covered under Section 195
4. Capital Asset Transfers: Payments for transfer of capital assets (subject to conditions)

Other Exceptions

• Section 197 Certificate: If the Assessing Officer issues a certificate for lower or nil TDS under Section 197 (provided PAN is furnished in the application)
• Form 15G/15H: If properly filed with PAN details (otherwise invalid without PAN)
• DTAA Benefits: In some interpretations, Double Taxation Avoidance Agreement provisions may override Section 206AA for non-residents

Section 206AA vs Section 206AB

Both Section 206AA and Section 206AB deal with higher TDS rates but apply in different scenarios.

Combined Impact (Before 1 April 2025)

Before the omission of Section 206AB, if both sections were applicable:

• Deductor had to check both provisions
• Apply the higher rate between Section 206AA and Section 206AB
• CBDT had provided an online portal to check 206AB applicability

How to Avoid Higher TDS Under Section 206AA

Both deductees and deductors can take steps to avoid complications arising from Section 206AA.

For Deductees (Recipients)

1. Always Furnish PAN: Provide valid PAN to the payer before receiving any payment
2. Verify PAN Details: Ensure your PAN is active and details match exactly with records
3. Quote PAN Everywhere: Mention PAN in all bills, invoices, correspondence, and agreements
4. Update PAN Information: If you've changed your name or other details, update PAN database immediately
5. Apply for Section 197 Certificate: If expecting large payments, apply for lower/nil TDS certificate with PAN
6. File Form 15G/15H: If income is below taxable limit, file these forms with valid PAN

For Deductors (Payers)

1. Collect PAN Upfront: Make PAN furnishing mandatory before making any payment
2. Verify PAN Online: Use Income Tax portal to verify PAN authenticity
3. Mention in Agreements: Include PAN furnishing clause in contracts and agreements
4. Maintain Records: Keep copy of PAN card/acknowledgment with payment records
5. System Validation: Implement software validation to check PAN before processing payments
6. Inform Payees: Educate vendors/employees about Section 206AA implications

Section 197 Certificate and PAN Requirement

Section 197 allows taxpayers to apply for a certificate for lower or nil TDS deduction from the Assessing Officer.

Key Points About Section 197

• Purpose: Reduce TDS burden if estimated tax liability is lower than TDS rate
• Who Can Apply: Any deductee expecting to have lower tax liability
• Application Process: Apply to Assessing Officer with Form 13
• Validity Period: Certificate is issued for a specific financial year or period

Form 15G and Form 15H - PAN Mandatory

These forms allow certain taxpayers to declare nil tax liability and request nil TDS:

• Form 15G: For individuals below 60 years of age with no tax liability
• Form 15H: For senior citizens (60 years and above) with no tax liability

Section 206AA clearly states that any declaration under Form 15G or 15H is invalid without PAN. If PAN is not mentioned:

• The declaration will be rejected
• TDS will be deducted at 20% or prescribed rate, whichever is higher
• The benefit of nil TDS will not be available

Practical Examples and Case Studies

Example 1: Freelance Professional Without PAN

Example 2: Contractor Payment - Company

Example 3: Salary Payment Without PAN

Example 4: Fixed Deposit Interest (Senior Citizen)

Consequences of Non-Compliance

For Deductors (Payers)

If a deductor fails to deduct TDS at higher rate under Section 206AA:

• Interest Penalty (Section 201(1A)): 1% per month or part thereof on TDS shortfall
• Disallowance under Section 40(a)(ia): 30% of payment amount may be disallowed as business expense
• Prosecution: Possible prosecution for willful default
• Penalty: Penalty equal to TDS amount not deducted

For Deductees (Recipients)

If a deductee does not furnish PAN:

• Higher TDS Deduction: 20% or prescribed rate, creating cash flow issues
• Delayed Refund: Must file ITR and wait for refund processing
• Additional Compliance: Mandatory ITR filing to claim excess TDS
• Interest Loss: No interest on delayed refund if delay is from taxpayer's side

Can You Claim Refund of Excess TDS?

Refund Process

1. File Income Tax Return: File ITR showing total income and TDS deducted
2. Claim TDS Credit: All TDS (including higher rate under 206AA) will be credited to your account
3. Tax Calculation: Tax will be calculated on actual income as per slab rates
4. Refund Issued: If TDS exceeds actual tax liability, refund will be processed
5. Interest on Refund: Under Section 244A, interest @0.5% per month on delayed refund (subject to conditions)

Important Points

• Refund is not automatic - ITR filing is mandatory
• Ensure Form 26AS reflects all TDS deducted
• Match TDS entries with Form 26AS before filing ITR
• Refund usually takes 2-6 months after ITR processing
• Better to furnish PAN upfront rather than go through refund hassle

Frequently Asked Questions (FAQs)

Key Takeaways

• Section 206AA mandates higher TDS (20% or prescribed rate, whichever higher) when PAN is not furnished
• Applies to all TDS payments - salary, rent, professional fees, interest, contractor payments, etc.
• Both residents and non-residents are covered (with certain exceptions for non-residents)
• Form 15G, 15H, and Section 197 certificates are invalid without PAN
• Section 206AB has been omitted from 1 April 2025
• Deductors must verify PAN before making payments to avoid compliance issues
• Deductees should always furnish valid PAN to avoid higher TDS and cash flow problems
• Excess TDS can be claimed as refund by filing ITR, but creates unnecessary compliance burden
• Non-compliance attracts interest, penalty, and disallowance of expenses

Conclusion

Section 206AA is a critical provision in the Income Tax Act that ensures PAN compliance in all TDS transactions. While the provision imposes higher TDS burden on those not furnishing PAN, it serves the larger purpose of bringing transparency and accountability to the tax system. The best approach is to always furnish valid PAN to avoid higher TDS deduction, compliance issues, and cash flow problems.

For deductors, it is essential to collect and verify PAN before making payments and implement proper systems to ensure Section 206AA compliance. For deductees, providing PAN upfront saves significant hassle, time, and money that would otherwise be lost in higher TDS and subsequent refund claims.

Stay compliant, furnish PAN, and ensure smooth TDS operations. For specific cases or complex situations, consult a qualified Chartered Accountant or tax professional to ensure proper compliance with Section 206AA provisions.