Section 206AA – TDS on payments made to non-residents and residents not having a PAN

Section 206AA – TDS on payments made to non-residents and residents not having a PAN

Every payment which is covered under the provisions of tax deduction at source is required to be made after a deduction of tax. Every payer is bound by the TDS provisions to deduct taxes at the rates specified in the relevant sections of the Income Tax Act. In all situations, the recipient is required to furnish their PAN to the person making the payment. However, there are certain circumstances where the recipient would not have PAN. In such circumstances, the payer is required to adopt the provisions of Section 206AA and deduct tax at a higher rate for the recipient. We discuss the scope and implications of Section 206AA below:

1. Scope of Section 206AA

Section 206AA was introduced from FY 2010-11. It requires every taxpayer who receives taxable income to furnish their PAN to the payer of such income. This applies to both resident and non-resident recipients. Payments in the case of residents include salary, rent, professional receipts, contractual receipts, etc. For non-residents, it includes all receipts taxable in India.

2. Submission of PAN

A recipient of taxable income should furnish PAN to comply with TDS provisions under the Income Tax Act. Upon furnishing PAN, payments made to the recipient will be taxed at the rates specified under relevant TDS sections. Failing to provide PAN will result in TDS at higher rates as per Section 206AA.

The recipient must provide their PAN to the payer, and both must mention it in all correspondence, bills, vouchers, and other documents.

3. Rate of TDS

If PAN is not furnished, TDS will be deducted at the highest of the following rates:

  • At the rate specified in the relevant provision of the Act
  • At the rate or rates in force (as prescribed in the Finance Act)
  • At the rate of 20%

4. Applicability in Case of Lower Deduction under Section 197

A recipient of taxable income can apply for a lower or nil deduction certificate under Section 197. The TDS will then be deducted at the rate specified in the certificate issued by the assessing officer. However, the certificate is not valid unless PAN is furnished during the application process, as mandated by Section 206AA.

5. Applicability in Case of Form 15H and 15G

A recipient may submit Form 15G (for individuals under 60) or Form 15H (for individuals aged 60 or more) under Section 197A to avoid TDS. However, as per Section 206AA, these declarations are invalid if they do not include the PAN of the declarant.

If PAN is not provided, TDS shall be deducted at the highest of the following rates:

  • At the rate specified in the relevant provision of the Act
  • At the rate or rates in force
  • At the rate of 20%

6. Scope of Section 206AA for Non-Residents

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

  • Interest on long-term bonds under Section 194LC

Further, as per Finance Act 2016, Section 206AA shall not apply to interest, royalties, fees for technical services, or capital gains payments to non-residents if the following are submitted to the payer (as per Rule 37BC under Notification No. 53/2016):

  • Name, email ID, and contact number
  • Address in the country or specified territory of residence
  • Tax residency certificate issued by the government of the home country
  • Tax Identification Number (TIN) or a unique identification number used by the government of the country of residence
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