206AB TDS: Updated Guide on Higher TDS for Non-Filers

Key Insights 

1. Section 206AB requires a higher TDS rate for people who have not filed their returns. The rate is either double the standard rate or 5%, depending on which is greater.

2. Non-residents without a permanent establishment in India are not required to pay the higher TDS rates under Section 206AB.

3. The higher rate only applies if a non-filer’s total annual TDS or TCS is ₹50,000 or more.

If you deduct TDS from vendors or contractors, you should know the 206ab TDS limit to avoid penalties. This rule sets a higher TDS rate for people who have not filed their income tax returns. It applies along with sections 206ab and 206cca.

Section 206AB is a penalty for people who often do not file their taxes. If someone is in this group, the person paying them must withhold tax at either twice the normal rate or 5%, whichever is higher. 

This rule works with Section 206cca of income tax act to encourage people to follow tax rules by making these deductions.

Example:

I paid a contractor ₹5,00,000 for their services. When I checked compliance check for section 206ab & 206cca, I found they had not filed their ITRs for two years. So, instead of the usual 10% rate, I used Section 206AB and deducted TDS at 20%, withholding ₹1,00,000.

Latest Update on Section 206AB As Per Union Budget 2025

The government has proposed an important change to the definition of a “specified person” under the Income Tax Act. This update aims to provide relief to some individuals.

Under this change, people who are not required to file income tax returns for the year, as well as non-residents without a permanent establishment in India, will not be treated as non-filers. This means they will not have to pay higher tax deductions at source (TDS).

The updated definition of a “specified person” under Sections 206AB and 206cca of income tax act now excludes:
 

• Non-residents without a permanent establishment in India.
• Individuals who are not obligated to file income tax returns for the assessment year related to the previous year, as notified by the Central Government in the Official Gazette.

This change ensures that those not required to file tax returns are not unfairly charged higher TDS rates.

Bonus Tip: Do you know? If section 206AA applies to a specified person, tax shall be deducted at the higher of the rates in this section and section 206AA.

TDS Rate Under Section 206AB

If you pay someone who has not filed their income tax returns for the last two years and has TDS or TCS of ₹50,000 or more, a higher TDS rate will apply. Under Section 206AB, the TDS will be whichever of the following is higher:
 

• Twice the rate mentioned in the Income Tax Act or Finance Act.
• 5% of the payment amount.

For example, if the normal TDS rate for a transaction is 10%, then under Section 206AB, the TDS will be either 20% (twice the standard rate) or 5%, whichever is higher.

If someone gives their PAN but has not filed their tax return, the higher TDS rate still applies. If they do not provide their PAN, a higher rate of 20% will be deducted under Section 206AA, which covers cases where PAN is not given but the 206AB TDS limit.

Suppose Ramesh pays ₹5,00,000 for professional services to Suresh. The standard TDS rate for these services under Section 194J is 10%. But since Suresh has not filed his tax return for the past year, Section 206AB applies. The TDS will be whichever of the following is higher:
 

• Twice the standard rate: 20% (10% times 2)
• Fixed rate: 5%

Since 20% is higher, Ramesh will deduct ₹1,00,000 as TDS, which is 20% of ₹5,00,000.

If both Section 206AA and Section 206AB apply, the higher rate will be used. This makes sure that people who do not comply face higher tax deductions.

Who Is Exempted from Section 206AB of the Income Tax Act?

Section 206AB(3) lists certain exemptions from the higher TDS rates. These mainly apply to the following groups:

• Non-residents without a permanent establishment in India: Foreign individuals or companies that do not have a fixed place of business in India do not have to pay the higher TDS rate. This prevents non-residents who are not required to file taxes in India from being unfairly penalised.

• Persons notified by the Central Government: Some people or organisations named by the Central Government in the Official Gazette, who do not have to file an income tax return for that year, are also exempt from Section 206AB. This may include those with incomes below the taxable limit or others who are not required to file returns.

These exemptions make sure that only the right taxpayers pay higher TDS rates, while those who do not have to file returns are protected, such as compliance check for section 206ab & 206cca.

Conclusion

Sections 206AB and 206CCA encourage tax compliance by imposing higher TDS rates on those who do not file returns. Payers need to check each case, apply the higher rate when needed, and use exemptions for non-residents and non-filers to make sure deductions are correct.

FAQs

What steps should we take to reverse this action by the Income Tax Department?  

If you want to reverse an action taken by the Indian Income Tax Department, you usually have three main options. You can file a rectification request, respond to an e-proceeding or demand, or file a formal appeal, depending on your situation.

How does TDS return help us? 

The TDS (Tax Deducted at Source) return mainly helps the person receiving the income claim tax credits and get a refund if too much tax was deducted. For the government, it helps make sure people follow tax rules and prevents tax evasion.

What is the declaration towards Section 206AB of the Income Tax? 

Section 206AB of the Income Tax Act requires the payee to give the deductor a self-declaration that confirms their income tax return (ITR) filing status. This helps the deductor decide if higher Tax Deducted at Source (TDS) rates apply.

How do I get myself removed from the specified person list as per Section 206AB and Section 206CCA in the Indian Income Tax Act?  

If you want to be removed from the “specified person” list under Section 206AB and Section 206CCA of the Indian Income Tax Act, file your Income Tax Return (ITR) for the last two financial years. Also, make sure your TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) refunds for each year are less than ₹50,000.

How can I check my TDS 206AB?

You can find out if Section 206AB applies to you, make sure you have filed your ITR for the last two financial years, and that your total TDS and TCS are each over ₹50,000 per year. The tax department also has online tools for deductors to check compliance.