Section 206AA of the Income Tax Act: PAN and Higher TDS Rules

Introduction

Section 206AA of the Income Tax Act, 1961 dealt with the requirement to furnish a Permanent Account Number, or PAN, where tax was deductible at source. It applied to residents as well as non-residents who received an amount on which TDS was deductible.

Where the recipient failed to provide a valid PAN, the person responsible for making the payment was generally required to deduct tax at a higher rate. However, certain relaxations were available to eligible non-residents for specified payments.

The Income tax Act, 2025, came into force on 1 April 2026. The corresponding PAN and higher TDS requirements are now covered under Section 397(2) of the Income tax Act, 2025. Section 206AA remains relevant for tax periods and proceedings governed by the Income Tax Act, 1961.

What Is Section 206AA of the Income Tax Act, 1961?

Section 206AA of the Income Tax Act, 1961 required every person entitled to receive an amount on which TDS was deductible to furnish their PAN to the person responsible for deducting the tax.

The person receiving the income is known as the deductee, while the person responsible for deducting TDS is known as the deductor.

If the deductee failed to furnish a valid PAN, the deductor was required to deduct tax at the higher rate prescribed under Section 206AA of the Income Tax Act. An invalid PAN or a PAN that did not belong to the deductee was treated in the same manner as non-furnishing of PAN.

Applicability of Section 206AA of the Income Tax Act

Section 206AA of the Income Tax Act, 1961 applied to any person receiving an amount on which tax was deductible under the TDS provisions of the Income Tax Act, 1961. Therefore, it applied to both residents and non-residents.

It could apply to different categories of payments, including:

• Salary;
• Interest;
• Rent;
• Professional fees;
• Contractual payments;
• Commission or brokerage;
• Royalty;
• Fees for technical services; and
• Other payments subject to TDS.

However, Section 206AA did not automatically apply merely because a payment was made to a non-resident. The payment must first have been subject to TDS under the applicable provision.

Further, it is incorrect to state that Section 206AA did not apply to non-residents who did not have PAN. A non-resident without PAN could avoid the higher TDS rate only when the payment and documentation satisfied the specific conditions prescribed under the Act and Rule 37BC.

Rate of TDS Under Section 206AA of the Income Tax Act

If a person failed to furnish a valid PAN, TDS was required to be deducted at the highest of the following rates:

• The rate specified under the relevant TDS provision of the Income Tax Act;
• The rate or rates in force; or
• The rate of 20%.

For transactions covered under Sections 194O and 194Q, the applicable rate for the third condition was 5% instead of 20%.

Example

Suppose a payment was normally subject to TDS at 10%, but the recipient did not furnish a valid PAN. Assuming the rate in force was not higher than 20%, the applicable TDS rate under Section 206AA would be 20%.

In the case of a non-resident, the applicable rate should also be examined under the relevant tax treaty. Judicial decisions have recognised that a beneficial treaty rate may prevail over the higher rate prescribed under Section 206AA, subject to sat

Under the current Income tax Act, 2025, Section 397(2) similarly provides for deduction at the higher of the prescribed rate, the rate in force, or 20% in most cases. A 5% rate applies to specified transactions covered by the provision.

Important Provisions of Section 206AA

1. PAN Required for a Lower or Nil TDS Certificate

Section 197 of the Income Tax Act, 1961 allowed an eligible taxpayer to apply for a certificate authorising deduction of tax at a lower or nil rate.

However, the Assessing Officer could not issue a certificate under Section 197 unless the application contained the applicant’s PAN.

2. PAN Required in Form 15G or Form 15H

Under the Income Tax Act, 1961, eligible taxpayers could submit a declaration under Section 197A requesting that tax not be deducted from certain specified incomes.

These declarations were submitted through:

• Form 15G by eligible individuals below 60 years of age and certain other eligible persons; and
• Form 15H by eligible resident individuals who were 60 years of age or older.

A declaration under Section 197A was invalid if the declarant failed to furnish a valid PAN. In such a case, the deductor was required to deduct tax at the rate prescribed under Section 206AA.

From 1 April 2026, Forms 15G and 15H have been consolidated into Form 121 under the Income tax Rules, 2026.

3. Invalid or Incorrect PAN

If the PAN furnished by the deductee was invalid or did not belong to the deductee, it was treated as if no PAN had been furnished.

The deductor was then required to deduct TDS at the higher rate applicable under Section 206AA.

4. PAN in Bills and Correspondence

The deductee was required to provide PAN to the deductor. Both parties were also required to mention the deductee’s PAN in relevant correspondence, bills, vouchers, and other documents exchanged between them.

Relaxation for Certain Non-Residents

Section 206AA of the Income tax Act, 1961 provided certain relaxations to eligible non-residents. These relaxations did not exempt the payment from TDS. They only provided relief from the higher TDS rate that would otherwise apply because a valid PAN had not been furnished.

Businesses making cross-border payments should understand the rules governing TDS on Non-Residents before determining the applicable deduction rate.

Interest on Specified Long-Term Bonds

The higher TDS provisions under Section 206AA did not apply to interest paid or payable on specified long-term bonds where tax was deductible under Section 194LC.

Payments Covered Under Rule 37BC

Under Rule 37BC of the Income tax Rules, 1962, a non-resident, other than a company, or a foreign company could claim relief from the higher TDS rate for the following specified payments:

• Interest;
• Royalty;
• Fees for technical services;
• Dividend; and
• Consideration for the transfer of a capital asset.

The relaxation was available only when the non-resident furnished the prescribed information and documents to the deductor. These included:

• Name, email address, and contact number;
• Address in the country or territory of residence;
• A tax residency certificate, where the law of the relevant country or territory provided for its issuance; and
• A foreign Tax Identification Number (TIN) or another government-issued identification number.

Therefore, the absence of PAN did not automatically provide relief from the higher TDS rate. The nature of the payment and the prescribed documentation requirements had to be satisfied.

Relief Under Rule 114AAB

Section 206AA also did not apply to eligible non-residents and foreign companies who were not required to obtain PAN under Rule 114AAB. The relief applied to specified transactions involving eligible foreign investors, specified funds or recognised stock exchanges located in an International Financial Services Centre, subject to the prescribed conditions.

Position Under the Income tax Act, 2025

From 1 April 2026, a similar relaxation is available under Section 397(2)(c) of the Income tax Act, 2025, read with Rule 217 of the Income tax Rules, 2026.

Rule 217 covers specified payments such as interest, royalty, fees for technical services, dividends, and consideration for the transfer of a capital asset. It also provides relief where an eligible non-resident or foreign company is not required to apply for PAN under Section 262 and the applicable rules.

Expert Support for TDS Filing and Corrections

Accurate PAN details, correct TDS rates, and proper reporting are important for error-free TDS compliance. Ebizfiling assists businesses, employers, and deductors with preparing, filing, and correcting TDS statements, commonly referred to as TDS returns.

Our team can help with:

• Checking PAN and deduction details;
• Identifying the applicable TDS section and rate;
• Preparing and filing TDS statements;
• Correcting PAN, challan, or deduction-related errors; and
• Assisting with TDS certificates and compliance records.

Need help with accurate TDS filing or correction of an existing statement? Get professional assistance from Ebizfiling for TDS Return Filing.

Conclusion

Section 206AA of the Income Tax Act required a deductee to furnish a valid PAN where TDS was applicable. Failure to provide a valid PAN generally resulted in tax deduction at a higher rate. However, eligible non-residents could claim relief for specified payments by meeting the conditions under Rule 37BC. From 1 April 2026, the corresponding PAN and higher TDS rules are covered under Section 397(2) of the Income tax Act, 2025.

Suggested Reads:

Section 397 of the Income Tax Act

Frequently Asked Questions