Section 206 AA of the Income Tax Act, 1961: A complete guide

Introduction

The Income Tax Act, 1961, covers TDS deductions from payments made to non-resident Indians (NRIs). Section 206AA of the Act deals specifically with furnishing a Permanent Account Number (PAN) for NRIs for TDS (Tax Deduction at Source). In this blog, we will discuss the provisions of Section 206AA of the Income Tax Act, 1961 in detail.

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

If a taxpayer is entitled to receive any income that is subject to TDS, he must provide their Permanent Account Number (PAN) to the taxpayer responsible for paying that income. Section 206AA of the Income Tax Act, 1961 makes it mandatory to furnish PAN for NRIs. Failure to provide the PAN would result in TDS being deducted at a higher rate.

Applicability of Section 206AA

Section 206AA applies to all payments made to NRIs (non-resident Indians). The payments include salary, rent, contractual payments, etc. It is important to note that this provision does not apply to the  NRIs who do not have a Permanent Account Number (PAN) in India.

Rate of TDS under Section 206 AA of Income Tax Act, 1961

The rates of TDS (Tax deduction at Source) that will be applied to the person who fails to furnish Permanent Account Number (PAN) under Section 206 AA are either –

• The rate mentioned in the specific provision of the Act or;
• The rate in force or;
• The rate of 20%.

Important points for Section 206 AA of Income Tax Act, 1961

• As per Section 206AA, the Assessing Officer cannot issue a certificate under Section 197 without the PAN of the applicant.
• A deductee must submit a declaration under Section 197 of the Income Tax Act, 1961 for Nil TDS (Tax Deduction at Source) with the help of Form 15G or Form 15H. Form 15G applies to taxpayers who are below 60 years and Form 15H to taxpayers who are about 60 years of age. If the taxpayer fails to provide the PAN while filing a Nil TDS return, the tax must be deducted at the rates specified in Section 206AA.
• If the PAN provided to the deductor is invalid or incorrect, it will be deemed that the deductee has not furnished PAN to the deductor and the tax will be deducted at the rates applicable under Section 206 AA.
• Both the deductor and the deductee must mention the Permanent Account Number (PAN) of the deductee in all communication, invoices, receipts, and other relevant documents.

Payment exempted to the NRIs under Section 206 AA of the Income Tax Act, 1961

Under Section 206AA, certain payments to NRIs are exempted, including:

• Payment of interest on long-term bonds as per Section 194LC;

• Payments such as interest, royalties, or fees for technical services, and payments made for the transfer of capital assets.

Conclusion

In conclusion, Section 206AA of the Income Tax Act, 1961, is an important provision for the Tax Deduction at Source on payments made to non-resident Indians, which mandates the NRIs to furnish their PAN. The provision helps the government to collect taxes in a timely and efficient manner. Both the deductor and the deductee need to follow the guidelines laid out under Section 206AA of the Income Tax Act, 1961.