This blog will comprehensively discuss Section 206 of the Income Tax Act of 1961, an important provision that governs the collection of tax at source (TDS) on various payments made by taxpayers in India, as outlined in the act’s rules and regulations for income tax collection.
What is Section 206?
Section 206 of the Income Tax Act, 1961 in India deals with the provisions of Tax Deducted at Source (TDS) on payments made to recipients. This section applies to all types of payments, including salaries, interest, royalties, fees for technical services, and any other sum paid to recipients.
Who is Liable to Deduct Tax at Source (TDS)?
Tax Deducted at Source (TDS) is a system of collecting taxes at the source of income. It is the responsibility of certain categories of persons, as per the Income Tax Act, to deduct TDS from the payment made by them and remit the same to the government. The following are the persons who are liable to deduct TDS:
- Employers: Employers are required to deduct TDS on salaries paid to their employees.
- Individuals and HUFs: Individuals and HUFs who are carrying on a business or profession and whose turnover or gross receipts in the previous financial year exceed the specified limit are required to deduct TDS on specified payments.
- Companies: Companies are required to deduct TDS on various payments such as salaries, interest, rent, professional fees, commission, etc.
- Government and Semi-Government Organizations: Government and Semi-Government organizations are required to deduct TDS on payments made by them.
- Banks and Financial Institutions: Banks and financial institutions are required to deduct TDS on interest paid on fixed deposits, recurring deposits, etc.
- NRIs: In certain cases, non-resident Indians (NRIs) are required to deduct TDS on specified payments made to residents.
Types of Payments Covered Under Section 206
Section 206 of the Income Tax Act, 1961, lays down the provisions related to Tax Deducted at Source (TDS) on various payments. The following are the types of payments covered under Section 206:
- Salaries: TDS is required to be deducted on salaries paid to employees.
- Interest: TDS is required to be deducted on interest paid on fixed deposits, recurring deposits, savings accounts, etc.
- Rent: TDS is required to be deducted on rent paid to landlords if the monthly rent exceeds Rs. 50,000.
- Commission: TDS is required to be deducted on commission paid to agents.
- Professional Fees: TDS is required to be deducted on professional fees paid to professionals like doctors, lawyers, chartered accountants, etc.
- Contract payments: TDS is required to be deducted on payments made for contract work, including payments made to contractors, sub-contractors, and suppliers.
- Lottery winnings: TDS is required to be deducted on lottery winnings.
- Insurance commission: TDS is required to be deducted on commission paid to insurance agents.
- Royalty: TDS is required to be deducted on royalty paid to authors, musicians, artists, etc.
- Fees for technical services: TDS is required to be deducted on fees paid for technical services like consultancy, engineering, and technical know-how.
Who is Liable to Deduct Tax at Source (TDS)?
The rates of Tax Deducted at Source (TDS) under Section 206 of the Income Tax Act, 1961, vary depending on the nature of the payment and the status of the payee. The following are the TDS rates prescribed under Section 206:
- Salaries: TDS is required to be deducted on salaries paid to employees as per the applicable income tax slab rates.
- Interest: TDS is required to be deducted on interest paid on fixed deposits, recurring deposits, savings accounts, etc. The current rate of TDS on interest income is 10% for resident individuals and 20% for non-residents.
- Rent: TDS is required to be deducted on rent paid to landlords if the monthly rent exceeds Rs. 50,000. The current rate of TDS on rent is 10%.
- Commission: TDS is required to be deducted on commission paid to agents at the rate of 5%.
- Professional Fees: TDS is required to be deducted on professional fees paid to professionals like doctors, lawyers, chartered accountants, etc. The current rate of TDS on professional fees is 10%.
- Contract payments: TDS is required to be deducted on payments made for contract work, including payments made to contractors, sub-contractors, and suppliers. The current rate of TDS on contract payments is 1% for individuals and HUFs and 2% for others.
- Lottery winnings: TDS is required to be deducted on lottery winnings at the rate of 30%.
- Insurance commission: TDS is required to be deducted on commission paid to insurance agents at the rate of 5%.
- Royalty: TDS is required to be deducted on royalty paid to authors, musicians, artists, etc. at the rate of 10%.
- Fees for technical services: TDS is required to be deducted on fees paid for technical services like consultancy, engineering, and technical know-how at the rate of 2%.
TDS Rates Prescribed Under Section 206
The rates of TDS under Section 206 are prescribed by the government and are subject to change from time to time. The following are the current TDS rates prescribed under Section 206 for the financial year 2022-23:
Section | Nature of Payment | Threshold (Rs.) | Individual / HUF TDS Rates (%) | Others TDS Rate (%) |
---|---|---|---|---|
192 | Salaries | Rs. 2,50,000 | Slab Rates | Slab Rates |
192A | Premature EPF withdrawal* | Rs. 50,000 | 10% (20% in case of no PAN) | 10% (20% in case of no PAN) |
193 | – TDS on interest on securities*** | Rs. 10,000 | 10% | 10% |
194 | Payment of dividend | Rs. 5,000 | 10% | 10% |
194A | Interest issued by banks or post offices on deposits | Rs. 40,000 Rs. 50,000 (For senior citizens) | 10% | 10% |
194A | Interest by others apart from on securities | Rs. 5,000 | 10% | 10% |
194B | Amounts that someone has won through lotteries, puzzles, or games | Aggregate of Rs. 10,000** | 30% | 30% |
194ABA | Income from online games | NA | 30% | 30% |
194BB | Amounts that someone has won from horse races | Rs. 10,000 | 30% | 30% |
194C | Payments to contractor or sub-contractor – Single Payments | Rs. 30,000 | 1% | 2% |
194C | Payments to contractor/sub-contractor – Aggregate Payments | Rs. 1,00,000 | 1% | 2% |
194D | Payment of insurance commission to domestic companies | Rs. 15,000 | NA | 10% |
194D | Payment of insurance commission to companies other than domestic ones | Rs. 15,000 | 5% | NA |
194DA | Maturity of Life Insurance Policy | Rs. 1,00,000 | 5% | 5% |
194E | Payment to non-resident sportsmen/sports association | NA | 20% + Surcharge & Cess | 20% + Surcharge & Cess |
194EE | Payment of an amount standing to the credit of an individual under NSS (National Savings Scheme) | Rs. 2500 | 10% | 10% |
194F | Payment of repurchase of unit by UTI (Unit Trust of India) or any mutual fund | No Limit | NA | 20% |
194G | Payments or commission on sale of lottery tickets | Rs. 15,000 | 5% | 5% |
194H | Commission or brokerage | Rs. 15,000 | 5% | 5% |
194I | Rent of land, building, or furniture | Rs. 2,40,000 | 10% | 10% |
194I | Rent of plant and machinery | Rs. 2,40,000 | 2% | 2% |
194IA | Payment for transfer of immovable property other than agricultural land | Rs. 50,00,000 | 1% | 1% |
194IB | Rent payment that is made by an individual or HUF not covered under payment 194I | Rs. 50,000 (per month) | 5% | NA |
194IC | Rent payment that is made by an individual or HUF not covered under payment 194I | No Limit | 10% | 10% |
194J | Fees paid for professional services | Rs. 30,000 | 10% | 10% |
194J | Amount paid for technical services | Rs. 30,000 | 2% | 2% |
194J | Amounts paid as royalty for sale/distribution/exhibition of cinematographic films | Rs. 30,000 | 2% | 2% |
194K | Payment of income for units of a mutual fund, for example- dividends | NA | 10% | 10% |
194LA | Payment made for compensation for acquiring certain immovable property | Rs. 2,50,000 | 10% | 10% |
194LB | Payment of interest on infrastructure bonds to Non-Resident Indians | NA | 5% | 5% |
194LBA(1) | Certain income distributed by a business trust among its unit holder | NA | 10% | 10% |
194LC | Payment of interest by an Indian Company or a business trust in respect of money borrowed in foreign currency under a loan agreement or by way of issue of long-term bonds | NA | 4% (Long-term Bond or Rupee Denominated Bond listed on RSE in IFSC) 5% (Others) | 4% (Long-term Bond or Rupee Denominated Bond listed on RSE in IFSC) 5% (Others) |
194LD | Payment of interest on rupee-denominated bonds, municipal debt security, and government securities | NA | 5% | 5% |
194M | Amounts paid for contract, brokerage, commission or professional fee (other than 194C, 194H, 194J) | Rs. 50,00,000 | 5% | 5% |
194N | In case cash withdrawal over a certain amount takes place from the bank, and ITR is filed | Rs. 3 cr (Cooperative society) Rs. 1cr – Others | 2% | 2% |
194N | In case cash withdrawal over a certain amount takes place from the bank, and ITR not filed | Rs. 3 cr (Cooperative society) Rs. 1cr – Others | 5% | 5% |
194N | In case cash withdrawal takes place from a bank and one does not file ITR | Rs. 20,00,000 | 2% | 2% |
194O | Amount paid for the sale of products/services by e-commerce service providers via their digital platform | Rs. 5,00,000 | 1% (5%, in case of no PAN) | 1% (5%, in case of no PAN) |
194P | TDS on Senior Citizen above 75 Years (No ITR filing cases) | NA | Slab Rates | Slab Rates |
194Q | Payments made for the purchase of goods | Rs. 50,00,000 | 0.10% | 0.10% |
194R | Benefits or perquisites arising from business or profession | Rs. 20,000 | 10% | 10% |
194S | TDS on the payment of any crypto or other virtual asset | Rs 50,000 (Specified Persons) Rs 10,000 (Others) | 1% | 1% |
206AA | TDS for non-availability of PAN | NA | At a rate higher of 1. Specified rate as per the act 2. 20% 3. Rate in force | 20% |
206AB | TDS on non-filers of Income tax return | NA | Rate higher of: 1. 5% 2. Twice the mentioned rate in provision 3. Rate in force |
Consequences of Non-Compliance with Section 206
Non-compliance with Section 206 of the Income Tax Act, 1961 can lead to various consequences for the person responsible for deducting and depositing TDS. Some of the consequences of non-compliance with Section 206 are:
- Interest: If TDS is not deducted or not deposited within the prescribed time, interest will be levied under Section 201(1A) of the Income Tax Act. The interest rate is 1% per month or part of the month from the date on which TDS was supposed to be deducted till the date on which it is actually deducted.
- Penalty: The person responsible for deducting TDS may also be liable to pay a penalty under Section 271C of the Income Tax Act, which is equal to the amount of TDS that was not deducted or deposited.
- Prosecution: In serious cases of non-compliance, the person responsible for deducting TDS may be prosecuted under Section 276B of the Income Tax Act, which can result in imprisonment for a term ranging from three months to seven years.
- Disallowance of Expenses: If TDS is not deducted or deposited, the expenses on which TDS was supposed to be deducted will be disallowed while computing the income of the deductee.
- Refund Delays: Non-compliance with TDS provisions may also lead to delays in the processing of income tax refunds.
Exemptions under Section 206
Section 206 of the Income Tax Act, 1961 deals with the obligation of the person responsible for paying any income chargeable under the head “salaries” to deduct tax at source (TDS) at the time of payment.
However, there are certain exemptions under Section 206 that are available to specific types of payments. These exemptions include:
- Payments made to the Government: TDS is not required to be deducted from any salary or other payment made to the Central or State Government.
- Payments made to certain institutions: TDS is not required to be deducted from any salary or other payment made to certain institutions such as the United Nations or its agencies, or any other international organization declared by the Central Government to be exempt.
- Payments made to certain individuals: TDS is not required to be deducted from any salary or other payment made to certain individuals such as the President of India, the Vice-President of India, Governors of States, Judges of the Supreme Court and High Courts, Members of Parliament, and certain recipients of Gallantry Awards.
- Payments made below the prescribed limit: TDS is not required to be deducted if the amount of salary or other payment made to the recipient is below the prescribed limit. As of my knowledge cutoff of September 2021, the limit is Rs. 2,50,000 for individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), Body of Individuals (BOIs), and artificial juridical persons.
Filing TDS Returns
Filing TDS (Tax Deducted at Source) returns is mandatory for all persons and entities who have deducted TDS while making payments to other parties. The following are the key points to keep in mind while filing TDS returns:
- Types of TDS Returns: There are different types of TDS returns based on the nature of payments made and the type of deductor. These include Form 24Q for salaries, Form 26Q for non-salary payments to residents, and Form 27Q for non-salary payments to non-residents.
- Due Dates: The due date for filing TDS returns is on or before the 31st of July for the first quarter (April-June), 31st of October for the second quarter (July-September), 31st of January for the third quarter (October-December), and 31st of May for the fourth quarter (January-March).
- Late Filing: In case of late filing of TDS returns, a penalty of Rs. 200 per day under Section 234E of the Income Tax Act is levied until the time the TDS return is filed. Also, interest is charged on any late payment of TDS.
- Correction of TDS Returns: If there are any errors in the TDS return, they can be corrected by filing a revised return.
- TAN (Tax Deduction and Collection Account Number): Every person who is required to deduct TDS is required to obtain a TAN number and quote it in all TDS returns, challans, and other documents.
- Use of Digital Signature: For TDS returns filed electronically, the use of a digital signature is mandatory. However, if the return is filed without a digital signature, a signed copy of the return must be submitted to the TDS assessing officer.
- Consolidated TDS Returns: If you have deducted TDS from multiple parties, you can file a consolidated TDS return instead of separate returns.
Challenges and Controversies
There have been various challenges and controversies related to TDS (Tax Deducted at Source) provisions under Section 206 of the Income Tax Act, 1961. Some of these are:
- Disputes over TDS Rates: There have been disputes over the correct TDS rate to be applied in certain cases. For example, there have been disagreements between the tax authorities and taxpayers regarding the correct TDS rate for payments made to non-residents.
- Compliance Challenges: Compliance with TDS provisions can be challenging for some taxpayers, particularly small and medium-sized businesses that may not have dedicated tax departments. Keeping track of the correct TDS rates, filing TDS returns on time, and maintaining accurate records can be time-consuming and complex.
- Issues with TDS Deductions: In some cases, taxpayers may dispute the validity of TDS deductions made by the tax authorities. For example, a taxpayer may argue that TDS was incorrectly deducted on a payment that is exempt from TDS under the law.
- Confusion over TDS Exemptions: There can be confusion over the exemptions available under Section 206, particularly for payments made to non-residents or for payments made in specific circumstances. This can result in disagreements between taxpayers and the tax authorities.
- TDS Refunds: In some cases, taxpayers may face delays in receiving TDS refunds from the tax authorities, leading to cash flow issues.
- Litigation: Disputes over TDS provisions can sometimes result in litigation between taxpayers and the tax authorities, leading to long and costly legal battles.
TDS Certificates
TDS (Tax Deducted at Source) certificates are important documents that are issued to the deductee (the person from whose income tax has been deducted at source) by the deductor (the person who has made the TDS deduction) as proof of tax deduction. The following are the key points to keep in mind regarding TDS certificates:
- Types of TDS Certificates: There are two types of TDS certificates that can be issued by the deductor – Form 16 and Form 16A. Form 16 is issued in the case of TDS deduction on salary payments, while Form 16A is issued for TDS deduction on non-salary payments.
- Contents of TDS Certificates: TDS certificates contain important information such as the name and address of the deductee, the PAN (Permanent Account Number) of both the deductee and the deductor, the amount of TDS deduction, the rate at which TDS was deducted, and the date of deduction.
- Due Dates for Issuing TDS Certificates: Form 16 must be issued by 15th June following the end of the financial year, while Form 16A must be issued within 15 days from the due date of furnishing the TDS return.
- Validity of TDS Certificates: TDS certificates are valid documents and can be used as proof of tax deduction while filing income tax returns. However, it is important to ensure that the details mentioned in the certificate are accurate.
- Correction of TDS Certificates: In case of any errors in the TDS certificate, the deductor can issue a corrected certificate with the correct details.
- Penalty for Non-Issuance of TDS Certificates: Failure to issue TDS certificates on time or issuing incorrect TDS certificates can lead to a penalty under Section 272A of the Income Tax Act.
TDS certificates are important documents for taxpayers as they serve as proof of tax deduction and can be used while filing income tax returns. Deductors must ensure that TDS certificates are issued on time and contain accurate information to avoid any penalties or legal issues.
Penalties for Non-Compliance
Non-compliance with TDS (Tax Deducted at Source) provisions can lead to penalties under the Income Tax Act, 1961. The following are the key penalties that can be levied for non-compliance:
- Penalty for Late Payment of TDS: In case of late payment of TDS, interest is levied under Section 201(1A) of the Income Tax Act at the rate of 1% per month or part thereof from the date on which tax was deducted to the date on which it was actually deposited.
- Penalty for Late Filing of TDS Returns: In case of late filing of TDS returns, a penalty of Rs. 200 per day can be levied under Section 234E of the Income Tax Act, subject to a maximum of the amount of TDS deducted.
- Penalty for Non-Deduction or Short Deduction of TDS: If TDS is not deducted or is deducted at a lower rate than prescribed, a penalty equal to the amount of tax not deducted or deducted at a lower rate can be levied under Section 271C of the Income Tax Act.
- Penalty for Non-Payment of TDS: If TDS is deducted but not paid to the government, a penalty equal to the amount of TDS not paid can be levied under Section 271H of the Income Tax Act.
- Penalty for Non-Issuance of TDS Certificates: Failure to issue TDS certificates on time or issuing incorrect TDS certificates can lead to a penalty of Rs. 100 per day under Section 272A of the Income Tax Act, subject to a maximum of the amount of TDS.
It is important for taxpayers to comply with TDS provisions to avoid any penalties or legal issues. Deductors must ensure that TDS is deducted and deposited on time, TDS returns are filed on time, and TDS certificates are issued accurately and on time to avoid any penalties or legal issues.
TDS on Foreign Payments
TDS (Tax Deducted at Source) provisions also apply to certain foreign payments made by resident taxpayers. The following are the key points to keep in mind regarding TDS on foreign payments:
- Applicability of TDS on Foreign Payments: TDS is applicable on certain foreign payments made by resident taxpayers such as royalty, technical fees, interest, dividend, etc. The rates of TDS on foreign payments may vary depending on the nature of payment and the country of residence of the recipient.
- Rates of TDS on Foreign Payments: The rates of TDS on foreign payments are prescribed under Section 195 of the Income Tax Act. In case of non-resident recipients, TDS may be deducted at a higher rate than that applicable to resident recipients.
- Obligations of the Deductor: The deductor is required to obtain a Tax Residency Certificate (TRC) from the recipient to determine the rate of TDS applicable. The deductor is also required to file Form 15CA and Form 15CB with the Income Tax Department before making any foreign payment.
- Exemptions from TDS on Foreign Payments: TDS may not be applicable in certain cases such as if the payment is made to a resident recipient, if the payment is below a certain threshold, if the recipient is eligible for treaty benefits, etc.
- Compliance Requirements: The deductor is required to file TDS returns and issue TDS certificates to the recipient as proof of tax deduction.
It is important for taxpayers to comply with TDS provisions on foreign payments to avoid any penalties or legal issues. The deductor must ensure that TDS is deducted and deposited on time, TDS returns are filed on time, and accurate TDS certificates are issued to the recipient.
Conclusion
In conclusion, TDS (Tax Deducted at Source) is an important tax collection mechanism in India. It ensures that tax is collected at the time of payment itself, thereby increasing the efficiency and effectiveness of the tax collection process. TDS is applicable on various payments such as salaries, rent, interest, commission, etc. and also on certain foreign payments.
It is important for taxpayers to comply with TDS provisions to avoid any penalties or legal issues. Deductors must ensure that TDS is deducted and deposited on time, TDS returns are filed on time, and TDS certificates are issued accurately and on time to avoid any penalties or legal issues. Overall, TDS plays a critical role in the Indian tax system and helps in ensuring tax compliance and revenue generation for the government.