Understanding Section 206AA of the Income Tax Act, 1961: TDS Deduction at a Higher Rate

Section 206AA of the Income Tax Act, 1961 mandates a higher Tax Deducted at Source (TDS) rate when a recipient of taxable income fails to furnish a valid PAN. Under this section, if the PAN provided is invalid or not incorporated correctly, or if the PAN becomes inoperative due to non-linking with Aadhaar, then TDS must be deducted at a higher rate.

Applicability of Section 206AA

If a recipient of income fails to provide a valid PAN, the deductor must deduct TDS at the higher of the following rates:

1. The rate specified in the relevant provision of the Income Tax Act.
2. The rate in force as prescribed in the Finance Act.
3. A flat rate of 20% as per Section 206AA.

This provision applies to both residents and non-residents receiving taxable income in India.

Impact of Inoperative PAN due to Aadhaar Non-Linking

From 1st July 2023, PAN becomes inoperative if it is not linked with Aadhaar. In such cases:

• The PAN holder cannot file an income tax return.
• TDS under Section 206AA is deducted at 20% as the PAN is treated as inoperative or invalid.
• No tax refunds are processed until the PAN is reactivated.

How to Check if PAN is Inoperative?

• Visit the Income Tax e-filing portal.
• Use the PAN-Aadhaar linking status check tool.
• If PAN is inoperative, link Aadhaar immediately to avoid higher TDS.

Income Base for TDS Calculation Under Section 206AA

TDS under 206AA is deducted on the taxable income determined as:

Gross Annual Income – Exemptions under Section 10 = Taxable Base for TDS Calculation

✅ Allowed:

• Exemptions under Section 10 (e.g., House Rent Allowance (HRA), Leave Travel Allowance (LTA), Agricultural Income, etc.) are deducted before calculating TDS.

❌ Not Allowed:

• Standard Deduction under Section 16 (₹50,000) is NOT considered for TDS calculation.
• Deductions under Chapter VI-A (like 80C, 80D, 80E, etc.) are NOT allowed while computing taxable income for TDS under 206AA.

Thus, TDS under Section 206AA is deducted before considering any standard or Chapter VI-A deductions.

Frequently Asked Questions (FAQs)

Q1: Does Section 206AA apply if PAN is provided but is inoperative due to Aadhaar non-linking?
A: Yes, an inoperative PAN is treated as invalid under Section 206AA. Hence, TDS will be deducted at 20% until the PAN is reactivated.

Q2: What happens if an employee provides PAN after TDS has already been deducted at 20%?
A: Once TDS is deducted at 20% under 206AA, it cannot be reversed by the employer. However, the employee can claim a refund while filing the Income Tax Return (ITR).

Q3: Can a non-resident avoid Section 206AA if they do not have a PAN?
A: Non-residents can avoid 206AA if they provide alternative KYC documents and Tax Residency Certificate (TRC), as per DTAA (Double Taxation Avoidance Agreement).

Q4: Can Form 15G/15H be submitted to avoid TDS under 206AA?
A: No, Form 15G/15H is NOT valid without a PAN. If PAN is not provided or is invalid, TDS at 20% under 206AA still applies.

Q5: How can a taxpayer reactivate an inoperative PAN?
A: The taxpayer must link PAN with Aadhaar on the Income Tax e-filing portal and wait for it to become operative again.

Key Takeaways

✅ TDS under 206AA applies at 20% if PAN is not furnished or is inoperative due to Aadhaar non-linking.
✅ Exemptions under Section 10 are allowed before TDS calculation.
❌ Standard Deduction and Chapter VI-A deductions are NOT considered for TDS under 206AA.
✅ If excess TDS is deducted, the taxpayer can claim a refund by filing an ITR.

Employers and deductors must ensure that the PAN provided is valid and linked with Aadhaar to avoid unnecessary higher TDS deduction under Section 206AA.

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