The Indian tax system runs on the principle of “Pay as You Earn”, where certain payments like salary, interest, rent, or professional fees are taxed at source through TDS (Tax Deducted at Source).
To track these payments, the government uses PAN (Permanent Account Number)—a unique 10-digit alphanumeric number allotted to every taxpayer.
But what happens if a person or company does not give their PAN? To prevent misuse and ensure compliance, the government introduced Section 206AA in the Income Tax Act, effective from 1st April 2010.
Purpose of introducing Section 206AA
- To make PAN quoting mandatory for all taxpayers.
- To ensure correct tracking of income and TDS deducted.
- To reduce cases of tax evasion and fake identities.
Applicability to taxpayers and deductors
- Taxpayers: Any person receiving income (salary, interest, rent, professional fees, etc.).
- Deductors: Any person making a payment liable to TDS (employers, banks, companies, government agencies, etc.).
Link between PAN and TDS compliance
Without PAN, TDS cannot be matched against the taxpayer’s record in the Income Tax Department system. Section 206AA ensures this linkage by imposing a penalty in the form of higher TDS deduction.
Meaning of Section 206AA
In simple words, Section 206AA says: If you don’t give PAN to the person deducting TDS, then TDS will be deducted at a higher rate—20% or the rate specified under the Act, whichever is higher.
Impact on TDS deductions without PAN
- Even if the normal TDS rate is 10%, without PAN, 20% will be deducted.
- This results in higher outflow of tax and lower take-home income.
- The taxpayer will have to claim a refund later by filing an Income Tax Return (ITR).
Higher rate of TDS: 20% or applicable rate
The law is strict—the higher of the two rates will apply:
- The rate specified in the Act, OR
- 20% flat rate.
Applicability of Section 206AA
Section 206AA applies to almost all payments where TDS is required.
Transactions and payments covered
- Salary
- Bank interest
- Fixed deposit interest
- Rent payments
- Professional or technical service fees
- Contractor payments
- Commission and brokerage
- Non-resident payments (royalty, interest, dividends, technical services)
Who needs to furnish PAN?
- Individuals (residents and non-residents)
- Companies
- Firms (partnership/LLP)
- Trusts and societies
Basically, anyone who is liable to pay or receive income where TDS applies must provide PAN.
Exceptions, if any
Over time, the government has provided relaxations—especially for non-residents—where PAN may not be mandatory (discussed in detail later).
TDS Rates under Section 206AA
Let’s understand how TDS rates change when PAN is not furnished.
Normal TDS rates vs. higher rate without PAN
- With PAN: TDS at normal applicable rate (say 10%).
- Without PAN: TDS at 20% (or higher of the prescribed rate and 20%).
Rule: Higher of prescribed rate or 20%
- If normal TDS is 2% → Without PAN, 20% applies.
- If normal TDS is 30% → Without PAN, 30% applies (since it’s higher than 20%).
Comparative Table
| Payment Type | Normal TDS Rate (With PAN) | TDS Rate Without PAN (Sec 206AA) |
|---|---|---|
| Bank FD Interest | 10% | 20% |
| Professional Fees | 10% | 20% |
| Contractor Payment | 1% / 2% | 20% |
| Rent | 10% | 20% |
| Salary | As per slab | 20% (if PAN not given) |
| Non-resident Royalty | 10% (DTAA rate possible) | 20% |
Consequences of Not Providing PAN
- Higher TDS deduction: More money blocked with the government.
- Cash flow issues: Less money in hand for immediate use.
- Difficulty in refunds: Must file ITR to claim excess TDS.
- No lower/nil TDS certificate: Section 197 benefits denied.
- Compliance hassles: May face penalty notices or delays.
Exceptions and Relaxations under Section 206AA
The government has provided some relaxations, especially for foreign investors and non-residents.
- Non-residents can sometimes avoid PAN if they:
- Provide Tax Residency Certificate (TRC),
- Provide foreign tax ID,
- Receive certain income like interest, dividends, royalties, or fees for technical services.
- Certain transactions notified by CBDT circulars are exempt.
This makes compliance easier for foreign investors while ensuring tax collection.
Relation of Section 206AA with Other Sections
Section 206AB vs. Section 206AA
- 206AA: Higher TDS if PAN not provided.
- 206AB: Higher TDS if the taxpayer has not filed income tax returns for 2 years and has TDS of more than ₹50,000.
Combined impact
- If both apply, TDS will be deducted at the highest rate among 206AA and 206AB.
Priority of law
CBDT clarifications state that higher of the two sections will apply.
Compliance Measures for Taxpayers
- Always quote PAN in all TDS-related forms.
- Check that PAN and name match with the Income Tax database.
- Submit Form 15G/15H (with PAN) to avoid unnecessary TDS on bank interest.
- Non-residents should provide TRC and other documents to claim DTAA benefit.
- Regularly check Form 26AS to ensure TDS credit is reflected.
Expert Tips to Avoid Higher TDS under Section 206AA
- Furnish PAN correctly in all documents.
- Double-check PAN spelling and number.
- Keep PAN updated (especially after marriage/name change).
- NRIs should provide TRC, passport details, and ensure DTAA compliance.
- File ITR on time to avoid complications.
Conclusion: Section 206AA highlights the importance of PAN in India’s tax system. While it prevents evasion, it also puts an extra burden on those who fail to furnish PAN. The takeaway is simple: Always quote your PAN in every financial transaction to avoid higher TDS, delays, and refund hassles.
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