The objective of this newly inserted provision in the Income-tax Act, 1961 is to ensure that income tax return filing compliance is fulfilled by the taxpayers. It may happen that TDS on interest income has been deducted but ITR is not filed by the individual.
If you have not filed your income tax return (ITR) or do not file ITR then you might have to pay a higher amount of TDS/TCS from July 1, 2021. This is because as per an announcement made in Budget 2021, a person who has not filed ITR for the previous two financial years and the aggregate TDS and TCS deducted from payments made to him/her in each of these financial years exceeds Rs 50,000, then such person would be subjected to higher TDS rate. This will rule will come into effect from July 1, 2021.
To simplify this: Suppose you have not filed income tax returns for FY 2018-19 and 2019-20. However, you have fixed deposits, dividend income, interest from recurring deposits etc. where aggregate TDS exceeded Rs 50,000 in each financial year. In such a scenario, you will be subjected to a higher TDS rate on the incomes from July 1, 2021.
Abhishek Soni, CEO & founder, Tax2win.in says, “The objective of this newly inserted provision in the Income-tax Act, 1961 is to ensure that income tax return filing compliance is fulfilled by the taxpayers. It may happen that TDS on interest income has been deducted but ITR is not filed by the individual. Thus, to ensure correct income is reported to the government, ITR filing will become effectively mandatory to avoid higher TDS on future income. This is similar to the rule that requires that an individual must report his/her PAN to an income payer to avoid higher TDS.”
- To whom new law applies
Higher TDS will be deducted from the income of a person if he/she satisfies the following conditions:
a) Individual has not filed income tax return in the previous two financial years for which due date has expired as per section 139(1) of the Income-tax Act, 1961;
b) Sum of TDS and TCS in each of the financial years is Rs 50,000 or more.
Higher TDS/TCS rate
The TDS rate that will be applicable to such individuals will be higher of the following:
a) Twice the rate specified in the relevant section;
b) Twice the rate or rate in force; or
‘Twice the rate specified in the relevant section’ means the TDS rate mentioned in the Income-tax law whereas ‘Twice the rate or rate in force’ means the TDS rate that is effective for the financial year. For example, last year, the government had reduced the TDS/TCS rate by 25% on the non-salaried payments due to novel coronavirus pandemic. Thus, the rate in force became 7.5% from 10% as mentioned in the law.
In case of TCS, the higher of the following will be applicable
a) Twice the rate specified in the relevant section or
Here is how much TDS will be applicable with the help of an example. For instance, TDS on interest income from fixed deposit is deducted at the rate of 10% (provided PAN is given to the bank). Now if the above-mentioned conditions are satisfied, then new TDS rate will be higher of the following:
a) Twice the rate specified in the relevant section, i.e., 20% (10% X 2));
b) Twice the rate or rate in force 20% (10 X 2); or
The highest rate is 20%. This rate is same as in the case when PAN is not given to the bank. Thus, this will be applicable to interest income from fixed deposit if ITR is not filed for both previous two financial years and TDS in each financial year exceeds Rs 50,000.
- How will the deductor verify
The income tax department via a circular dated June 21, 2021, has clarified the ways by which the deductor/collector can verify the status of deductee or collectee.
As per the circular, “To ease this compliance burden the Central Board of Direct Taxes is issuing a new functionality ‘Compliance Check for Sections 206AB & 206CCA’ This functionality is made available through reporting portal of the Income-tax Department. The tax deductor or collectee can feed the single PAN or multiple PANs of the deductee or collectee and can get response from the functionality if such deductee is specified person.”
Further, a list is prepared by the tax department from the start of the financial year 2021-22, taking 2018-19 and 2019-20 as relevant previous years. The list contains the name of taxpayers who have not filed ITR for both the years and has aggregate TDS and TCS of Rs 50,000 or more in each financial year, the circular stated.
- Incomes out of purview of this new law
Do keep in mind that not all income on which TDS is applicable comes under the purview of the newly inserted law. Certain incomes are exempted which are as follows:
B) Payment of accumulated balance received by an employee from EPF
C) Winnings from lottery or crossword puzzles
D) Winnings from horse race
E) Income from investment in securitization trust
F) Cash withdrawals exceeding Rs 20 lakh in a financial year
If the income is received from the sources mentioned above, then tax will be deducted at the normal rates applicable, i.e., not at the higher rates due to not filing of ITR.
For other incomes such as dividend received from equity shares and mutual funds or interest received from fixed deposits, recurring deposits, annuity pensions etc., in case ITR is not filed for two previous financial years and aggregate TDS exceeds Rs 50,000 in each of these financial years, then tax on the income will be deducted at the higher rate.
- What if PAN is not given by the deductee
Usually, if an individual does not mention/quote his PAN then the financial institution deducts tax at a higher rate. For instance, if PAN is not updated in the bank’s records, then it will deduct tax on interest earned from fixed deposit (assuming interest exceeds the specified limit) at the rate of 20% instead of 10%.
Dr Suresh Surana, founder, RSM India a tax consultancy firm says, “In case where PAN is not updated and individual has not filed income tax return, then in such a case TDS will be deducted at the rate which is higher of the two. In case of fixed deposits, it would be 20%. Similarly, when an individual provides professional services to a Company on which TDS in normal course is 10% and he fails to provide his PAN, the company would be required to deduct TDS @ 20% and pay the balance to such Individual.”