The new provision will help increase compliance with the income tax return filing by individuals whose income is subject to TDS.
For those who have not filed their income tax return (ITR) but their income is liable for TDS deduction, there will be a levy of TDS at a higher rate. And, in case one does not have the PAN, the rate of tax deduction will even be higher. This new TDS rule will be effective from July 2021 as per the Budget announced by the Finance Minister. Archit Gupta, Founder and CEO, ClearTax explains the new TDS rule, whom it will impact and who all are excluded from it.
On new TDS rule
The Finance Minister in Budget 2021 has introduced a special provision of TDS in the income tax act. This section imposed a higher TDS rate on the individuals who have not filed income tax returns, but their income is liable for TDS deduction of more than Rs. 50,000 in the last two preceding previous years. The rate of TDS shall be higher of the following:
- Twice at the rates specified in the relevant provisions of the income tax act.
- At the rate of five per cent.
This rule of TDS shall be applicable with effect from 1st July 2021.
On whom will it apply
The new provision was created to increase compliance of the income tax return filing by individuals whose income is subject to TDS. It will encourage more individuals to file ITRs and bring transparency to the government. The new provision will be specifically applicable to the individuals mentioned below:
The person who has not filed an income tax return for two financial years immediately before the financial year in which tax is required to be deducted, for which the time limit to file the income tax return has expired and
In each of these two previous years, the total amount of TDS deducted by the payer is Rs.50,000 or more.
The new provision does not apply to a non-resident who does not have a permanent establishment in India.
On which transactions will it apply
The new provision is applicable to the nature of payments such as interest, contract, professional services, rent, etc.
However, this provision will not be applicable for such types of transactions where the full amount of tax is required to be deducted. Hence, the list of transactions that are excluded are given below:
- Salary
- Premature withdrawal of employees provident fund
- Winnings from any lottery or crossword puzzles or card games
- Winnings from any horse races
- Income from investment in securitisation trust
- TDS on cash withdrawals above Rs. 1 crore
What if PAN is not furnished
In addition to non-filing of the income tax returns within the due dates, if the specified person does not furnish PAN to the payer, then the TDS rate shall be higher of the rates mentioned above or 20%.
The new rule requires the payers to verify below three things every time while deducting TDS on making payments to the specified persons:
- Whether payee’s last two years tax deduction was above Rs. 50,000
- Whether the person from whom TDS is deductible has filed his return of income for the previous two years
- And for both the previous years, the due date to file the original return has expired.
While making a particular payment, if the due date to file ITR of any of the year has not expired, there is no need to deduct tax at higher rates on that payment.
Let us take an example, XYZ Co. Ltd. makes a contract payment of Rs. 70 lakhs to Mr. B for the preceding two previous years and on which tax was deducted at 1% (Rs. 70,000 in each year) by XYZ Co Ltd.
Mr. B, however, has not filed his return of income for both the years and the due date to file the ITR has expired.
Hence, when the payer ascertains these facts in the third year, the tax should be deducted at source at the higher rates given above. Accordingly, the TDS rate should be 5% which is higher than 2% (twice of 1%)
Further, if the person does not furnish PAN to the payer, then TDS shall be deducted at the rate of 20%, which is higher than 5% or 2%.
