My non-resident payee has no PAN. Must I deduct at twenty per cent, and is there any prescribed alternative?
Section 206AA(1) requires a deductee to furnish his permanent account number, failing which tax is deducted at the higher of the rate specified in the relevant provision, the rates in force, or twenty per cent — but two provisos substitute five per cent for twenty where the deduction is under section 194-O or section 194Q. Sub-section (7) disapplies the section altogether to a non-resident not being a company and to a foreign company in respect of interest on long-term bonds under section 194LC and any other payment subject to prescribed conditions, and rule 37BC prescribes those conditions. Under rule 37BC(1) the section does not apply to interest, royalty, fees for technical services, dividend and payments on transfer of any capital asset if the deductee furnishes the four items in sub-rule (2) to the deductor.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-07-01, reported as Income-tax Act 1961, s.206AA; second proviso to s.206AA(1) inserted by the Finance Act 2021 with effect from 1 July 2021; Income-tax Rules 1962, rule 37BC. It bears on section 206AA, section 206AA(7), section 194-O, section 194Q, section 194LC, section 197, section 197A, section 139A, section 90(2) of the Income Tax Act 1961, in TDS Defaults, How Tax Law Is Read and Residence & Treaty Benefit matters.
The twenty per cent figure is quoted far more often than it is due, and three things cut it down. First, the rate is the HIGHER of three, not a flat twenty: where the section rate is already higher — a thirty per cent slab, say — twenty per cent is irrelevant, and where the section rate is 0.1 per cent under section 194Q the second proviso caps the consequence at five per cent, not twenty. A CPC computation at twenty per cent on a section 194Q payment is wrong on its face. Second, rule 37BC is a complete answer for most cross-border payments and costs nothing: the non-resident supplies his name, e-mail and contact number, his address in his country of residence, a tax residency certificate from that Government where its law provides for one, and his tax identification number or, if he has none, a unique number by which that Government identifies him. Collect those four items at the contract stage and the section simply does not apply to interest, royalty, fees for technical services, dividend or payments on transfer of any capital asset. Third, rule 37BC(3) adds a separate disapplication where section 139A itself does not apply to the non-resident by reason of rule 114AAB. Note two limits. Rule 37BC(1) is a closed list of payment types; a payment outside it — a business profit, a commission — is not covered, and for those the argument has to be run on section 90(2) instead, on which the Special Bench decision in Nagarjuna Fertilizers is the leading authority. And the documents must reach the DEDUCTOR: the rule is drafted as an obligation on the deductee to furnish them to the deductor, so a deductor who cannot produce them in an assessment has no defence, however genuine the payee.
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Section 206AA(1) provides that notwithstanding anything contained in any other provision of the Act, any person entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B shall furnish his permanent account number to the person responsible for deducting the tax, failing which tax shall be deducted at the higher of the rate specified in the relevant provision of the Act, the rate or rates in force, or twenty per cent. A first proviso provides that where the tax is required to be deducted under section 194-O, clause (iii) shall apply as if for the words 'twenty per cent' the words 'five per cent' had been substituted, and a second proviso does the same where the tax is required to be deducted under section 194Q. Sub-section (2) provides that no declaration under section 197A(1), (1A) or (1C) shall be valid unless the person furnishes his permanent account number in it, and sub-section (3) that where a declaration becomes invalid the deductor shall deduct under sub-section (1). Sub-section (4) provides that no certificate under section 197 shall be granted unless the application contains the applicant's permanent account number. Sub-section (5) requires the deductee to furnish his number to the deductor and both to indicate it in all correspondence, bills, vouchers and other documents sent to each other. Sub-section (6) provides that where the number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished it and sub-section (1) shall apply accordingly. Sub-section (7) provides that the section shall not apply to a non-resident not being a company, or to a foreign company, in respect of payment of interest on long-term bonds as referred to in section 194LC and any other payment subject to such conditions as may be prescribed. Rule 37BC(1) provides that in the case of such a deductee not having a permanent account number, section 206AA shall not apply in respect of payments in the nature of interest, royalty, fees for technical services, dividend and payments on transfer of any capital asset, if the deductee furnishes the details and documents specified in sub-rule (2) to the deductor. Sub-rule (2) specifies those as name, e-mail id and contact number; address in the country or specified territory outside India of which the deductee is a resident; a certificate of his being resident in that country or specified territory from the Government of that country or territory, if the law there provides for issuance of such a certificate; and the Tax Identification Number of the deductee in that country or territory, or, where no such number is available, a unique number on the basis of which the deductee is identified by that Government. Sub-rule (3) provides that section 206AA shall not apply in respect of payments made to such a person if the provisions of section 139A do not apply to him on account of rule 114AAB.
Statutory position — no holding is asserted; this entry reproduces statutory and subordinate legislative text. Section 206AA(1) prescribes the higher of three rates and not a flat twenty per cent, and its two provisos substitute five per cent for twenty where the deduction is under section 194-O or section 194Q. Section 206AA does not apply at all to a non-resident not being a company, or to a foreign company, in respect of interest on long-term bonds under section 194LC, or in respect of interest, royalty, fees for technical services, dividend or payments on transfer of any capital asset where the deductee furnishes to the deductor the four items in rule 37BC(2), or where section 139A does not apply to him by reason of rule 114AAB.
The section is built as an incentive to furnish a number rather than as a charge, and every one of its limbs is directed at that. Sub-section (1) sets the consequence of not furnishing; sub-sections (2) and (3) close the route of a declaration under section 197A without a number; sub-section (4) closes the route of a lower-deduction certificate under section 197 without one; sub-section (5) requires both parties to carry the number through their documentation; and sub-section (6) prevents a bad number from being treated as compliance. That purposive reading is what limits the section's reach: the non-obstante clause in sub-section (1) is doing the work of overriding the ordinary deduction rates, and the legislature dealt separately, in sub-section (7) and rule 37BC, with the class of payee for whom obtaining a number is not a realistic requirement. Rule 37BC does not lower the rate; it disapplies the section, so that the ordinary provision — including any beneficial treaty rate applied through section 2(37A) — governs. The rule is drafted as a condition on the DEDUCTEE furnishing documents to the DEDUCTOR, so the deductor is the person who must hold them, and the certificate limb is expressly conditional on the foreign Government's law providing for such a certificate, which is why a deductee from a jurisdiction that issues none is not shut out. Sub-rule (3) covers the different case where the payee is exempted from section 139A altogether by rule 114AAB, so that the premise of section 206AA — a person who could have obtained a number — is absent.
(7) The provisions of this section shall not apply to a non-resident, not being a company, or to a foreign company, in respect of— (i) payment of interest on long-term bonds as referred to in section 194LC; and (ii) any other payment subject to such conditions as may be prescribed.
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Handle my notice → Ask a CA on WhatsAppSection 206AA(1) requires a deductee to furnish his permanent account number, failing which tax is deducted at the higher of the rate specified in the relevant provision, the rates in force, or twenty per cent — but two provisos substitute five per cent for twenty where the deduction is under section 194-O or section 194Q. Sub-section (7) disapplies the section altogether to a non-resident not being a company and to a foreign company in respect of interest on long-term bonds under section 194LC and any other payment subject to prescribed conditions, and rule 37BC prescribes those conditions. Under rule 37BC(1) the section does not apply to interest, royalty, fees for technical services, dividend and payments on transfer of any capital asset if the deductee furnishes the four items in sub-rule (2) to the deductor. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 206AA, section 206AA(7), section 194-O, section 194Q, section 194LC, section 197, section 197A, section 139A, section 90(2) of the Income Tax Act 1961. It is reported as Income-tax Act 1961, s.206AA; second proviso to s.206AA(1) inserted by the Finance Act 2021 with effect from 1 July 2021; Income-tax Rules 1962, rule 37BC. The twenty per cent figure is quoted far more often than it is due, and three things cut it down. First, the rate is the HIGHER of three, not a flat twenty: where the section rate is already higher — a thirty per cent slab, say — twenty per cent is irrelevant, and where the section rate is 0.1 per cent under section 194Q the second proviso caps the consequence at five per cent, not twenty. A CPC computation at twenty per cent on a section 194Q payment is wrong on its face. Second, rule 37BC is a complete answer for most cross-border payments and costs nothing: the non-resident supplies his name, e-mail and contact number, his address in his country of residence, a tax residency certificate from that Government where its law provides for one, and his tax identification number or, if he has none, a unique number by which that Government identifies him. Collect those four items at the contract stage and the section simply does not apply to interest, royalty, fees for technical services, dividend or payments on transfer of any capital asset. Third, rule 37BC(3) adds a separate disapplication where section 139A itself does not apply to the non-resident by reason of rule 114AAB. Note two limits. Rule 37BC(1) is a closed list of payment types; a payment outside it — a business profit, a commission — is not covered, and for those the argument has to be run on section 90(2) instead, on which the Special Bench decision in Nagarjuna Fertilizers is the leading authority. And the documents must reach the DEDUCTOR: the rule is drafted as an obligation on the deductee to furnish them to the deductor, so a deductor who cannot produce them in an assessment has no defence, however genuine the payee. If it applies to you, the first step is this: Before any cross-border payment, get the rule 37BC(2) set on file: name, e-mail and contact number; address in the country of residence; the tax residency certificate where that country's law provides for one; and the Tax Identification Number or, failing one, the unique identifying number.
Section 206AA(1) provides that notwithstanding anything contained in any other provision of the Act, any person entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B shall furnish his permanent account number to the person responsible for deducting the tax, failing which tax shall be deducted at the higher of the rate specified in the relevant provision of the Act, the rate or rates in force, or twenty per cent. A first proviso provides that where the tax is required to be deducted under section 194-O, clause (iii) shall apply as if for the words 'twenty per cent' the words 'five per cent' had been substituted, and a second proviso does the same where the tax is required to be deducted under section 194Q. Sub-section (2) provides that no declaration under section 197A(1), (1A) or (1C) shall be valid unless the person furnishes his permanent account number in it, and sub-section (3) that where a declaration becomes invalid the deductor shall deduct under sub-section (1). Sub-section (4) provides that no certificate under section 197 shall be granted unless the application contains the applicant's permanent account number. Sub-section (5) requires the deductee to furnish his number to the deductor and both to indicate it in all correspondence, bills, vouchers and other documents sent to each other. Sub-section (6) provides that where the number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished it and sub-section (1) shall apply accordingly. Sub-section (7) provides that the section shall not apply to a non-resident not being a company, or to a foreign company, in respect of payment of interest on long-term bonds as referred to in section 194LC and any other payment subject to such conditions as may be prescribed. Rule 37BC(1) provides that in the case of such a deductee not having a permanent account number, section 206AA shall not apply in respect of payments in the nature of interest, royalty, fees for technical services, dividend and payments on transfer of any capital asset, if the deductee furnishes the details and documents specified in sub-rule (2) to the deductor. Sub-rule (2) specifies those as name, e-mail id and contact number; address in the country or specified territory outside India of which the deductee is a resident; a certificate of his being resident in that country or specified territory from the Government of that country or territory, if the law there provides for issuance of such a certificate; and the Tax Identification Number of the deductee in that country or territory, or, where no such number is available, a unique number on the basis of which the deductee is identified by that Government. Sub-rule (3) provides that section 206AA shall not apply in respect of payments made to such a person if the provisions of section 139A do not apply to him on account of rule 114AAB. The matter was decided on 2021-07-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory and subordinate legislative text. Section 206AA(1) prescribes the higher of three rates and not a flat twenty per cent, and its two provisos substitute five per cent for twenty where the deduction is under section 194-O or section 194Q. Section 206AA does not apply at all to a non-resident not being a company, or to a foreign company, in respect of interest on long-term bonds under section 194LC, or in respect of interest, royalty, fees for technical services, dividend or payments on transfer of any capital asset where the deductee furnishes to the deductor the four items in rule 37BC(2), or where section 139A does not apply to him by reason of rule 114AAB.
The section is built as an incentive to furnish a number rather than as a charge, and every one of its limbs is directed at that. Sub-section (1) sets the consequence of not furnishing; sub-sections (2) and (3) close the route of a declaration under section 197A without a number; sub-section (4) closes the route of a lower-deduction certificate under section 197 without one; sub-section (5) requires both parties to carry the number through their documentation; and sub-section (6) prevents a bad number from being treated as compliance. That purposive reading is what limits the section's reach: the non-obstante clause in sub-section (1) is doing the work of overriding the ordinary deduction rates, and the legislature dealt separately, in sub-section (7) and rule 37BC, with the class of payee for whom obtaining a number is not a realistic requirement. Rule 37BC does not lower the rate; it disapplies the section, so that the ordinary provision — including any beneficial treaty rate applied through section 2(37A) — governs. The rule is drafted as a condition on the DEDUCTEE furnishing documents to the DEDUCTOR, so the deductor is the person who must hold them, and the certificate limb is expressly conditional on the foreign Government's law providing for such a certificate, which is why a deductee from a jurisdiction that issues none is not shut out. Sub-rule (3) covers the different case where the payee is exempted from section 139A altogether by rule 114AAB, so that the premise of section 206AA — a person who could have obtained a number — is absent. In the words reproduced by the source cited on this page: "(7) The provisions of this section shall not apply to a non-resident, not being a company, or to a foreign company, in respect of— (i) payment of interest on long-term bonds as referred to in section 194LC; and (ii) any other payment subject to such conditions as may be prescribed."
It was decided by the CBDT Circulars & Instructions on 2021-07-01 and is reported as Income-tax Act 1961, s.206AA; second proviso to s.206AA(1) inserted by the Finance Act 2021 with effect from 1 July 2021; Income-tax Rules 1962, rule 37BC. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 206AA, section 206AA(7), section 194-O, section 194Q, section 194LC, section 197, section 197A, section 139A, section 90(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory and subordinate legislative text. Section 206AA(1) prescribes the higher of three rates and not a flat twenty per cent, and its two provisos substitute five per cent for twenty where the deduction is under section 194-O or section 194Q. Section 206AA does not apply at all to a non-resident not being a company, or to a foreign company, in respect of interest on long-term bonds under section 194LC, or in respect of interest, royalty, fees for technical services, dividend or payments on transfer of any capital asset where the deductee furnishes to the deductor the four items in rule 37BC(2), or where section 139A does not apply to him by reason of rule 114AAB. It arises in TDS Defaults, How Tax Law Is Read and Residence & Treaty Benefit matters, on section 206AA, section 206AA(7), section 194-O, section 194Q, section 194LC, section 197, section 197A, section 139A, section 90(2) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check whether the payment is one of the five types in rule 37BC(1) — interest, royalty, fees for technical services, dividend, or payment on transfer of a capital asset. If it is not, the rule does not help and the argument must be run under s.90(2). Where the deduction is under s.194-O or s.194Q, apply five per cent, not twenty, and challenge any demand computed at twenty per cent on the face of the provisos. Read s.206AA(1) as a comparison of three rates, not as a flat rate; where the specified rate or the rate in force is already the highest, s.206AA adds nothing. For a resident deductee, note that s.206AA(2) invalidates a s.197A declaration filed without a permanent account number and s.206AA(3) then requires deduction under sub-section (1) — so a Form 15G or 15H without a PAN is worse than useless. Check s.206AA(6) before relying on a number you were given: a number that is invalid or does not belong to the deductee is treated as no number at all. Where the non-resident is one to whom s.139A does not apply by reason of rule 114AAB, take the separate point under rule 37BC(3).
Still good law. This is the statute and the rule, not a decision about them. The section text in its current form was read from five departmental pages stamped Year 2022, Year 2023, Year 2024 (No. 1), Year 2024 (No. 2) and Year 2025, all identical; the Year 2025 stamp is the most recent located, so a later amendment cannot be excluded. Only one of those pages printed a footnote list, and it records only the Finance Act 2021 insertion of the section 194Q proviso and the cross-reference to rule 37BC, so the commencement dates of the section 194-O proviso and of sub-section (7) could not be sourced and are not stated. Rule 37BC carries no year stamp, as no departmental rule page does. What section 206AA does NOT do — override a beneficial treaty rate under section 90(2) — is not a statutory question and is dealt with in the separate entry on the Special Bench decision in Nagarjuna Fertilizers and Chemicals Ltd. v. ADIT (IT)-II, Hyderabad, and in the Delhi High Court's decision in Danisco India P. Ltd. v. Union of India already in the library. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a statutory entry, not a decided case. The 'tier' value 'cbdt' is used because the library's fixed tier vocabulary has no value for a statutory entry; 'bench' reads 'Not applicable — statutory text' and 'favours' is null. The date in 'decided_on', 1 July 2021, is the COMMENCEMENT DATE of the latest amendment stated here — the second proviso to sub-section (1), applying five per cent where tax is deductible under section 194Q, which the 2024 edition records at footnote 72 as 'Inserted by the Finance Act, 2021, w.e.f. 1-7-2021' — and is not a decision date. Sourcing. Section 206AA was read in ten editions, running from 2009 to the current one. The five most recent print identical text with both provisos and sub-section (7); the editions of 2018 and 2019 print sub-section (7) but neither proviso; those from 2009 to 2011 print neither. Only one of them printed a footnote list, carrying two notes — footnote 72 for the section 194Q proviso and footnote 73, 'See rule 37BC', against sub-section (7)(ii). The commencement dates of the first proviso (section 194-O) and of sub-section (7) itself could not be established from anything read, and they are not stated. What the sequence of editions does show is that sub-section (7) was present by 2018 and the first proviso was not, and that both provisos were present by 2022. Rule 37BC was read in full. Its published text carries no date, so the rule is not dated here, and the date on which 'dividend' was added to sub-rule (1), or on which sub-rule (3) was inserted, has not been established. Rule 114AAB, referred to in rule 37BC(3), has not been read, and nothing is said about its content beyond the cross-reference. No bare-act reproduction was used for any part of this entry. Two points on how the section works with what surrounds it. Sub-section (7) is an exception and not a relief: it takes the specified non-resident payments outside sub-section (1) altogether, on the conditions rule 37BC prescribes, so the documents have to be with the deductor before the payment is made rather than produced afterwards. And s.206AA does not displace s.197 or s.197A, which go on operating on their own terms; both of those routes depend on the payee having a permanent account number under s.139A, which is the practical difficulty for a non-resident. Nothing here decides the relationship between s.206AA and s.90(2), which this library deals with separately. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory and subordinate legislative text. Section 206AA(1) prescribes the higher of three rates and not a flat twenty per cent, and its two provisos substitute five per cent for twenty where the deduction is under section 194-O or section 194Q. Section 206AA does not apply at all to a non-resident not being a company, or to a foreign company, in respect of interest on long-term bonds under section 194LC, or in respect of interest, royalty, fees for technical services, dividend or payments on transfer of any capital asset where the deductee furnishes to the deductor the four items in rule 37BC(2), or where section 139A does not apply to him by reason of rule 114AAB.
TaxSphere, “Statutory position — section 206AA, sub-section (7) and rule 37BC: the twenty per cent rate, the five per cent provisos, and the non-resident's way out”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-206aa-206aa-7-and-rule-37bc/ (validity last checked 2026-09-08)
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In March 2026 I remitted a fee to a company outside India without deducting anything, because I did not think any part of it was taxable here. The Assessing Officer now says section 195 obliged me to deduct on the whole remittance, or at least to apply to him before paying. Does section 195 say that — and since the new Act has come in, which Act governs my payment at all?
My money is stuck. Every invoice I raise has tax deducted at the full rate, my actual tax for the year is far less than the deductions, and I only get it back a year later when the refund comes. Somebody told me to apply for a lower-deduction certificate under section 197. What does section 197 actually say — which payments does it cover, what does the Assessing Officer have to be satisfied about, what form do I file, and can the certificate be backdated to cover the deductions already made?
My income is below the taxable limit and I filed Form 15G, but the finance company says it cannot act on it without a PAN. Can section 206AA be applied to me?
My bank has deducted tax on my fixed deposit interest and I was told the limit had gone up. My father is a senior citizen and his bank deducted too. There is also a loan I took from a friend on which I pay interest, and a co-operative society that pays me interest on a deposit. Who exactly has to deduct under section 194A, on what amount, and what are the limits as they stand now?
