Sections 206AB and 206CCA Are Gone: The Higher-TDS-for-Non-Filers Regime That Quietly Double-Taxed NRIs Has Been Abolished

For three or four years, a particular email landed in my inbox every spring. An NRI in Dubai or Toronto would forward a bank TDS certificate showing tax deducted on NRO fixed-deposit interest at a rate that made no sense. Not the 30% plus surcharge and cess they expected on NRO interest, but something closer to 40% or higher, with no clear reason on the statement. The bank's relationship manager, when pressed, would mutter something about the PAN being "flagged as a non-filer" on the income tax portal. The NRI had never filed an Indian return because, on their income, they were not required to. They were being penalised for a return they never owed.

That was Section 206AB at work, and as of 1 April 2025 it no longer exists. The Finance Act 2025 omitted Sections 206AB and 206CCA outright, ending the higher-TDS-and-TCS-for-non-filers experiment that ran from July 2021. This guide is about what that regime was, why it became a compliance nightmare that caught NRIs it was never meant to catch, and what genuinely changes for you now, set against the wider 2025-2026 push to simplify TDS.

The 30-second answer: Sections 206AB and 206CCA, which forced deductors to apply the higher of twice the normal TDS rate or 5% on payments to "specified persons" who had not filed an income tax return, were omitted by the Finance Act 2025 with effect from 1 April 2025 (Clauses 66 and 68). The rule was meant to push non-filers to file, but it created a verification burden that blocked working capital and, for NRIs, frequently misfired: although the section legally excluded non-residents without a permanent establishment in India, the Department's bulk Compliance Check flagged PANs by filing history alone, and many banks applied higher TDS to NRI deposits anyway. From FY 2025-26, no deductor can apply a non-filer penalty rate. Your base rates (30% on NRO interest under Section 195, treaty rates with a TRC) are unchanged.

This is news analysis, not a how-to, so I assume you already know how NRO interest is taxed and what Section 195 does. If those are fuzzy, the deeper mechanics live in TDS for NRIs and how to claim refunds and tax on NRO interest. What follows is the part that matters for your money: why a rule that was never supposed to apply to you ended up draining your NRO account, and what is left standing now that it is gone.

What 206AB actually did, in one clean pass

The Finance Act 2021 inserted Section 206AB from 1 July 2021 with a simple intent: make it expensive to be a non-filer. If you were a "specified person", any deductor paying you had to deduct TDS at the higher of twice the rate in the relevant section, or 5%. Section 206CCA mirrored this for TCS, the tax collected at source on certain sales and remittances.

A specified person was defined narrowly on its face but broadly in effect. You qualified if you had not filed your income tax return for the year immediately preceding the year of deduction (with the filing deadline already lapsed), and your aggregate TDS plus TCS in that preceding year was Rs 50,000 or more. Originally the test looked back two years; the Finance Act 2022 tightened it to one. Both conditions had to be met, so a one-off non-filer with small TDS was safe, but anyone with meaningful Indian income who had skipped a return was squarely in scope.

The doubling is what made it bite. Take an ordinary professional fee taxed under Section 194J at 10%. For a specified person it became 20%. Rent under Section 194-I at 10% became 20%. And the interaction nobody planned for: where the base rate was already high, the multiplication was brutal. On NRO interest, Section 195 deducts at 30% plus surcharge and cess. Double that and you are looking at 60% before the 5% floor is even relevant, which on a substantial deposit is a confiscatory rate sitting on income the depositor will later get refunded only by filing the very return whose absence triggered the penalty. The circularity was not lost on anyone who experienced it.

To operate the rule, the Income Tax Department built the Compliance Check for Sections 206AB and 206CCA, a portal where a deductor could submit a single PAN or a bulk file and get back, for each PAN, a yes or no on specified-person status. Deductors were told to run the check at the start of the financial year, or before the first payment, and rely on the result for the rest of the year. In theory, clean and automated. In practice, the source of the whole NRI mess.

Why this was never supposed to touch most NRIs

Here is the fact that turns the NRI experience from a tax rule into a grievance. Section 206AB explicitly excluded a non-resident who does not have a permanent establishment in India. A permanent establishment, in treaty language, is a fixed place through which an enterprise carries on business: an office, a branch, a factory. The salaried NRI in London with an NRO account, the Dubai consultant remitting savings home, the Toronto family holding an inherited flat and a fixed deposit, none of them have a permanent establishment in India. By the plain text of the section, they were carved out. The higher-TDS-for-non-filers rule did not apply to them at all.

So why did so many of them get hit?

Because the carve-out lived in the statute, but the flag lived in the Compliance Check tool, and the two did not talk to each other. The portal classified a PAN as a specified person based on filing history and the Rs 50,000 TDS threshold. It did not know, and did not ask, whether the PAN belonged to a non-resident without a permanent establishment. An NRI PAN that had high NRO-interest TDS (easily over Rs 50,000) and no return on file came back from the portal as flagged, identical in appearance to a defaulting resident business.

A bank or mutual fund registrar processing thousands of PANs through a bulk file then faced a choice. The conservative, system-driven path was to apply the higher rate to every flagged PAN and let the customer sort it out. The correct path was to overlay a second check, asking whether each flagged PAN was a non-resident without a permanent establishment, and suppress the higher rate for those. Plenty of institutions did not build that second layer, or built it imperfectly, or applied it inconsistently across branches. The honest framing is that this was a known carve-out unevenly implemented, not a black-letter rule that taxed NRIs by design. But to the NRI staring at the certificate, the distinction was academic. The money was gone until a refund.

Put a number on the damage. Suppose Anil, a UAE-resident NRI, holds an NRO fixed deposit of Rs 50,00,000 at 7%, earning Rs 3,50,000 of interest in a year. The correct TDS under Section 195 is 30% plus 4% cess (ignore surcharge at this size), so Rs 1,09,200. He has no permanent establishment in India and has never been required to file, so 206AB should never apply.

His bank runs the bulk Compliance Check, his PAN comes back flagged because last year's NRO-interest TDS exceeded Rs 50,000 and he filed no return, and the system doubles the rate to 60%. Now Rs 2,10,000 is withheld, plus cess, roughly Rs 2,18,400. The extra slice, about Rs 1,09,200, is pure over-withholding on income the treaty might have taxed at 12.5% or less. To recover it he must obtain a PAN-linked login, file an Indian return he was not otherwise obliged to file, claim the refund, and wait months. He has been forced into the exact compliance the rule was designed to compel, except he never owed it.

That is the compliance nightmare in one example: a non-filer penalty applied to someone with no filing obligation, recoverable only by becoming a filer.

The other half of the trap: PAN, Rule 37BC, and the 206AA confusion

Many NRIs who got burned conflated two separate higher-TDS rules, and it is worth pulling them apart because only one of them was abolished.

Section 206AB was the non-filer penalty. It is gone.

Section 206AA is the no-PAN penalty, and it is still very much alive. If you do not furnish a PAN to the deductor, tax is deducted at 20%, or the applicable rate, whichever is higher, and the deduction may not even show up against your name in Form 26AS and the AIS, which makes the credit hard to claim. For an NRI without a PAN, a flat 20% landed on income that might otherwise have suffered a lower treaty rate, and on NRO interest the 30% base already exceeds 20%, so 206AA usually did not raise the rate there but did jeopardise the credit.

The relief, settled by a long line of tribunal and court decisions, is that Section 206AA cannot override a lower DTAA rate if the non-resident furnishes the particulars under Rule 37BC: the TRC, the tax identification number in the home country, the address, and contact details. Furnish those, and treaty-eligible interest, royalty, fees for technical services and dividends are deducted at the treaty rate even without a PAN. This is unchanged by the 2025 reform.

So the practical hierarchy after 1 April 2025 is cleaner than it was. The non-filer flag is gone. The no-PAN penalty remains but bends to your treaty if you document it. And the base rate still bends to your treaty if you claim it properly, which is the subject of reducing NRO TDS through the DTAA.

Why the government scrapped it

The official reasoning, stated in the Finance Bill 2025 memorandum, was blunt and accurate: representations from stakeholders said it was difficult for deductors and collectors to verify whether the payee had filed a return, the verification blocked working capital, and the whole apparatus added compliance cost. The Department chose to omit Sections 206AB and 206CCA rather than patch them.

Read between the lines and the NRI problem was a symptom of the deeper flaw. The rule asked a deductor, a bank or a company, to police someone else's filing compliance at the moment of payment. That is the wrong actor at the wrong time. The bank knows your interest; it does not know your filing history except through a portal flag it cannot interrogate. The result was systematic over-deduction, both for genuine non-filers (who could often have explained themselves) and for carved-out non-residents (who should never have been flagged). The cleanest fix for a rule that puts a private party in charge of verifying a public-law obligation is to delete the rule, which is what happened.

There is a quiet honesty in the repeal that is worth naming. The state effectively conceded that pushing the filing-enforcement job onto deductors, and asking NRIs to file returns to recover money wrongly withheld under a section that excluded them, was not worth the friction. The non-filer problem is now back where it belongs: with the Department's own data systems, which already see your high-value transactions through the AIS and can chase non-filers directly.

How this fits the wider 2025-2026 TDS clean-up

The omission of 206AB and 206CCA was not a standalone gesture. It was one move in the most substantial TDS and TCS rationalisation in years, and the others matter to NRIs too.

The same Finance Act 2025 removed Section 206C(1H), the TCS on sale of goods above Rs 50 lakh, from 1 April 2025. That provision overlapped messily with the TDS on purchase of goods under Section 194Q, and businesses routinely deducted and collected on the same transaction. Killing one half ended a duplication that, while not NRI-specific, fed the same complaint: too many parallel withholding obligations on a single payment.

On the threshold side, the Budget lifted several TDS trigger points to stop small payments dragging people into the net. The TDS on interest thresholds rose. The rent threshold under Section 194-I moved to Rs 6,00,000 a year, and the individual-payer rent rule under Section 194-IB shifted to a Rs 50,000 a month test. For an NRI letting out Indian property through a resident tenant, the higher thresholds reduce the number of small deductions and certificates flying around, though the core obligation on a tenant paying an NRI landlord under Section 195 is a separate matter and unchanged.

The throughline across all of it is the same instinct that killed 206AB: fewer, simpler, higher-threshold withholding rules, and a retreat from making private deductors do the tax department's enforcement and verification work. For NRIs specifically, the single most consequential piece of that programme is the 206AB repeal, because it was the one most likely to be misapplied to you. The broader Budget 2025 and 2026 picture for NRIs sits in Budget 2026: what changed for NRIs.

What actually changes for you, and what does not

Let me be precise, because the headline "higher TDS for non-filers abolished" tempts people into expecting refunds that are not coming.

What changes. From 1 April 2025 (FY 2025-26 onward), no bank, fund house, registrar, company or tenant can deduct extra TDS, or collect extra TCS, on the ground that you did not file an Indian return. The specified-person concept is repealed. The Compliance Check flag for these sections is no longer operative. If you were among the NRIs whose NRO interest, dividends, or other Indian income was deducted at twice the normal rate because of a non-filer flag, that layer is structurally gone going forward. You no longer have to file a return purely to unwind a penalty that should never have applied.

What does not change. The base rate on NRO interest is still 30% plus surcharge and cess under Section 195. The base rate on capital gains, dividends and rent for NRIs is unchanged. Section 206AA, the no-PAN penalty, survives untouched. The way you reduce any of these to a treaty rate, by furnishing a TRC, Form 10F, and a beneficial-ownership declaration, is exactly as before. And crucially, the repeal is prospective from 1 April 2025: it does not refund the higher TDS you suffered in FY 2021-22 through FY 2024-25. For those years, your only recovery route was, and remains, filing the return for that year and claiming the refund, subject to the time limits.

Consider the contrast directly. Priya, a UK-resident NRI, had NRO-deposit interest of Rs 4,00,000 in FY 2024-25 and was flagged, suffering TDS at the doubled rate. Her correct liability, after a UK-treaty interest rate of 15% claimed properly, was around Rs 60,000, but the bank withheld roughly Rs 2,49,600 at 60% plus cess. To recover the Rs 1,89,000 difference she had to file an ITR for AY 2025-26 and claim the refund, the mechanics of which are in ITR filing for NRIs, AY 2026-27.

Her cousin Vivek, identical deposit and treaty position, earns the same interest in FY 2025-26. With 206AB gone, the bank cannot double the rate at all. If Vivek does nothing, the bank deducts the standard 30% plus cess, about Rs 1,24,800, and he files to claim back down to the treaty figure. If Vivek instead lodges his DTAA documentation with the bank up front, the bank can deduct at the 15% treaty rate, roughly Rs 62,400, and there is little or no refund to chase. Same income, same treaty, two financial years apart, and the repeal plus a treaty claim turns a Rs 1,89,000 refund scramble into a Rs 62,400 deduction handled at source. That is the practical value of the change stacked on top of doing your DTAA paperwork.

Edge cases

NRIs with a genuine permanent establishment in India. If you actually run a business through a fixed place in India, a branch, an office, a dependent agent, then you were never inside the carve-out, and 206AB could legitimately have applied to you as a non-filer. For you the repeal is a clean simplification, not a correction of a misapplication. File your Indian returns regardless; a PE means real Indian-source business income and real filing obligations.

The flag may linger in legacy systems. A repeal in the statute does not instantly reprogram every bank's batch job. Through FY 2025-26 it is worth checking your first TDS certificate of the year. If you see a deduction above the standard base rate on NRO interest and you have no permanent establishment, raise it with the bank in writing, citing the omission of Section 206AB from 1 April 2025. The over-deduction is recoverable by filing, but it is easier to stop at source than to refund.

Prior-year refunds and the closing window. If you were over-deducted in earlier years and never filed, check whether the return for that assessment year is still within the filing or updated-return window. The doubled TDS sits in your Form 26AS and AIS as credit available to you; it is your money, but only a filed return releases it, and the windows do eventually close.

Do not let the repeal make you complacent about filing. The non-filer penalty is gone, but the reasons to file an Indian return when you have Indian income are not. A return is how you claim treaty rates not given at source, recover excess TDS, carry forward capital losses, and stay clean with a Department that sees your transactions through the AIS. The repeal removed a bad stick; it did not remove the carrots.

The closing read

The honest read is that Sections 206AB and 206CCA were a well-intentioned rule that solved the government's non-filer problem by creating a worse problem for everyone in the payment chain, and for NRIs it was close to indefensible: a penalty for not filing a return many of you were never required to file, applied through a portal flag that ignored the section's own carve-out for non-residents without a permanent establishment. Scrapping it from 1 April 2025 is the right call, and it is part of a coherent 2025-2026 drift toward fewer withholding rules and higher thresholds, with the enforcement job handed back to the Department's data systems where it belongs.

For most NRIs, here is what to actually do. First, stop expecting a refund for the repeal itself; it is prospective, so any over-deduction from FY 2021-22 to FY 2024-25 is recoverable only by filing the return for that specific year, and you should check those windows now before they close. Second, for FY 2025-26 onward, confirm your first NRO-interest TDS certificate reflects the standard base rate and not a doubled one, and challenge it in writing if a legacy system still flags you. Third, and this is the lever that was always more powerful than the repeal, lodge your DTAA documentation, the TRC, Form 10F and beneficial-ownership declaration, with your bank up front so the base 30% itself comes down to your treaty rate at source rather than after a refund cycle. The repeal removed a penalty that should never have hit you. Your treaty removes the tax that legitimately can. Use both. If your situation involves a real Indian permanent establishment or several years of tangled over-deduction, that is the point to pay a chartered accountant rather than rely on a guide, this one included.

Related guides

• TDS for NRIs and how to claim refunds
• Tax on NRO interest for NRIs
• How to reduce NRO TDS using the DTAA
• Budget 2026: what changed for NRIs
• ITR filing for NRIs: AY 2026-27
• Form 26AS and the AIS for NRIs
• Capital gains tax for NRIs on shares and mutual funds
• All News and analysis
• All Taxation guides
• All Banking guides

This guide is news analysis and general in nature, not individual tax advice. The omission of Sections 206AB and 206CCA took effect on 1 April 2025 and applies prospectively; outcomes for earlier years, your permanent-establishment status, and your treaty position depend on your exact facts. Confirm your specific position with a qualified chartered accountant before acting, especially on prior-year refund claims and treaty-rate deductions at source.