Section 206AB ran from 2021 to 2025 and doubled TDS for non-filers. Most NRIs were exempt the whole time. Most banks didn't notice.

Section 206AB ran from 1 July 2021 to 31 March 2025. Finance Act 2025 repealed it. If a bank, AMC, or other Indian payer is deducting higher TDS from you today, it is not because of Section 206AB — that rule no longer exists.

The section is still worth understanding for one reason: if you were an NRI between FY 2021-22 and FY 2024-25 and your bank applied the higher rate on your NRO interest or other Indian income, that over-deduction is recoverable. The amount is sitting at the tax department under your PAN, waiting for a refund claim or condonation petition.

Here's how the rule worked while it was live. If you didn't file an income tax return for the previous year, and the total TDS deducted from you crossed ₹50,000 in that year, the next time anyone paid you something taxable, they were supposed to deduct TDS at twice the normal rate. Or 5%. Whichever was higher.

(The original 2021 version of the rule looked at two prior years. Finance Act 2022 tightened it to a single prior year, effective 1 April 2022.)

The idea was to push chronic non-filers back into the system by making non-filing expensive. To make it checkable, the income tax department built a tool — the Compliance Check Functionality. Any payer (bank, AMC, employer) plugged your PAN into the tool. The tool returned one of two answers: 'Specified person — apply higher rate' or 'Not specified — apply normal rate'. The payer followed the tool. No judgment, no nuance.

For resident Indians, it worked as intended. For NRIs, there was a wrinkle the tool didn't catch.

When Section 206AB was drafted in 2021, it was paired with an exemption written into the section itself. Non-residents who didn't have a permanent establishment in India were excluded from Section 206AB altogether. The exemption was there from 1 July 2021, the day the section took effect. A 'permanent establishment' here meant a fixed place of business in India — a branch, an office, a factory. The ordinary NRI working abroad, holding NRO and NRE accounts, owning some Indian shares and a flat in Bengaluru, did not have a PE.

In plain terms: if you were an NRI without a business presence in India during FY 2021-22 to FY 2024-25, Section 206AB did not apply to you. Your bank should have been deducting at the normal rate even if you'd never filed an Indian ITR.

The carve-out was real, it sat inside the statute from the day the section took effect, and it covered the overwhelming majority of NRIs. The problem is what happened next.

The Compliance Check tool was built around the PAN. It didn't ask the payer whether the PAN-holder was resident or non-resident. It didn't ask whether the PAN-holder had a permanent establishment. It just checked the ITR filing history and spat out a verdict.

For an NRI who hadn't filed an ITR — because they didn't have to — the tool said 'specified person — apply higher rate'. The bank's compliance officer read the tool's answer and applied the higher rate. The fact that the carve-out existed, that the NRI was exempt, never entered the workflow.

Most banks did not build the second layer — the manual override that should have caught the non-resident-without-PE carve-out before deducting. A few did. ICICI's NRI desk and HDFC's premium NRI banking would sometimes apply the override if you escalated. Most other banks wouldn't, because the system flagged you and overriding the flag created audit risk for them.

The practical result: your NRO FD interest got deducted at 60% instead of 30%. Or 25% instead of 12.5% on a treaty-rated transaction. The over-deduction showed up on your Form 26AS at the end of the quarter, by which point it had already gone to the tax department. Multiply that across four financial years of NRO interest, treaty-rated dividends, and mutual fund redemptions and the trapped amount per NRI is often in the lakhs.

There was a cascading problem here while 206AB was live. An NRI who only earned NRO interest in India had no legal obligation to file an ITR, because the bank's TDS already covered their entire Indian tax liability. So they didn't file. After the prior year of not filing, the Compliance Check tool flagged them as a specified person. The carve-out should have kicked in, but the bank didn't apply it. So their TDS doubled.

The fix back then — and still good practice today even after 206AB's repeal — was to file an ITR anyway. Even if your net tax owed is zero, even if you have no taxable income beyond the already-TDS'd interest, file. The mere act of filing kept you off the specified-person list. It also gives you the auxiliary benefit of any DTAA refund the bank's TDS over-collected against your treaty rate. ITR-2 is the form. Even when there's nothing to recover under 206AB any more, filing it gives you a clean record at the tax department and unlocks treaty-rate refunds that may otherwise sit trapped.

While Section 206AB was live, the non-resident-without-PE carve-out was a status-based exemption. The moment you became a tax resident of India under the residence test (the day-count rule under Section 6), the carve-out stopped applying. You became a regular Indian taxpayer for the purposes of Section 206AB.

Returning NRIs caught in this transition between 2021 and 2025 were a common over-deduction scenario. They'd never filed an Indian ITR as an NRI. Once their PAN flipped to resident, the Compliance Check tool flagged them as a specified person, and any payer applied the higher rate.

Section 206AB doesn't catch them any more. But the broader practice still holds: file an ITR for the year of return and every subsequent year, even if the RNOR window means your tax owed is small. The filing keeps you visible at the tax department, unlocks DTAA refunds where the bank over-deducted, and avoids the friction that 206AB used to create — and that a future re-introduction of a similar rule could re-create.

If your NRO interest, treaty-rated dividend, or mutual fund redemption was hit with the higher rate any time between FY 2021-22 and FY 2024-25, the recovery path is mechanical. The over-deducted amount is not lost — it's sitting at the tax department under your PAN. You recover it by filing an ITR for the year and claiming the excess back as a refund.

For years where you missed the original filing deadline, you can still recover up to five assessment years back using the condonation-of-delay route under Section 119(2)(b) of the Act. A CA familiar with that route files the condonation petition and a revised return; the recovery is real but the process takes 6-12 months. Under CBDT Circular 11/2024, the five-year window runs from the end of the assessment year — so as of June 2026, AYs 2021-22 onwards are still inside the window.

Going forward (FY 2025-26 onwards): the 206AB higher-rate problem no longer exists, because the section is gone. Banks deduct at the normal rate or, where you've filed Form 10F + TRC, at your DTAA rate. If a bank is still applying a higher rate today, it's not 206AB — escalate to find out which other section they're citing. Common culprits in 2026 are missing Form 10F, missing TRC, or a stale PAN-Aadhaar linking flag.