Inoperative PANs and Higher TDS/TCS: CBDT Offers Significant Relief
New Delhi: The Income Tax Department, through the Central Board of Direct Taxes (CBDT), has announced crucial relief for taxpayers and businesses concerning higher Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) rates applied when Permanent Account Numbers (PANs) are inoperative.
The Root of the Problem:
As per Rule 114AAA of the Income-tax Rules, a PAN becomes inoperative if it isn’t linked with Aadhaar. This triggers higher TDS and TCS rates under sections 206AA and 206CC of the Income Tax Act, respectively. Consequently, many businesses and individuals received notices for “short deduction” or “short collection” when they applied normal rates to transactions involving inoperative PANs of their clients or vendors.
Earlier Attempts at Relief:
Previously, the CBDT had offered a grace period until March 31, 2024, provided the inoperative PAN was linked with Aadhaar by May 31, 2024. Despite this, numerous default notices continued to be issued.
The Latest Clarification and Extended Relief (Circular No. 09/2025 dated July 21, 2025):
The CBDT has now provided further, much-needed extensions and clarifications:
- For Payments from April 1, 2024, to July 31, 2025: If an inoperative PAN is made active by linking with Aadhaar on or before September 30, 2025, the higher TDS/TCS rates will not apply. This means deductors and collectors will not be held liable for short deduction/collection during this period if the PAN is subsequently regularized by the new deadline.
- For Payments on or after August 1, 2025: For transactions occurring from this date onwards, if an inoperative PAN is made operative within two months from the end of the month in which the payment was made, the higher TDS/TCS rates will not be levied.
Implications for Taxpayers and Businesses:
This move is a welcome development, significantly reducing the compliance burden and potential penalties for genuine taxpayers:
- No Liability for Short Deduction/Collection: Deductors and collectors will be absolved of liability for applying normal TDS/TCS rates if the conditions for making the PAN operative are met within the new deadlines.
- Standard Rates Apply: Provided the PAN linkage occurs as per the revised timelines, only the regular TDS/TCS rates, as stipulated by the Income-tax Act, will be applicable.
- Reduced Hardship: The clarification aims to mitigate financial hardships and prevent unnecessary demands arising from technical compliance issues.
Immediate Action Recommended:
- Link PAN with Aadhaar: Prioritize linking your PAN with Aadhaar if you haven’t already.
- Review Notices: If you have received any notices for short deduction/collection, check if your case falls under the scope of this new relief.
- Maintain Records: It is crucial to keep thorough proof that the PAN was made operative within the timelines specified by the CBDT.
This proactive step by the CBDT is set to provide substantial relief and streamline compliance for businesses and individuals grappling with inoperative PAN-related issues.