Inoperative PAN card: CBDT offers relief to TDS, TCS deductors and collectors from tax notices

The Central Board of Direct Taxes (CBDT) has partially modified the rule about the consequences of not linking PAN with Aadhaar. The change will benefit tax deductors and collectors who received tax demand notices after deducting/collecting tax from inoperative PAN card holders at a lower rate.

As per the rules announced by the CBDT from time to time in the last few years, a PAN card becomes inoperative when it is not linked to Aadhaar. Taxpayers holding inoperative PAN cards have to pay TDS/TCS at higher rates of up to 20%. However, the onus of collecting or deducting tax at higher rates from inoperative PAN card holders is on tax deductors and collectors.

However, many tax deductors and collectors failed to deduct TDS/TCS at higher rates from inoperative PAN card holders and received income tax demand notices stating they had committed a default of "Short deduction/collection". The CBDT had provided some relief to such deductors/collectors in 2024. However, given more grievances, the Board has once again offered relief.

Let's understand what the issue is in more detail, including what the CBDT has said.

What were the consequences of inoperative PAN?

• No refund of any amount of tax
• No payment of interest on such refund till the PAN becomes operative
• Where tax is deductible at source (TDS), tax shall be deducted at a higher rate from such persons
• Where tax is collectible at source, tax shall be collected at a higher rate.

Why the new decision

The CBDT has modified the rule after receiving several grievances from taxpayers who claimed they had received tax notices stating that they had committed a default of "short deduction/collection" of TDS/TCS while carrying out transactions where the PANs of the deductees/collectees were inoperative.

Tax demands were raised against such deductors/collectors in cases where they had not made deductions/collections at a higher rate.

"Several grievances have been received from the taxpayers that they are in receipt of notices intimating that they have committed default of 'short deduction/collection' of TDS/TCS while carrying out the transactions where the PANs of the deductees/collectees were inoperative," the CBDT said in a circular dated July 21, 2025.

"In such cases, as the deduction/collection has not been made at a higher rate, demands have been raised by the Department against the deductors/collectors while processing of TDS/TCS statements under section 200A or under section 206CB of the Act, as the case maybe," it added.

What's new for tad deductors and collectors?

The CBDT has clarified that there will be no liability on the deductor/collector under section 206AA/206CC of Income tax Act in following cases:

• Where the amount is paid or credited from April 1, 2024 to July 31, 2025 and the PAN is made operative (as a result of linkage with Aadhaar) on or before September 30, 2025.

• Where the amount is paid or credited on or after August 1, 2025 and the PAN is made operative (as a result of linkage with Aadhaar) within two months from the end of the month in which the amount is paid or credited.