CBDT Offers Relief on TDS/TCS Defaults Due to Inoperative PANs

The Central Board of Direct Taxes (CBDT) has issued an important circular – Circular No. 9/2025 dated July 21, 2025, giving a major relief to taxpayers and tax deductors who received notices for short deduction or collection of TDS/TCS due to the use of inoperative PANs.

If you’ve recently received a tax demand notice, deducted TDS on a property deal, or made a payment to someone whose PAN wasn’t linked with Aadhaar, this official update from the Income Tax Department may help you avoid penalties.

Let’s break down this update in simple terms and explain what you need to do.

Background

According to earlier Circular No. 3 of 2023, all PANs not linked with Aadhaar by July 1, 2023, were marked inoperative, invoking higher TDS/TCS rates under Sections 206AA and 206CC of the Income-tax Act, 1961.

Later, Circular No. 6 of 2024 allowed relief for such transactions up to March 31, 2024, if the PANs were linked and made operative on or before May 31, 2024.

However, even after this relief, many deductors and collectors continued to receive demand notices for short deduction or collection, especially where PANs were inoperative during the transaction but later made valid.

PAN-Aadhaar Linking: CBDT’s New Rules and Relief on TDS/TCS Defaults

The Income Tax Department understands that many deductors/donors made payments at normal TDS rates without knowing the PAN was inactive. So, the government is now giving them more time to ensure PANs are made operative.

Here’s the summary of the relief:

Transactions Between April 1, 2024, and July 31, 2025

• If the PAN was inoperative during the transaction: No penalty or demand notice will be enforced if the PAN is made operative by September 30, 2025.

Transactions On or After August 1, 2025

• If the PAN was inoperative during the transaction: Relief is available if the PAN is linked with Aadhaar within 2 months from the end of the month in which the transaction took place

Examples to Help You Understand

Property Buyer Case

• You bought a property worth ₹80 lakh on June 15, 2024, and deducted 1% TDS (₹80,000) from the seller.
• Later, you received a tax notice saying the seller’s PAN was inoperative, and you should’ve deducted 20% (₹16,00,000). That’s a huge shortfall.
• Now, if the seller links PAN with Aadhaar by September 30, 2025, the notice will be cancelled. You don’t need to pay the shortfall.

Freelancer or Consultant Case

• You hired a freelancer in May 2024 and paid them ₹60,000. You deducted 10% TDS (₹6,000) as per Section 194J.
• Later, the tax department says you should’ve deducted 20% because the freelancer’s PAN was inactive. That’s an extra ₹6,000.
• But if the freelancer links their PAN before September 30, 2025, you’re safe — no extra tax or penalty.

Why This Update Is Important for Taxpayers

Many taxpayers have been receiving income tax demand notices for short deduction of TDS or short collection of TCS because the PAN of the other person involved in the transaction was not linked with Aadhaar, and hence marked inoperative.

What happens when a PAN becomes inoperative?

According to Rule 114AAA of the Income Tax Rules:

• You cannot file your ITR if your PAN is inactive.
• Anyone paying you must deduct TDS at a higher rate — usually 20%.
• This leads to confusion and extra tax burdens, especially in property deals, freelancer payments, and contract work.

The CBDT has now given a grace period and announced new deadlines to help honest taxpayers avoid penalties.

Also read the CBDT clarification on the Consequences of Failure to link PAN with Aadhaar

Who Should Pay Attention to This?

This relief applies to:

• Property buyers (under Section 194-IA)
• Employers, business owners, and startups hiring freelancers or consultants
• Companies making TDS/TCS payments
• TCS collectors selling goods or services
• Anyone who received a tax notice related to inoperative PAN transactions

How to Check and Link PAN with Aadhaar

• Visit: https://www.incometax.gov.in
• Click on “Link Aadhaar” under Quick Links.
• Enter PAN, Aadhaar number, and pay the applicable fee (₹500 or ₹1,000).
• Link successfully and wait for confirmation via SMS/email.
• Once PAN is linked, it becomes operative again.

Click here to get the complete process of linking PAN with Aadhaar

Important Deadlines to Remember

Miss these deadlines and you’ll be liable to pay the TDS/TCS shortfall along with interest or penalty.

Key Takeaway

• Check the PAN status of sellers, contractors, service providers, or payees before deducting TDS.
• Inform parties with inoperative PANs to link them with Aadhaar immediately to avoid penalties.
• Respond to any TDS/TCS-related tax notice in light of CBDT Circular No. 9/2025 — relief may apply.
• Don’t ignore PAN status — deducting TDS at standard rates on inoperative PANs can trigger demand notices.
• Don’t delay — PAN-Aadhaar linking and activation take time. Early action ensures compliance.
• Review all transactions made since April 1, 2024 and ensure affected PANs are regularised within the deadlines.
• Take action now to avoid unnecessary tax demands, interest, and penalties in future assessments.

Act now, stay compliant, and save yourself from unwanted tax troubles.

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