Higher TDS/TCS on Inoperative PANs? CBDT's New Circular Brings Major Relief for Deductors & Collectors!

New Delhi, July 22, 2025: In a significant move that brings much-needed relief to businesses and individuals, the Central Board of Direct Taxes (CBDT) has issued Circular No. 9/2025 today, July 22, 2025. This circular provides important changes to earlier directives, mainly focusing on the high TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) rates applied to transactions with inoperative PANs.

For months, many taxpayers acting as deductors or collectors have been receiving demand notices for "short-deduction/collection" of TDS/TCS. This situation arose when they processed payments to individuals whose Permanent Account Numbers (PANs) had become inoperative due to not linking with Aadhaar. As a result, tax was not deducted or collected at the higher rate required under Sections 206AA or 206CC of the Income-tax Act, 1961. The processing of TDS/TCS statements under sections 200A or 206CB then triggered these demands.

Recognizing the real issues and challenges faced by these deductors and collectors, the CBDT has acted to clarify and lessen these liabilities. This new circular is a partial update and continuation of Circular No. 3 of 2023, dated March 28, 2023, which first explained the penalties for inoperative PANs effective from July 1, 2023. It also builds on Circular No. 6 of 2024, dated April 23, 2024, which provided some initial relief.

The Core of the Relief: No Higher TDS/TCS Liability in These Cases

The most important part of Circular No. 9/2025 is the clear exemption from higher TDS/TCS liability for deductors or collectors in two specific situations, as long as the inoperative PAN is made operative within set timelines:

1. For amounts paid or credited between April 1, 2024, and July 31, 2025:
   If the PAN of the deductee or collectee is made operative (by linking with Aadhaar) on or before September 30, 2025, then the deductor or collector will not have to deduct or collect tax at the higher rates specified under sections 206AA or 206CC. In such cases, the normal TDS/TCS rules (as per other sections of Chapter XVII-B or Chapter XVII-BB of the Act) will apply.
2. For amounts paid or credited on or after August 1, 2025:
   If the PAN of the deductee or collectee is made operative (by linking with Aadhaar) within two months from the end of the month in which the amount is paid or credited, then the deductor or collector will again not be liable for the higher TDS/TCS rates under sections 206AA or 206CC. The normal TDS/TCS rates will apply.

Why This Circular is a Game-Changer

• Addresses a Long-Standing Grievance: This circular directly responds to a significant issue for businesses and individuals who faced penalties despite genuine efforts, simply because the deductee's or collectee's PAN was inoperative.
• Provides Retrospective and Prospective Relief: The relief covers transactions from April 1, 2024, onward, allowing time to resolve past issues. It also sets clear guidelines for future transactions from August 1, 2025.
• Encourages PAN-Aadhaar Linkage: By linking the relief to the PAN becoming operative, the CBDT continues to promote universal PAN-Aadhaar linkage, which is key for an efficient tax system.
• Reduces Compliance Burden: Deductors and collectors will no longer have to worry about the higher TDS/TCS rates if the recipient ensures their PAN is operative within the required time frames. This will greatly reduce the administrative burden and potential for disputes.
• A Fairer Approach: This move shows the CBDT's willingness to respond to taxpayer feedback and its commitment to ensuring that genuine difficulties do not lead to unfair penalties.

What Does This Mean for You?

If you are a Deductor or Collector:

• Review your past transactions: If you have received notices for short-deduction/collection for transactions between April 1, 2024, and now where the deductee's or collectee's PAN was inoperative, reach out to them.
• Inform your deductees or collectees: Advise them strongly to link their PAN with Aadhaar as soon as possible, especially if the transaction falls within the specified periods.
• Monitor PAN status: For future transactions, it's wise to check the operational status of the recipient's PAN to avoid any potential issues, even with this new relief.

If you are a Deductee or Collectee with an Inoperative PAN:

• Link your PAN with Aadhaar immediately: If your PAN is inoperative, link it to your Aadhaar without delay. This is important for TDS/TCS, many other financial transactions, and receiving tax refunds.
• Communicate with your deductor or collector: Once your PAN becomes operative, inform the entity that deducted or collected tax from you. This will help them update their TDS/TCS statements if needed.

Important Dates to Remember:

• July 1, 2023: Date from which PANs became inoperative if not linked with Aadhaar (as per Circular No. 3 of 2023).
• April 1, 2024 - July 31, 2025: Transactions during this period will get relief if the PAN is made operative by September 30, 2025.
• August 1, 2025 onward: For transactions from this date, relief is available if the PAN is made operative within two months from the end of the month of payment or credit.

This latest circular from the CBDT is welcome news and a positive step toward resolving a complex compliance issue. It clearly shows that the tax authorities are listening to taxpayers' concerns. Make sure you and your business stay compliant by understanding these changes and taking timely action!

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