2025 Update: CBDT Offers Breather on TDS Notices Due to PAN-Aadhaar Issue

In a significant move that brings much-needed relief to many taxpayers, the Central Board of Direct Taxes (CBDT) has announced a waiver from tax demand notices due to short deduction of tax at source (TDS) because the PAN of the deductee was inoperative. This development, detailed in CBDT Circular No. 9/2025 dated July 21, 2025, allows taxpayers to regularize their compliance without facing hefty penalties.

This blog post breaks down the issue, the relief provided, who stands to benefit, and the key deadlines to keep in mind.

Understanding the Problem: Higher Tax Deductions for Inactive PANs

The Income Tax Act, 1961, requires that every person with a Permanent Account Number (PAN) link it with their Aadhaar number. If this is not done by the deadline, the PAN becomes "inoperative."

One major consequence of an inoperative PAN is that tax must be deducted at a higher rate. According to the Income Tax Act, if the PAN of the person receiving the payment (deductee) is inoperative, the person making the payment (deductor) must deduct TDS at a significantly higher rate, which may be twice the normal rate or 20%, whichever is higher.

This resulted in many deductors, unaware that the deductee's PAN was inoperative, continuing to deduct TDS at the standard lower rates. Consequently, the Income Tax Department issued numerous tax demand notices to these deductors for "short deduction" of TDS. This created a significant compliance burden and financial strain for many individuals and businesses. A common example involves property transactions where the buyer must deduct TDS. If the seller's PAN was inoperative, the buyer faced an obligation to deduct a much higher TDS, leading to substantial demand notices for the shortfall.

The Lifeline: CBDT's Relief Measures

Recognizing the real hardships faced by taxpayers, the CBDT has introduced a conditional relief. The main point of the relief is that no demand for short deduction of TDS will be raised against the deductor, as long as the deductee links their PAN with Aadhaar by a certain date, making the PAN operative again.

The relief depends on when the transaction took place:

• For transactions between April 1, 2024, and July 31, 2025: If the deductee's PAN becomes operative on or before September 30, 2025, the demand for short deduction of TDS will be waived.
• For transactions on or after August 1, 2025: The relief is available if the deductee's PAN is made operative within two months after the end of the month in which the transaction occurred.

It is essential to note that this relief only applies to the higher TDS rate due to an inoperative PAN. The deductor must still deduct and deposit TDS at the standard applicable rates for those transactions.

Who Benefits from This Relief?

This announcement provides significant relief for a wide range of taxpayers, including:

• Individuals and businesses that have received tax demand notices for short deduction of TDS due to the inoperative PAN of their vendors, service providers, or other payees.
• Property buyers issued demand notices for deducting TDS at the standard rate instead of the higher rate from sellers whose PANs were not linked with Aadhaar.
• Employers who may have deducted TDS at normal rates for employees whose PANs were inoperative.
• Any person or entity responsible for deducting TDS who has unintentionally not complied with the higher TDS rate requirement for payments made to individuals with inoperative PANs.

What You Need to Do: Actionable Steps

If you are a deductor who has received a demand notice for short deduction of TDS due to an inoperative PAN, the immediate action is to:

• Inform the Deductee: Contact the person to whom the payment was made and urge them to link their PAN with Aadhaar if they haven't done so already.
• Ensure PAN is Operative by the Deadline: For transactions up to July 31, 2025, the deductee's PAN must be made operative by September 30, 2025. For later transactions, the two-month window must be strictly followed.
• Track the Status: Verify the operative status of a PAN on the Income Tax e-filing portal.
• Respond to the Notice (if applicable): Once the PAN is operative, provide this information to the tax authorities in response to the demand notice.

For deductees, the message is clear: link your PAN with Aadhaar without delay. This will save your deductors from potential financial liabilities and ensure your financial transactions and tax-related processes proceed smoothly.

Conclusion

The CBDT's circular is a practical and welcome step that acknowledges the challenges faced by taxpayers. It offers a fair chance for correction and eases the burden of significant and often unintentional tax demands. However, it is crucial for both deductors and deductees to be proactive and ensure compliance within the specified timelines to take advantage of this relief. Moving forward, all taxpayers should verify the PAN status of the parties they transact with to avoid complications in the future.

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