CBDT Modifies PAN Inoperativeness Rules: A Critical Update for Tax Compliance

The Central Board of Direct Taxes (CBDT) has recently issued significant modifications to the rules governing inoperative Permanent Account Numbers (PANs), particularly concerning their impact on Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) liabilities. This latest move, encapsulated in Circular No. 9/2025 dated July 21, 2025, provides much-needed relief to tax deductors and collectors who have faced demand notices for short deduction or collection due to the inoperability of PANs of their deductees or collectees. For Indian lawyers and tax professionals, understanding these amended rules is paramount to ensuring compliance, mitigating risks, and effectively advising clients in the evolving landscape of tax enforcement. 

The Genesis: PAN-Aadhaar Linkage and Inoperability 

The concept of an "inoperative PAN" is intrinsically linked to the government's mandate for linking Permanent Account Numbers with Aadhaar. Section 139AA of the Income-tax Act, 1961, made it mandatory for every person who has been allotted a PAN as of July 1, 2017, and who is eligible to obtain an Aadhaar number, to link their PAN with Aadhaar. The deadline for this linkage has been extended multiple times, with the latest effective date for PANs to become inoperative being July 1, 2023, if not linked with Aadhaar. 

Prior to the recent modifications, an inoperative PAN carried severe consequences as per Rule 114AAA of the Income-tax Rules, 1962, and CBDT Circular No. 3/2023 dated March 28, 2023. These consequences included: 

• No Tax Refunds: Refunds of any tax amount could not be made to the taxpayer. 

• No Interest on Refunds: Interest on such refunds was not payable for the period during which the PAN remained inoperative. 

• Higher TDS/TCS: Tax was required to be deducted or collected at a higher rate as per Section 206AA (for TDS) and Section 206CC (for TCS) of the Income-tax Act, 1961. This often meant a default rate of 20%, significantly higher than the standard rates. 

• Inability to file ITR: Taxpayers with inoperative PANs could not file their Income Tax Returns. 

• Other Financial Transaction Restrictions: Various financial transactions, such as opening new bank accounts, investing in mutual funds, or transactions involving sale/purchase of goods/services exceeding certain thresholds, were restricted or subjected to higher scrutiny. 

The onus to deduct/collect tax at higher rates fell on the deductor/collector. However, many taxpayers (deductees/collectees) failed to link their Aadhaar with PAN, leading to their PANs becoming inoperative. Consequently, deductors/collectors, often unaware of the inoperative status at the time of transaction, deducted TDS/TCS at normal rates, only to later receive notices from the Income Tax Department for "short-deduction/collection" under Section 200A (for TDS) or Section 206CB (for TCS). This caused significant hardship and compliance challenges for businesses and individuals alike. 

To address these grievances, the CBDT had earlier issued Circular No. 6/2024 dated April 23, 2024, which provided relief for transactions entered into up to March 31, 2024, provided the PAN became operative (through Aadhaar linkage) on or before May 31, 2024. However, the problem persisted for transactions occurring after this date. 

The New Relief: CBDT Circular No. 9/2025 

Recognizing the continued difficulties faced by deductors and collectors, CBDT has now issued Circular No. 9/2025 dated July 21, 2025, which modifies the earlier guidelines. This circular brings substantial relief by clarifying the applicability of higher TDS/TCS rates under Sections 206AA and 206CC in specific scenarios where the PAN of the deductee/collectee was inoperative at the time of the transaction but later became operative. 

The key modifications introduced by Circular No. 9/2025 are as follows: 

1. For payments or credits made between April 1, 2024, and July 31, 2025: 

2. If the PAN of the deductee/collectee was inoperative at the time of such payment or credit, the deductor/collector will not be held liable for deduction/collection at higher rates under Section 206AA or 206CC. 

3. This relief is contingent upon the PAN being made operative (through Aadhaar linkage) on or before September 30, 2025. 

4. In such cases, the normal TDS/TCS deduction/collection rates, as mandated by other provisions of Chapter XVII-B or Chapter XVII-BB of the Act, will be applicable. 

5. For payments or credits made on or after August 1, 2025: 

6. If the PAN of the deductee/collectee is inoperative at the time of such payment or credit, the deductor/collector will not be held liable for deduction/collection at higher rates under Section 206AA or 206CC. 

7. This relief is applicable if the PAN is made operative (through Aadhaar linkage) within two months from the end of the month in which the amount is paid or credited. 

8. Similar to the above, normal TDS/TCS rates will apply in these cases. 

Practical Impact and Illustrations 

These modifications provide a crucial window of opportunity for both deductors/collectors and deductees/collectees to regularize their compliance. 

Example 1: Transaction between April 1, 2024, and July 31, 2025 

• Company A paid professional fees to Mr. X (a freelancer) of ₹1,00,000 in May 2024. Mr. X's PAN was inoperative at that time. Company A deducted TDS at 10% (₹10,000) under Section 194J, instead of 20% under Section 206AA. 

• Under the old rules, Company A would have received a demand notice for short deduction of ₹10,000. 

• Under the new Circular No. 9/2025, if Mr. X links his Aadhaar with PAN and makes his PAN operative by September 30, 2025, Company A will not be liable for the higher TDS under Section 206AA. The original 10% TDS will be considered valid. 

Example 2: Transaction on or after August 1, 2025 

• Ms. Y purchased a property from Mr. Z for ₹70,00,000 on August 5, 2025. Mr. Z's PAN was inoperative. Ms. Y deducted TDS at 1% (₹70,000) under Section 194-IA, instead of 20%. 

• Under the new Circular No. 9/2025, if Mr. Z links his Aadhaar with PAN and makes it operative by October 31, 2025 (within two months from the end of August 2025), Ms. Y will not be held liable for the higher TDS under Section 206AA. The 1% TDS deducted will be considered compliant. 

This relief is particularly significant for large organizations that process numerous transactions and may not always have real-time information on the PAN operability status of all their deductees/collectees. It shifts the focus from penalizing unintentional non-compliance to encouraging proactive regularization of PAN-Aadhaar linkage. 

Implications for Indian Lawyers and Tax Professionals 

The CBDT's latest circular holds several key implications for legal and tax professionals: 

1. Advisory Role: Lawyers and Chartered Accountants will be crucial in advising their clients (both deductors/collectors and deductees/collectees) on these updated rules. This includes: 

2. Educating Deductors/Collectors: Informing businesses about the grace periods and deadlines to avoid future demand notices. They must understand that proactive follow-up with deductees/collectees to get their PANs operative is now even more critical. 

3. Guiding Deductees/Collectees: Advising individuals whose PANs are inoperative on the urgency of linking Aadhaar to PAN, explaining the steps involved (including the ₹1,000 fee for belated linkage), and the benefits of becoming compliant to avoid higher TDS/TCS and other restrictions. 

4. Impact on Form 26AS/AIS: Clarifying that once a PAN becomes operative, the TDS/TCS credit will reflect correctly in Form 26AS/Annual Information Statement (AIS), enabling taxpayers to claim their rightful credit while filing ITR. 

5. Dispute Resolution: For cases where demand notices for short deduction/collection have already been raised for transactions falling within the specified periods, lawyers can now leverage this circular to seek the withdrawal or cancellation of such demands. This requires presenting evidence that the deductee/collectee subsequently made their PAN operative within the new prescribed timelines. 

6. Compliance Management: Tax compliance strategies for businesses will need to be updated. While the circular provides relief, it does not absolve the responsibility of due diligence. Businesses should implement robust systems to: 

7. Verify PAN Status: Regularly check the operability status of PANs of vendors, employees, and other deductees/collectees. The Income Tax e-filing portal provides a utility for this. 

8. Communicate with Stakeholders: Proactively communicate with parties whose PANs are inoperative, urging them to link their Aadhaar to avoid complications. 

9. Maintain Records: Document all communications and efforts made to ensure PAN operability, which can serve as evidence in case of future queries from the tax authorities. 

10. Legislative Intent: The circular underscores the legislative intent behind the PAN-Aadhaar linkage, which is primarily to broaden the tax base, prevent tax evasion, and streamline tax administration. While the penalties for non-compliance are strict, the CBDT's pragmatic approach in issuing such reliefs demonstrates a willingness to mitigate genuine hardships faced by compliant taxpayers due to systemic or awareness gaps. 

11. Future Outlook: While this circular provides significant relief, it is crucial for professionals to remain updated on any further amendments or clarifications. The emphasis on Aadhaar-PAN linkage is unlikely to diminish, and future policies may introduce more stringent measures for continued non-compliance after these grace periods. 

Exemptions from PAN-Aadhaar Linking 

It is also important for lawyers to remember the categories of individuals who are exempt from mandatory PAN-Aadhaar linkage, as per Notification No. 37/2017: 

• Residents of the States of Assam, Jammu and Kashmir, and Meghalaya. 

• Non-Resident Indians (NRIs) as per the Income-tax Act, 1961. 

• Individuals of the age of eighty years or more at any time during the previous year. 

• Persons who are not citizens of India. 

For these exempted categories, the consequences of an inoperative PAN due to non-linkage would not apply. However, if such individuals voluntarily choose to link their PAN with Aadhaar, they would still need to pay the prescribed fee. 

Conclusion 

The CBDT's modification of PAN inoperativeness rules through Circular No. 9/2025 is a timely and pragmatic response to the challenges faced by taxpayers, particularly deductors and collectors. By providing grace periods for regularization of PAN-Aadhaar linkage, the Board aims to streamline tax administration and reduce unwarranted demands for short TDS/TCS. 

For Indian lawyers specializing in tax and corporate law, this circular necessitates a swift update of their advisory frameworks. It reinforces the importance of meticulous compliance, proactive client communication, and a keen understanding of evolving tax regulations. As the tax ecosystem continues its digital transformation, staying abreast of such critical modifications will be indispensable for legal professionals to effectively guide their clients through the intricacies of India's tax laws. The current modifications provide a crucial reprieve, but the underlying mandate for PAN-Aadhaar linkage remains a fundamental pillar of India's tax compliance regime.