Inoperative PAN? No Tax Penalty If Aadhaar Is Linked On Time In These Cases

If you recently got a tax demand notice because of a transaction involving an inoperative PAN, there is some relief on the way. The Income Tax Department, through a fresh circular issued on July 21, 2025, has said that such demands will be withdrawn, but only if the inactive PAN is reactivated by linking it to Aadhaar within specified timelines.

This update comes after months of confusion and multiple complaints filed by taxpayers, the Central Board of Direct Taxes noted in its release.

Many individuals and businesses had received tax notices simply because the PAN of the person they made a payment to was not linked to Aadhaar and had therefore been declared inoperative. And when a PAN is inactive, the law says a higher rate of Tax Deducted at Source (TDS) (or Tax Credited at Source - TCS) must be applied, usually 20 per cent instead of the standard 1 per cent or 10 per cent. That did not always happen, especially when the deductor was not aware of the PAN status.

Now, the tax department has said that such demands will not hold if the recipient of the payment (whose PAN was inactive) regularises it by linking with Aadhaar within the new deadlines.

Two Key Relief Windows:

The circular lays down two different cut-off periods:

Payments made between April 1, 2024, and July 31, 2025: If the PAN is made operative on or before September 30, 2025, the deductor or collector won’t be held responsible for not applying the higher rate.

Payments made on or after August 1, 2025: If the PAN is reactivated within two months from the end of the month in which the payment was made, the deductor or collector will be protected from penalty.

In short, no TDS or TCS shortfall demand will apply in either case, as long as the PAN issue is fixed in time.

The Property Buyer Problem

This is especially relevant for those who have bought property in the last year or so. Under tax rules, buyers of property worth Rs 50 lakh or more must deduct 1 per cent TDS before paying the seller. But if the seller’s PAN is inactive, the buyer is technically supposed to deduct 20 per cent. Many did not do this either because they never checked the PAN status or simply weren’t aware.

As a result, plenty of property buyers have received demand notices from the tax department, asking them to cough up the remaining 19 per cent. This circular now offers them a way out, if the seller’s PAN is linked to Aadhaar and made active again by the applicable deadline.

Not Just Property Deals

The relief is not limited to real estate. It applies to any transaction where TDS or TCS is applicable such as professional fees, contractor payments, commissions, interest income, and more. If a company paid a consultant Rs 60,000 in May 2024 and deducted 10 per cent TDS without knowing the PAN was inactive, they won’t face any consequences if the consultant links Aadhaar and reactivates their PAN by September 30, 2025.

The same goes for businesses that made contractor payments, deducted TDS at the standard rate, but later got flagged due to inoperative PANs. The notices in such cases can now be withdrawn.

Why This Relief Now?

According to the CBDT, the department has been receiving a large number of grievances from deductors and collectors who ended up facing demands even though the responsibility to maintain a valid PAN lies with the payee. Processing of TDS/TCS statements under sections 200A and 206CB led to automatic demand generation, leaving many stuck with notices for no genuine fault of their own.

The current circular is essentially an acknowledgement of that, and an attempt to fix it.

However, just because there is relief now does not mean that the PAN-Aadhaar linking can be taken lightly. PANs that remain inoperative can still cause problems, especially if deadlines are missed. Also, this waiver doesn’t apply to all tax defaults, only those where the issue was the inactive PAN and the deductor used the standard TDS/TCS rate in good faith.