TDS Demand on Inoperative PAN Due to PAN–Aadhaar Non-Linking: Remedies When No CBDT Relief Applies

A persistent compliance challenge confronting deductors and assessees alike involves situations where tax was deducted or collected at the standard prescribed rate, yet the Income Tax Department subsequently raises a higher-rate demand during processing — solely because the payee's or collectee's PAN had turned inoperative on account of non-linkage with Aadhaar. This issue has acquired particular significance in property-related transactions processed under Section 194-IA through Form 26QB, and across other withholding scenarios governed by Section 206AA and Section 206CC of the Income Tax Act, 1961.

Critically, the legal position governing this issue is not derived from a single circular or standalone notification. Instead, it emerges from an interconnected chain of statutory provisions, CBDT circulars, departmental notifications, and portal-level clarifications. The relief available — and the course of action when no relief applies — depends squarely on the date of the original transaction, the date on which the PAN was restored to operative status, and whether the concerned person belongs to an exempt category.

This article systematically sets out the entire official regulatory framework applicable to this issue and, more importantly, walks through the practical remedial options available to an assessee or deductor when their case does not fall within any of the CBDT relaxation windows.

1. The Foundational Statutory Framework

The Aadhaar–PAN Linkage Mandate

Section 139AA of the Income Tax Act, 1961 casts an obligation on specified PAN holders who are eligible for Aadhaar to intimate their Aadhaar number in the prescribed manner. However, this requirement does not apply universally. Certain classes of persons are specifically exempted, as originally identified under Department of Revenue Notification No. 37/2017 dated 11.05.2017.

The recognised exempt categories include:

  • Individuals residing in Assam, Jammu & Kashmir, and Meghalaya
  • Non-residents as defined under the Income Tax Act, 1961
  • Individuals who are eighty years of age or older at any point during the relevant previous year
  • Persons who are not citizens of India

Where the deductee or collectee falls squarely within any of these exempt categories, the PAN–Aadhaar linkage requirement is altogether inapplicable in ordinary circumstances, and any higher-rate demand premised on PAN inoperability may itself be legally misconceived.

The Operative Rule: Rule 114AAA

The day-to-day operational consequences of a PAN turning inoperative are governed by Rule 114AAA of the Income Tax Rules, 1962. CBDT Circular No. 03/2023 dated 28.03.2023 placed on record that Rule 114AAA was substituted by virtue of Notification No. 15 of 2023 dated 28.03.2023. The same circular spelled out the downstream consequences — including withholding of refunds, denial of interest on refunds during the inoperative period, application of higher TDS under Section 206AA, and higher TCS under Section 206CC. These consequences were confirmed to take effect from 01.07.2023 and to persist until the PAN is restored to operative status.

2. The Complete Chain of Official Circulars and Notifications

For practical compliance purposes, the following instruments collectively constitute the governing framework:

Notification No. 37/2017 dated 11.05.2017

This notification delineated the broader classes of persons for whom Aadhaar–PAN linkage is not mandatory. It remains operationally significant because if the deductee or collectee qualifies under this notification, the entire premise of a higher-rate demand may be flawed from the outset.

CBDT Circular No. 07/2022 dated 30.03.2022

This was the earlier departmental circular addressing linkage consequences and the fee structure. However, it must be noted that CBDT Circular No. 03/2023 expressly superseded Circular No. 07/2022. Accordingly, Circular No. 07/2022 retains only historical relevance and does not govern the current legal position.

Notification No. 15/2023 and CBDT Circular No. 03/2023 dated 28.03.2023

Together, these instruments constitute the foundational framework for the present inoperative PAN consequence regime. Circular No. 03/2023 confirmed that higher TDS under Section 206AA and higher TCS under Section 206CC would apply from 01.07.2023 for inoperative PANs, subject to the exemption class under Section 139AA(3).