Big Relief for Taxpayers: PAN-Aadhaar Linking Deadline Can Save You from TDS Penalties
The Income Tax Department has granted significant relief to taxpayers who have recently received income tax demand notices. These notices were issued due to tax being deducted or collected at a lower rate than required when the recipient’s PAN (Permanent Account Number) was inactive. A PAN becomes inoperative when it is not linked with the Aadhaar card.
The Income Tax Department clarified that if the PAN is reactivated within a specified time limit, it will cancel demand notices issued due to short deduction or collection of TDS/TCS.
Two Situations and Deadlines for PAN-Aadhaar Linking
In a recent circular dated July 21, 2025, the Income Tax Department stated that if a payment was made to another person whose PAN was inactive (due to it not being linked to Aadhaar), the deductor or collector would not be held responsible for higher TDS/TCS if the PAN is activated within the allowed time.
1. For Payments Made Between April 1, 2024, and July 31, 2025:
- If the PAN is linked with Aadhaar and made active on or before September 30, 2025, there will be no penalty for short deduction or collection of tax.
2. For Payments Made On or After August 1, 2025:
- If the PAN is linked and made active within 2 months from the end of the month in which the payment was made, there will be no penalty.
The circular outlines two different deadlines to obtain relief from notices sent for short deduction or collection of tax. An expert noted that numerous individuals and companies who deducted or collected tax have received TDS/TCS demand notices from the tax portal TRACES, often due to using a normal (lower) tax rate for transactions involving inactive PANs.
TDS Implications in Property Transactions
As per Section 194-IA, when someone purchases property worth ₹50 lakh or more, they must deduct 1% TDS from the payment to the seller. If the seller’s PAN is inoperative, the buyer is required to deduct 20% TDS instead. Unfortunately, many buyers remain unaware of their seller’s PAN status, resulting in notices from the Income Tax Department for the remaining 19% TDS.
This new circular provides relief to these buyers. If the seller links their PAN with Aadhaar and activates it within the given deadline, the buyer will not incur penalties for short TDS.
Experts advise that while inactive PANs can still be used for filing Income Tax Returns (ITRs) or significant financial transactions, complications arise in property sales where the seller’s PAN is critical. Buyers must deduct TDS at 20% for sellers with inoperative PANs; however, many taxpayers mistakenly deduct TDS at the lower 1%, leading to potential tax demand notices for the shortfall.
This relief also extends to property buyers who could not deduct TDS at the higher 20% rate due to the sellers’ inactive PANs. For example, if someone bought property on April 2, 2024, from a person with an inactive PAN, the correct TDS deduction would have been 20%. If they did not comply and received a demand notice, the Income Tax Department will cancel this only if the seller activates their PAN by linking it to Aadhaar by September 30, 2025.
