CBDT Clarifies PAN-Aadhaar Linking Impact on TDS/TCS Rates

The Central Board of Direct Taxes (CBDT) has issued a crucial clarification regarding the application of higher TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) rates when a Permanent Account Number (PAN) becomes inoperative due to non-linking with Aadhaar. This relief, issued via Circular 9/2025 dated 21 July 2025, has important implications for both employers and individual taxpayers.

In this blog, we break down the circular, share real-world implications, and highlight key takeaways for the financial year 2024–25 and beyond.

📘 Understanding the Context

Under Rule 114AAA, PAN becomes inoperative if it is not linked with Aadhaar. When PAN is inoperative, higher TDS/TCS rates are automatically applicable under Sections 206AA and 206CC of the Income Tax Act. These sections mandate up to twice the normal rate or 20%, whichever is higher, for taxpayers without a valid PAN.

Previously, CBDT had allowed relief for transactions until 31 March 2024, if PAN was subsequently linked by 31 May 2024. However, ambiguity remained for transactions beyond this period—especially for salary credits and vendor payments already processed with inoperative PANs.

📜 Key Highlights from Circular 9/2025

CBDT’s latest circular expands relief to two major scenarios:

💼 Case 1: Relief for Past Transactions

Period of Transaction	Condition	Outcome
1 April 2024 to 31 July 2025	PAN linked to Aadhaar on or before 30 September 2025	✅ No higher TDS/TCS

Example:
A vendor was paid in June 2025 with an inoperative PAN. If they link Aadhaar by 30 September 2025, the deductor won’t need to revise TDS and no additional demand will be raised by the IT Department.

🔮 Case 2: Relief for Future Transactions

Date of Credit/Payment	Condition	Outcome
On or after 1 August 2025	PAN is linked within 2 months from the end of transaction month	✅ No higher TDS/TCS

Example:
An employee receives salary on 15 August 2025 with an inoperative PAN. If they complete Aadhaar linking by 31 October 2025, their employer need not deduct higher TDS, and no demand will arise.

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🧾 What’s Still Unclear?

Despite this welcome clarification, there’s still uncertainty regarding situations where higher tax has already been deducted and e-TDS filings for FY 2024–25 are closed. For example:

• If employees faced higher TDS due to inoperative PAN earlier in the fiscal year and those returns are already filed, can they claim refunds when filing their ITR?
• The circular doesn’t yet address retroactive adjustments or revised filings, leaving employers uncertain about reprocessing past payroll entries.

📌 It is likely that individual taxpayers will need to claim refunds through their personal ITR filings, but further clarification from CBDT is awaited.

📥 Download Official Circular

✅ Conclusion: A Step Toward Ease of Compliance

This circular is a positive move toward simplifying TDS/TCS administration and preventing unfair tax burdens on individuals. The government’s flexibility in allowing post-transaction PAN activation serves both employers and taxpayers struggling with Aadhaar linkage delays.

Employers should track PAN activation timelines closely, especially for vendors and employees with previous deductions at higher rates. And employees should link Aadhaar ASAP to avoid unnecessary deductions in the coming months.

📌 Stay tuned for further updates from CBDT on refund eligibility and retroactive adjustments. And don’t forget to share this blog with fellow HR professionals, finance managers, and employees filing ITRs for FY 2024–25.