Big Relief for Taxpayers: PAN-Aadhaar Linking Deadline Can Save You from TDS Penalties

The Income Tax Department has granted big relief to taxpayers who have recently received income tax demand notices. These notices were sent because tax was deducted or collected at a lower rate than required when the recipient’s PAN (Permanent Account Number) was not active. One’s PAN becomes inoperative when it is not linked with the Aadhaar card.

The Income Tax Department has clarified that if the PAN will again be made active within a specified time limit or deadline, it will cancel such demand notices issued due to short deduction/collection of the TDS/TCS.

The Income Tax Department in its recent circular dated July 21, 2025, has said if someone paid money (or gave credit) to another person whose PAN was inactive (because it was not linked to Aadhaar), the deductor or collector will not be held responsible for deducting or collecting TDS/TCS at a higher rate if the PAN is made active again within the allowed time.

Two Situations and Deadlines for PAN-Aadhaar Linking:

• 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.
• 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 table below shows the deadline by which the PAN should be linked to the Aadhaar to get relief on tax demand notices:

The circular outlines two different deadlines to get relief from notices sent for short deduction or collection of tax.

An expert explains that numerous individuals and companies who deducted or collected tax have received TDS/TCS demand notices from the tax portal TRACES. These notices were sent because they used the normal (lower) tax rate for people whose PAN was not active at the time of the transaction. In most cases, this happened because the PAN was not linked to Aadhaar.

In accordance with Section 194-IA, when someone buys a property worth Rs. 50 lakh or more, they must deduct 1% TDS from the payment to the seller. But, if the seller’s PAN is inoperative, then the buyer is supposed to deduct 20% TDS instead of 1%. The issue happens when buyers still deduct only 1%, not knowing that the seller’s PAN is inactive. In such cases, the buyer gets a notice from the Income Tax Department asking for the remaining 19% TDS.

This new circular gives relief to such buyers. If the seller links their PAN with Aadhaar and makes it active within the given deadline, then the buyer will not be penalised for the short TDS.

According to experts, inactive PANs can be used for filing ITRs or performing significant financial transactions. However, this leads to problems in cases like property sales where the PAN of the seller is imperative due to not being linked with Aadhaar. In these cases, it is mandatory for buyers to deduct TDS at 20% instead of the regular 1%. But, many taxpayers are unaware of their PAN status and hence, conclude by deducting TDS at 1%. This ultimately leads to a tax demand notice to the property buyer from the Income Tax Department for the shortfall of 19%.

This relief is also applicable to property buyers who could not deduct TDS at the higher 20% rate from sellers with inoperative PANs. For instance, if someone bought a property on April 2, 2024, from a person whose PAN was inactive, the buyer was required to deduct TDS at 20% instead of the standard 1%. If they did not deduct and receive a demand notice, the tax department will only be cancelled on the condition that the seller activates their PAN by linking it to Aadhaar by September 30, 2025.