The Income Tax Act, 1961, mandates that every taxpayer must link their PAN (Permanent Account Number) with Aadhaar to ensure compliance. Failure to link Aadhaar with PAN leads to an inoperative PAN, triggering higher Tax Deducted at Source (TDS) under Section 206AA.
From 1st July 2023, as per CBDT notification, if a PAN is not linked with Aadhaar, it becomes inoperative, meaning it is treated as if the individual has not provided a PAN at all. This results in TDS being deducted at a higher rate of 20%, creating financial implications for salaried individuals, businesses, and non-residents earning in India.
What is Section 206AA?
Section 206AA of the Income Tax Act specifies that if an individual fails to furnish a valid PAN, the deductor (employer, bank, or payer) must deduct TDS at the highest rate applicable, which is 20% in most cases.
As per recent guidelines, if PAN is not linked with Aadhaar, it becomes inoperative and attracts a higher TDS rate.
Who is Affected by Higher TDS Under Section 206AA?
If your PAN is inoperative due to Aadhaar non-linking, you will face a higher TDS deduction in cases such as:
✅ Salary payments (TDS under Section 192)
✅ Interest on fixed deposits (TDS under Section 194A)
✅ Professional or contractual payments (TDS under Section 194J)
✅ Dividend income (TDS under Section 194)
✅ Rent payments (TDS under Section 194I)
✅ Foreign remittances (TDS for non-residents)
Even if a taxpayer has a valid PAN, if it is not linked to Aadhaar, it will be considered invalid, and TDS will be deducted at 20% under 206AA.
How is TDS Calculated Under Section 206AA?
The calculation of TDS under Section 206AA is based on Gross Income before any deductions.
Income Base for Higher TDS Calculation
Gross Income – Exemptions under Section 10 = Taxable Base for TDS Calculation
✅ Allowed Exemptions (before TDS Calculation):
- House Rent Allowance (HRA) – Section 10(13A)
- Leave Travel Allowance (LTA) – Section 10(5)
- Agricultural Income – Section 10(1)
- Gratuity – Section 10(10)
❌ Not Allowed for TDS Reduction (while calculating taxable income for TDS):
- Standard Deduction (₹50,000) under Section 16
- Chapter VI-A deductions (80C, 80D, 80E, etc.)
Since standard deduction and Chapter VI-A deductions are only applicable at the time of filing the Income Tax Return (ITR), they are not considered when deducting TDS.
What Happens if PAN Becomes Inoperative Due to Aadhaar Non-Linking?
🚨 Immediate Consequences:
- Higher TDS at 20% on all applicable payments.
- No income tax refunds can be processed until PAN is linked back.
- No ITR filing is allowed with an inoperative PAN.
- Foreign remittances may get blocked or taxed at higher rates.
To reactivate an inoperative PAN, the taxpayer must link PAN with Aadhaar on the Income Tax e-filing portal.
Frequently Asked Questions (FAQs)
Q1: How can I check if my PAN is inoperative?
A: You can check PAN status by visiting the Income Tax e-filing portal and using the PAN-Aadhaar linking tool.
Q2: Can I get a refund if excess TDS is deducted at 20% under 206AA?
A: Yes, but only after filing an ITR and claiming a refund from the Income Tax Department.
Q3: If my PAN becomes active after linking, will my past TDS at 20% be corrected?
A: No, once TDS is deducted, it cannot be reversed. However, you can claim a refund while filing your ITR.
Q4: Can a non-resident avoid Section 206AA?
A: A non-resident (NRI) can avoid higher TDS under DTAA (Double Taxation Avoidance Agreement) by submitting a Tax Residency Certificate (TRC) and Form 10F.
Q5: Can Form 15G/15H be submitted to avoid TDS under 206AA?
A: No, Form 15G/15H is NOT valid if PAN is inoperative. TDS at 20% will still apply under Section 206AA.
Conclusion
If you haven’t linked your PAN with Aadhaar, you may face higher TDS deductions at 20% under Section 206AA. To avoid unnecessary tax deductions, ensure that your PAN is active and linked with Aadhaar.
✅ Key Takeaways:
- If PAN is not linked with Aadhaar, it becomes inoperative, leading to 20% TDS under 206AA.
- TDS is deducted before considering Standard Deduction (₹50,000) and Chapter VI-A deductions.
- Exemptions under Section 10 (like HRA, LTA) are allowed before TDS calculation.
- To avoid excess TDS, link PAN with Aadhaar immediately.
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