Section 206AA of the Income Tax Act: PAN Requirements and TDS

In summary

Section 206AA of the Income-tax Act, 1961 required recipients of payments subject to Tax Deducted at Source (TDS) to furnish a valid Permanent Account Number (PAN). If PAN was missing or invalid, the payer generally had to deduct tax at a higher rate.

• The Income-tax Act, 1961 was repealed from 1 April 2026, subject to transitional provisions for earlier tax years and proceedings.
• Section 397 of the Income-tax Act, 2025 contains the corresponding PAN-related requirements.
• Under the new Act, the general higher TDS rate for failure to furnish PAN is 20%, or 5% for specified transactions, subject to the applicable rate rules.
• Certain non-resident recipients may qualify for exceptions if they meet the prescribed conditions.
• An invalid PAN or an invalid declaration can affect TDS treatment.

Check the law applicable to the relevant tax year and transaction before applying a rate. The date of payment alone may not determine which Act governs the matter.

Section 206AA required a person receiving income subject to TDS to provide a valid PAN to the person responsible for deducting tax. The rule helped link tax deductions with the correct taxpayer records.

Under the earlier Act, the general rule was to deduct TDS at the highest of:

• The rate specified under the relevant provision.
• The rate or rates in force.
• 20%.

Specified transactions under Sections 194-O and 194Q had a 5% alternative to the general 20% rate. The exact treatment depended on the applicable provision and transaction.

For background on related tax concepts, read what are Short Term Capital Gains Tax and what is Long Term Capital Gain Tax. Capital gains taxation is distinct from the rules governing higher TDS when PAN is missing.

The Income-tax Act, 2025 came into effect on 1 April 2026 and replaced the 1961 Act, while preserving the earlier law's application to relevant prior tax years and proceedings. Section 397 of the new Act contains the corresponding PAN requirement.

Under Section 397, a person receiving an amount subject to TDS must furnish a valid PAN. If they do not, TDS is generally deducted at the higher of the rate under the relevant provision, the rate or rates in force, or 20%. For specified transactions, the 5% alternative applies.

For tax collection at source (TCS), the new provision sets out a separate higher-rate calculation, generally based on twice the prescribed rate or 5%, subject to a maximum of 20%. Do not apply the TDS formula automatically to TCS.

The wider legislative change is explained in difference between Income Tax Act and direct tax code and what is direct tax code.

A missing, invalid, or incorrectly attributed PAN can lead to a higher deduction. The payer must verify the details and apply the relevant provisions rather than assume the normal TDS rate applies.

For example, suppose a payment of Rs. 1,00,000 is subject to a 10% TDS rate, but the applicable higher-rate rule requires deduction at 20% because the recipient has not furnished a valid PAN. The payer would deduct Rs. 20,000 instead of Rs. 10,000, leaving Rs. 80,000 before any other adjustments. This is an illustration, not a universal rate for every payment.

If excess tax has been deducted, the recipient should check the tax credit reflected in their records and follow the applicable return or correction process. A deduction at source is not necessarily the recipient’s final tax liability.

If you are reviewing investments alongside your tax records, the mutual fund calculator and lumpsum calculator from Bajaj Finance can help model investment scenarios. They do not calculate your final TDS or Income Tax liability.

The earlier Section 206AA included specific exceptions for certain non-resident payments. For example, interest on qualifying long-term bonds under Section 194LC was excluded from the provision. Rule 37BC also provided relief for specified payments, including interest, royalties, fees for technical services, dividends, and transfers of capital assets, when prescribed information was supplied.

Depending on the applicable rule, information could include the recipient’s name, address, tax identification number, and other required details. The recipient must meet the relevant conditions; non-resident status alone does not automatically remove every PAN requirement.

Section 397 of the Income-tax Act, 2025 contains its own exceptions. Check the wording that applies to the tax year and transaction, especially where a foreign company or a non-resident is involved. For wider estate-related context, read - what is an inheritance tax.

Payers should collect and validate PAN details before deducting tax, apply the rate prescribed for the transaction, and maintain the required records. Recipients should check that their PAN is valid and that tax credits are reported correctly.

If you submit a declaration for nil or lower TDS under the relevant provisions, ensure the declaration contains the required PAN details. Under the earlier law, the absence of PAN could invalidate certain declarations, including those under Section 197A. Verify the current form and process for your situation.

For investment planning, you can estimate regular contributions using the SIP calculator or step-up SIP calculator. 

Section 206AA governed higher TDS when a valid PAN was not furnished under the Income-tax Act, 1961. From 1 April 2026, Section 397 of the Income-tax Act, 2025 provides the corresponding requirements. The applicable rate and exceptions depend on the transaction and relevant tax year, so verify the current law before deducting or claiming tax.

Last reviewed: 15 October 2026

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