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Direct and Indirect Taxation · PAN

Penalties and Higher TDS Rate for PAN Defaults

Updated 10 October 2026

If a person entitled to receive an amount on which tax is deductible does not furnish a valid PAN, the deductor must deduct tax at the higher of the specified rate, the rate in force, or 20% (5% in two listed cases). For collection at source, the rate is the higher of twice the specified rate or 5%, capped at 20%. Separate penalties apply for PAN defaults.

Understand Penalties and Consequences for PAN Defaults

A PAN links every tax deduction, payment and return to one person. The Income-tax Act, 2025 therefore makes PAN compulsory in tax deduction and collection. Section 397(2) says that, irrespective of anything in any other provision, every person entitled to receive an amount on which tax is deductible, or paying an amount on which tax is collectible, must give a valid PAN to the person responsible for deducting or collecting the tax.

The main consequence of failing to do this is a higher rate of TDS or TCS. This is not a penalty in the legal sense. It is the rate at which the deductor must deduct.

The Act also protects the deductor's records. The deductee must show the PAN in all bills, vouchers, correspondence and other documents sent to the deductor, and the deductor must do the same in return. A declaration (such as one made for non-deduction) or an application for a lower or nil deduction certificate that does not carry a valid PAN fails. The declaration becomes invalid, and the certificate is not granted.

This page covers the consequences set out in section 397(2): the higher rate, the invalid declaration and the refusal of a certificate. It does not cover any separate penalty provisions for PAN defaults. Check your study material if a question asks about them.

Key rules to remember

TDS rate when PAN is not furnished
Rate = highest of (A) rate in the relevant provision, (B) rate or rates in force, (C) 20%, or 5% where tax is deductible under section 393(1) Table Sl. No. 8(ii) or 8(v)
Section 397(2)(b)(i). Take the highest of the three. For the two listed items, the third figure is 5% instead of 20%.
TCS rate when PAN is not furnished
Rate = higher of (twice the specified rate, 5%), but not more than 20%
Section 397(2)(b)(ii). The 20% cap applies to the result.
Rent cap
Where tax on rent under Table Sl. No. 2(i) is required to be deducted at the higher rate under section 397(2)(b)(i): deduction ≤ rent payable for the last month of the tax year or the last month of the tenancy
Section 397(2)(e). The cap applies only where the higher rate arises from the PAN default. The deduction cannot exceed that one month's rent.
Exception to higher TDS (non-resident)
Higher rate does not apply to a non-resident who is not a company or foreign company, for interest on long-term bonds (section 393(2) Table Sl. Nos. 2, 3 and 4) and other payments as prescribed
Section 397(2)(c).
Exception to higher TCS (non-resident)
Higher TCS rate does not apply to a non-resident with no permanent establishment in India
Section 397(2)(d). Permanent establishment includes a fixed place of business through which the business is wholly or partly carried on.
Invalid declaration or application
No valid PAN in a declaration under section 393(6) or 394(2): declaration invalid, then higher rate applies. No valid PAN in an application under section 395(1) or (3): no certificate granted
Section 397(2)(f) and (g).

How to solve Penalties and Consequences for PAN Defaults questions

    Quickest way: Three-line check for the higher rate

    When to use it: Use this in MCQs and short numerical questions where the PAN is missing and you need the rate fast.

    1. TDS: write the normal rate, then compare with 20%. The answer is the larger, unless the item is 8(ii) or 8(v), where you compare with 5%.
    2. TCS: double the normal rate, compare with 5%, take the larger, never above 20%.
    3. Rent: where the higher rate under section 397(2)(b)(i) applies because PAN is missing, check if the TDS exceeds the last month's rent. If it does, the deduction equals that month's rent.

    Common mistakes in Penalties and Consequences for PAN Defaults

    • Applying a flat 20% every time PAN is missing

      Students remember '20% if no PAN' and stop.

      Fix: Compare 20% with the specified rate and the rate in force. If the normal rate is higher than 20%, that higher rate applies.

    • Using the same rule for TCS as for TDS

      Both sit in section 397(2)(b) and look alike.

      Fix: For TCS use the higher of twice the specified rate or 5%, capped at 20%.

    • Forgetting the rent cap

      Students compute 20% on the whole year's rent and write the answer.

      Fix: Where the higher rate applies under section 397(2)(b)(i) to rent under Table Sl. No. 2(i), compare the result with the last month's rent and restrict it if higher.

    • Ignoring the effect on declarations and certificates

      Students treat PAN only as a rate issue.

      Fix: A declaration without a valid PAN becomes invalid, tax is then deducted at the higher rate, and no certificate is granted on an application without a valid PAN.

    • Calling the higher TDS rate a penalty

      The word 'consequence' is mixed with 'penalty'.

      Fix: Keep them apart. The higher rate is the deduction rate under section 397(2), not a penalty.

    • Applying the higher TCS rate to a non-resident with no permanent establishment

      Students overlook the exceptions.

      Fix: Read the residential and permanent establishment facts first. The higher TCS rate does not apply to such a non-resident.

    Worked examples

    Example 1

    Sunrise Traders Pvt. Ltd. pays ₹2,00,000 to a resident contractor, Mr. Rakesh Verma, who does not furnish his PAN. Assume the rate specified in the relevant provision is 10% and no other rate in force is higher. The item is not Table Sl. No. 8(ii) or 8(v). Find the TDS.

    Show the solution
    1. PAN is not furnished, so section 397(2)(b)(i) applies.
    2. Rates to compare: specified rate 10%; rate in force 10%; 20% for any other case.
    3. The highest is 20%.
    4. TDS = 20% × ₹2,00,000 = ₹40,000.

    Answer: Tax of ₹40,000 must be deducted at 20%.

    Example 2

    Mr. Anil Gupta rents out a shop to Bharat Stores Ltd. at ₹50,000 per month for the whole tax year, and does not furnish his PAN. Assume the rate specified for this rent under Table Sl. No. 2(i) is 10%. Find the TDS on the year's rent.

    Show the solution
    1. Annual rent = ₹50,000 × 12 = ₹6,00,000.
    2. No PAN, so the higher rate under section 397(2)(b)(i) applies: the highest of 10% and 20% is 20%.
    3. 20% × ₹6,00,000 = ₹1,20,000.
    4. Under section 397(2)(e), the deduction cannot exceed the rent payable for the last month of the tax year, which is ₹50,000.
    5. ₹1,20,000 exceeds ₹50,000, so restrict it to ₹50,000.

    Answer: TDS is limited to ₹50,000, the rent for the last month.

    Exam tips

    • In MCQs, do the comparison first: normal rate versus 20%. The trap options are usually 20% when the normal rate is higher, or the normal rate itself.
    • Quote 'section 397(2)' and the words 'valid PAN' in written answers. Name the three rates you compared and the winner.
    • If the question mentions rent, check the last-month cap before writing the final figure. It applies where the higher rate under section 397(2)(b)(i) is being used.
    • Structure your answer around the consequences under section 397(2): the higher rate, the invalid declaration, and no certificate on an application without a valid PAN.
    • Always check for a non-resident who is not a company before applying the higher rate or TCS.

    Practice questions from PAN

    Penalties and Consequences for PAN Defaults: frequently asked questions

    At what rate is TDS deducted if PAN is not furnished?

    Under section 397(2)(b)(i), tax is deducted at the highest of the rate in the relevant provision, the rate or rates in force, and 20%. Where tax is deductible under section 393(1) Table Sl. No. 8(ii) or 8(v), the third figure is 5% instead of 20%.

    What is the TCS rate if PAN is not furnished?

    Tax is collected at the higher of twice the specified rate or 5%, but not more than 20%. This does not apply to a non-resident who has no permanent establishment in India.

    Is the higher TDS rate a penalty?

    No. It is the rate at which tax must be deducted under section 397(2) when a valid PAN is not furnished. This page does not cover any separate penalty provisions for PAN defaults, so check your study material if a question asks about them.

    What happens to a declaration or certificate application without a PAN?

    A declaration under section 393(6) or 394(2) without a valid PAN becomes invalid, and the deductor or collector then applies the higher rate. An application under section 395(1) or (3) without a valid PAN gets no certificate.

    Does the higher TDS rate apply to every non-resident?

    No. It does not apply to a non-resident who is not a company or foreign company for interest on long-term bonds specified in section 393(2) Table Sl. Nos. 2, 3 and 4, and for other payments subject to prescribed conditions.