Bulk PAN Verification for TDS: Prevent Short-Deduction Defaults Under Section 397(2)

Bulk PAN Verification for TDS: Avoid Higher Deduction Under Section 206AA

For a company with 50 vendors, PAN checks are a clerical task. For a bank with lakhs of depositors, or a corporate with thousands of vendors across branches, they are a control. One wrong character in a PAN, or a PAN that became inoperative because it was not linked to Aadhaar, turns a 1% or 10% deduction into a 20% deduction, and a missed higher deduction turns into a demand on TRACES months later.

This guide explains when the higher rate applies, what "valid" actually means for TDS, and a step-by-step bulk PAN verification process for finance teams, banks and CA firms.

What Section 206AA (now Section 397(2)) requires

Every person receiving a payment on which TDS is deductible must give the deductor their PAN. If they don't, or the PAN given is invalid, the deductor must deduct tax at the highest of:

In practice, for most payments the higher rate is 20%. Under the Income-tax Act, 2025, Section 397(2) provides for higher tax deduction or collection when a valid PAN is not furnished. For TDS, the higher rate is the highest of the applicable rate under the Act, the rate or rates in force, and the specified 5% rate for covered payments, or 20% in other cases. For TCS, the higher rate is twice the applicable rate or 5%, whichever is higher, subject to the statutory cap of 20%. For TCS the rule is different: twice the normal rate or 5%, whichever is higher, capped at 20%.

Three related points catch teams out:

• An invalid PAN is treated as no PAN. A typo or a PAN belonging to someone else does not protect you.
• Declarations need to meet the applicable statutory conditions. Forms 15G and 15H have been replaced by Form 121 under the Income-tax Rules, 2026, for declarations under Section 393(6). Before applying a no-deduction benefit, verify the declarant's eligibility and the prescribed PAN requirements.
• Higher TDS does not apply where nothing is deductible, for example where the payment is below the threshold.

Salary and non-residents

For salary, tax is generally deducted under Section 392(1) at the average rate of income-tax calculated on the basis of the applicable rates for the tax year and the employee's estimated salary income. The application of Section 397(2) to a particular salary payment should be assessed under the relevant statutory provisions rather than assuming that 20% applies to every salary payment.

Under Rule 217 of the Income-tax Rules, 2026, the higher deduction provisions under Section 397(2) do not apply to specified payments made to eligible non-residents without a PAN, subject to the prescribed conditions. These payments include interest, royalty, fees for technical services, dividends and payments on the transfer of a capital asset. The deductee must furnish the prescribed identifying details, overseas address, residence certificate where applicable, and foreign tax identification number or the prescribed alternative identification number.

Inoperative PAN: the most common cause of higher TDS

Where an individual is required to intimate Aadhaar under Section 262(6) of the Income-tax Act, 2025 but fails to do so, the PAN becomes inoperative under Rule 162 of the Income-tax Rules, 2026. The consequences for TDS must be read with Section 397(2), which prescribes higher deduction where a valid PAN is not furnished. Applicable exemptions and any specific statutory relief should be considered before applying the higher rate.

This is why PAN verification can't be a one-time onboarding step. A vendor's PAN may have been valid when you created the vendor master in 2022 and inoperative today. CBDT has previously issued time-bound relief from higher TDS/TCS rates where an inoperative PAN became operative within the specified period. Those reliefs applied to defined transaction periods under the earlier law. Do not assume that they extend to tax year 2026–27; verify any subsequent circular or notification applicable to the relevant transaction before granting relief.

Individuals who fall within an applicable exemption from Aadhaar–PAN linking are not subject to PAN inoperability solely for failing to complete linking where the exemption applies. Confirm the individual's eligibility under the applicable provisions and notifications before treating the PAN as exempt from linking requirements.

What "valid" means when you verify a PAN

A PAN check for TDS has four parts. A basic format check only covers the first.

The fourth character of a PAN also shows the type of holder (P for individual, C for company, F for firm, H for HUF, T for trust and so on). A mismatch with the deductee type in your master is worth flagging, because it can also affect the rate or section you apply.

The cost of getting it wrong

If the deductee has no valid PAN and you deduct at the normal rate, TRACES will flag a short deduction when your quarterly return is processed. The deductor then faces:

• A demand for the difference between the higher rate and the rate applied.
• Interest on the short deduction under Section 398(3) of the Income-tax Act, 2025, generally at 1% for every month or part of a month from the date tax was deductible until it is deducted, and at 1.5% for every month or part of a month from the date of deduction until payment, as applicable. The deductee cannot see the credit in Form 26AS if the PAN is wrong, which leads to complaints, revision requests and correction statements.

Deducting at the higher rate when a valid PAN existed has its own cost: the vendor or depositor is out of pocket and will ask for a refund or a correction. Either way, the fix is checking PANs before deduction, not after the demand arrives.

Where a deductee has not furnished a valid PAN, apply the rate prescribed under Section 397(2), where applicable, and report the deductee details in accordance with the current return-form and validation specifications. Confirm the permitted PAN-unavailability indicator and reporting format for the applicable statement before using "PANNOTAVBL".

Step-by-step bulk PAN verification process

1. 1

   Clean the master

   Pull all deductee PANs from the vendor master, depositor base, employee master and any one-off payees. Remove duplicates, trim spaces, convert to upper case and run the format check. Flag blanks.

2. 2

   Verify in bulk against the department's records

   Run the full list through a bulk verification: TRACES (for registered deductors), or a PAN verification API connected to your ERP. Capture, for each PAN, whether it exists, the name on record and whether it is operative.

3. 3

   Match names

   Compare the returned name with your master using a tolerance for initials and spacing. Treat clear mismatches as invalid until the deductee confirms.

4. 4

   Set the TDS rate flag

   Mark each deductee as "normal rate", "higher rate (no/invalid PAN)" or "higher rate (inoperative PAN)". This flag should drive the deduction in the ERP, not a manual override.

5. 5

   Follow up with deductees

   Ask deductees with invalid or inoperative PANs to correct their PAN or complete Aadhaar linking. Keep proof of communication.

6. 6

   Re-verify before every quarterly return

   PAN status changes. Re-run the bulk check before you file each quarter's return and before payment runs for large vendors.

Bulk PAN verification checklist

How Figment handles bulk PAN verification

TaxCPC is Figment's TDS return filing software, built for banks and large corporates that file very large volumes. For PAN checks it provides:

• Bulk PAN verification across the full deductee list before deduction and before filing.
• Live API validation with TRACES, so records are checked against TRACES before the statement is filed, as part of complete TRACES integration.
• A justification report before filing, to find short deduction and other defaults while they can still be fixed.
• Form 15G/15H (Form 121) validation, creation and mapping to deductee records.
• Custom data templates and handling of lakhs of records per quarter, so data from SAP, core banking or payroll can be loaded without reformatting.

For checks inside your own systems, the PAN Verification API verifies PAN status, name and PAN-Aadhaar link in real time or in bulk, for TDS, vendor onboarding and KYC. At onboarding, VenCPC runs bulk PAN, GSTIN and MSME verification on new vendors.

Your tax team should still review rate flags and name mismatches before each payment run.

Key takeaways

• A missing, invalid or inoperative PAN means TDS at the higher rate, usually 20%, under Section 206AA / Section 397(2).
• An inoperative PAN (not linked with Aadhaar) is treated as no PAN.
• Valid means four checks: format, existence, name match and operative status.
• Verify in bulk before deduction and again before each quarterly return.
• Missed higher deduction becomes a short-deduction demand with interest on the deductor.