The Draft Income Tax Rules, 2026 introduce Rule 162, which clearly outlines the circumstances under which a Permanent Account Number (PAN) becomes inoperative for failure to link Aadhaar, along with the financial and compliance consequences that follow.
The provision operationalizes Section 262(6) of the Income Tax Act and reinforces the government’s continued push for mandatory PAN-Aadhaar linkage.
When Does PAN Become Inoperative?
Under Rule 162(1), if a person who has been allotted a PAN is required to intimate their Aadhaar number under Section 262(6) but fails to do so, the PAN will become inoperative.
In such cases, the individual will also be liable to pay fees as prescribed under Rule 158 to restore operability.
This makes Aadhaar intimation not just a procedural formality, but a mandatory compliance requirement.
How to Reactivate an Inoperative PAN
Rule 162(2) provides relief for taxpayers who subsequently comply. Once the person:
- Intimates their Aadhaar number under Section 262(6), and
- Pays the applicable fee under Rule 158,
The PAN shall become operative within 30 days from the date of Aadhaar intimation.
This formalizes the timeline for restoration and removes ambiguity around activation delays.
Consequences of Having an Inoperative PAN
Rule 162(3) prescribes strict financial and tax implications during the period when the PAN remains inoperative. These consequences apply from the date of commencement of the rule until the PAN becomes operative again.
1. No Tax Refunds
If any refund of tax is due under the Income-tax Act, it shall not be granted during the period when PAN is inoperative.
2. No Interest on Refund
Even if the refund is processed later, no interest shall be payable for the period beginning from the commencement of the rule until the date the PAN becomes operative.
This can significantly impact taxpayers expecting refund-related cash flows.
3. Higher TDS/TCS Rates
Where tax is deductible or collectable at source under Chapter XIX-B, such tax shall be deducted or collected at a higher rate in accordance with Section 397(2).
This effectively treats the inoperative PAN situation similarly to non-furnishing of PAN, leading to increased withholding rates and reduced liquidity for taxpayers.
System-Based Verification of PAN Status
Rule 162(4) empowers the Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems) to specify:
- Formats and technical standards, and
- Procedures for verifying PAN operational status.
This indicates a technology-driven compliance ecosystem where deductors, collectors and financial institutions can digitally verify whether a PAN is operative before processing transactions.
Why Rule 162 is Important for Taxpayers
Rule 162 reinforces that PAN-Aadhaar linkage is no longer optional. The consequences extend beyond technical non-compliance and directly affect:
- Tax refunds
- Interest entitlements
- TDS and TCS rates
- Overall financial transactions
Taxpayers who have not yet linked Aadhaar with PAN must act promptly to avoid operational disruptions and higher tax deductions.
With the Draft Income-tax Rules, 2026, moving toward stricter data integration and automated compliance checks, ensuring an operative PAN is now critical for smooth tax administration and financial functioning.
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