What Is Higher Withholding Without PAN?
Higher Withholding Without PAN is the rule that pushes tax deducted at source (TDS) or tax collected at source (TCS) up to 20% — or the rate already applicable to the payment, if that is higher — whenever the person receiving a payment fails to give the deductor or collector a valid Permanent Account Number (PAN). It is built directly into the withholding machinery: no assessment, no notice, no chance to explain first. The deductor is simply required to withhold more from the payment itself.
The rule sits at section 397(2) of the Income-tax Act, 2025 (section 206AA of the Income-tax Act, 1961). It applies on top of the ordinary TDS and TCS provisions in sections 393 and 394 of the 2025 Act, so a payee with no PAN can end up taxed at a materially higher rate than a payee who has one — for that omission alone.
Legal Basis
Section 397(2)(a)-(b) — the PAN Requirement and the Higher Rate
Clause (a) states the duty plainly: "every person, entitled to receive any amount on which tax is deductible or, paying any amount on which tax is collectible, shall furnish his valid Permanent Account Number to the person responsible for deducting or collecting tax." Failure to comply triggers clause (b).
For TDS, clause (b)(i) requires deduction at the highest of three rates:
- the rate specified in the relevant provision of the Act; or
- the rate or rates in force; or
- 5% where tax is required to be deducted under section 393(1) (Table, Sl. No. 8(ii) or 8(v)) — or 20% in any other case.
The 5% carve-out is narrow, and it does not reach non-residents at all. Both entries sit in the section 393(1) Table, which governs payments to a resident: Sl. No. 8(ii) is TDS on purchase of goods exceeding fifty lakh rupees (the buyer ordinarily deducts 0.1%), and Sl. No. 8(v) is TDS an e-commerce operator deducts on amounts credited or paid to an e-commerce participant, itself defined in section 2(14) as a person resident in India (also ordinarily 0.1%). For every other payment — professional fees, rent, contractor payments, interest, royalties — the no-PAN rate is 20%, even where the ordinary rate on that payment is far lower.
Clause (b)(ii) is the TCS mirror: where the collectee has no PAN, tax is collected at the higher of twice the rate ordinarily specified or 5%, capped at 20%.
Section 397(2)(c) — Relief for Certain Non-Residents
Clause (c) narrows clause (b)(i) for some non-resident payees: "the provisions of clause (b)(i) shall not apply to a non-resident, not being a company or a foreign company, in respect of— (i) payment of interest on long-term bonds as specified in section 393(2) (Table: Sl. Nos. 2, 3 and 4); and (ii) any other payment subject to such conditions, as may be prescribed."
Limb (i) is an unconditional carve-out. Section 393(2), Table Sl. Nos. 2, 3 and 4 cover interest on foreign-currency loans and long-term infrastructure bonds, rupee-denominated ("masala") bonds, and bonds listed on a recognised stock exchange in an International Financial Services Centre — categories already taxed at reduced rates of 4%, 5%, or 9% to attract overseas bond investors. A non-resident bondholder in these categories keeps that rate even without a PAN — but only a non-resident that is not a company or a foreign company, because clause (c) excludes those from the carve-out entirely.
Limb (ii) is where a page can go wrong. Unlike the 1961 Act's section 206AA(7) — which set out the relief for other non-resident payments (interest, royalty, fees for technical services and similar) as available on furnishing a name, address, Tax Identification Number and a Tax Residency Certificate under Rule 37BC of the Income-tax Rules, 1962 — section 397(2)(c)(ii) of the 2025 Act says only that the relief applies "subject to such conditions, as may be prescribed." The Act text itself does not fix what those conditions are; they depend on the Income-tax Rules, 2026. Until that rule is confirmed, a foreign payee should not assume that furnishing a Tax Residency Certificate and Tax Identification Number by itself still avoids the 20% rate on these other payments — whether that combination, or something else, satisfies the "prescribed conditions" is a rules question, not a settled one.
Section 397(2)(d) — Relief From Higher TCS
Clause (d) narrows clause (b)(ii): the higher TCS rate "shall not apply to a non-resident who does not have permanent establishment in India (which includes a fixed place of business through which the business of the enterprise is wholly or partly carried on)." A non-resident with no Indian permanent establishment keeps the ordinary TCS rate even without a PAN.
Section 397(2)(e)-(h) — Rent Cap and PAN in Declarations
Clause (e) caps the no-PAN deduction on rent (section 393(1), Table Sl. No. 2(i)) at the rent payable for the last month of the tax year or of the tenancy, so the higher rate cannot exceed the rent actually due for that period. Clauses (f)-(h) tie PAN to two further compliance steps: a declaration under section 393(6) or 394(2) becomes invalid if it is not accompanied by a valid PAN, and no certificate can be granted on an application under section 395(1) or (3) — the lower or nil-deduction certificate route — without one. Clause (h) requires the deductee or collectee to quote their PAN on all bills, vouchers, and correspondence exchanged with the deductor or collector.
Why It Matters for Foreign Companies and Investors
Any foreign company, non-resident individual, or overseas investor receiving India-sourced income — dividends, interest, royalties, fees for technical or professional services, rent, or consideration for the sale of goods — is directly exposed to section 397(2) if it has not obtained a PAN the deductor can verify. The consequences are practical:
- Cash-flow impact. A payment that would ordinarily suffer a lower rate of withholding can instead be taxed at 20%, until the payee recovers the excess by filing an Indian tax return and claiming a refund.
- DTAA eligibility does not fix this on its own. A payee can be fully eligible for a lower treaty rate and still be pushed to 20% under section 397(2) if it has no PAN and cannot show that clause (c) or (d) relief applies. A Tax Residency Certificate and treaty eligibility are not, by themselves, a substitute for the PAN requirement.
- The 5% carve-out will not help a foreign payee. Both entries that attract the 5% rate sit in the section 393(1) Table for payments to a resident, and an e-commerce participant is defined as a person resident in India. A non-resident payee without a PAN should plan on 20%, not 5%.
The practical fix in most cases is straightforward: obtain a valid PAN before the first payment is due, and furnish it to the deductor. Non-resident bondholders in the section 393(2), Sl. 2-4 categories need no PAN to keep the reduced rate, provided they are not a company or a foreign company. For every other cross-border payment, a payee should not rely on clause (c)(ii) relief without first confirming what the Income-tax Rules, 2026 actually prescribe.
Related Compliance Duties in the Same Section
Section 397 is titled "Compliance and reporting" and covers more than the no-PAN rate. Section 397(1) requires every person who deducts or collects tax to obtain a Tax Deduction and Collection Account Number and quote it on challans, statements, and certificates, subject to the exemptions in clause (1)(c) for certain deductors. Separately, section 397(3)(d) imposes a remittance-reporting duty distinct from the higher-rate rule in section 397(2): "every person responsible for paying to a non-resident, not being a company or a foreign company, any sum, whether or not chargeable under this Act, shall furnish the information relating to payment of such sum, in such form and manner as may be prescribed." That duty underlies the remittance forms filed before money leaves India — a separate obligation from the PAN-driven rate increase in clause (2), and one that applies whether or not tax is even deductible on the payment.
Worked Example
A US-incorporated consulting firm invoices its Indian client fifty lakh rupees for technical services during the year. Ordinarily, TDS on fees for technical or professional services is well below 20%. If the US firm has not furnished a PAN, section 397(2)(b)(i) requires the client to deduct at the higher of the specified rate, the rate in force, or 20% — since the payment does not fall under Table Sl. No. 8(ii) or 8(v), the 5% carve-out does not apply, so the client must withhold at 20%. The firm can recover the excess only by filing an Indian tax return. Nor would holding a rupee-denominated bond covered by section 393(2), Sl. No. 3 change that: clause (c)(i) preserves the reduced rate without a PAN only for a non-resident that is not a company or a foreign company, so the carve-out is closed to a US-incorporated firm. Had the bondholder instead been a non-resident individual, the reduced rate would have survived the missing PAN.
Frequently Asked Questions
Does a Tax Residency Certificate avoid the higher no-PAN rate?
Not automatically. A Tax Residency Certificate supports a treaty claim on the ordinary withholding rate, but section 397(2) is a separate, PAN-specific rule. Relief from the 20% rate for non-residents under clause (c)(ii) now depends on conditions the Income-tax Rules, 2026 must prescribe, so a Tax Residency Certificate alone should not be assumed sufficient until those rules are confirmed.
Is the higher rate always 20%?
No. It is 20% for most payments, but only 5% where tax is deducted under section 393(1), Table Sl. No. 8(ii) (purchase of goods above the threshold) or Sl. No. 8(v) (payments by an e-commerce operator to an e-commerce participant). Both sit in the Table for payments to a resident, so the 5% rate is not available to a non-resident payee. If the payment's ordinarily applicable rate is itself above 20%, that higher rate governs instead.
Does section 397(2) apply to TCS as well as TDS?
Yes. Clause (b)(ii) requires tax to be collected at the higher of twice the rate ordinarily specified or 5%, capped at 20%, when the collectee has no valid PAN. A non-resident with no permanent establishment in India is excluded from this higher TCS rate under clause (d).
Can a payee still get a lower-deduction certificate without a PAN?
No. Under section 397(2)(f)(ii), no certificate can be granted on an application for a lower or nil-deduction certificate under section 395(1) or (3) unless the applicant furnishes a valid PAN.
What happens to a declaration filed under section 393(6) or 394(2) without a PAN?
It becomes invalid under section 397(2)(f)(i), and the deductor or collector must then deduct or collect tax at the higher rate under clause (b)(i) or (b)(ii), as though no declaration had been filed at all.
See also: Permanent Account Number (PAN), Section 393(2) — TDS on Payments to Non-Residents, and Withholding Tax.
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