Section 397 Income Tax Act 2025: What Are the TDS and TCS Compliance Rules?
Section 397 sets out the core compliance and reporting obligations for tax deducted at source (TDS) and tax collected at source (TCS). It addresses TAN registration, PAN disclosure, higher tax rates when PAN is not furnished, deposit of tax, filing of statements and correction of reporting errors.
Chapter: XIX - Collection and recovery of tax.
Law: Income-tax Act, 2025, as amended by the Finance Act, 2026.
Important amendment: Section 397(1)(c) was substituted with effect from 1 October 2026.
Official source: Income Tax Department - amended Act (PDF).
What is Section 397 of the Income-tax Act, 2025?
Section 397 contains three principal subsections. Subsection (1) regulates the tax deduction and collection account number (TAN). Subsection (2) requires a valid Permanent Account Number (PAN) and prescribes consequences where it is not furnished. Subsection (3) governs payment to the Central Government, statements, information returns and corrections.
| Provision | Primary obligation |
|---|---|
| 397(1) | Apply for TAN where required, quote it on prescribed documents, and check statutory exceptions. |
| 397(2) | Obtain and furnish valid PAN; apply higher TDS/TCS rates and restrictions where PAN is absent. |
| 397(3) | Deposit tax, file statements and information, correct qualifying statements, and comply with special reporting duties. |
Section 397(1): When is TAN required for TDS or TCS?
Under Section 397(1)(a), every person deducting or collecting tax must apply to the Assessing Officer for a tax deduction and collection account number within the prescribed time, unless already allotted one or covered by an exception.
Section 397(1)(b) requires the allotted TAN to be quoted in challans, statements, certificates and prescribed documents relating to the transactions.
TAN exceptions effective from 1 October 2026
The Finance Act, 2026 substituted Section 397(1)(c) with effect from 1 October 2026. The TAN application requirement under clause (a) does not apply to the following specified persons or transactions:
- A person deducting tax on a transaction covered by Section 393(1), Table serial numbers 2(i), 3(i) or 6(ii).
- A person referred to in Section 393(4), Table serial number 12.C(a), in respect of a virtual digital asset transfer transaction subject to Section 393(1), Table serial number 8(vi).
- A resident individual or Hindu undivided family deducting tax on consideration for transfer of immovable property under Section 393(2), Table serial number 17.
- Any person notified for this purpose by the Central Government.
Note: These are precise statutory cross-references. Whether an exception applies depends on the particular transaction and the law effective on its date; it is not a blanket exemption from the obligation to deduct tax.
Section 397(2): What happens if PAN is not furnished?
Under Section 397(2)(a), a person entitled to receive a payment subject to TDS, or making a payment subject to TCS, must furnish a valid PAN to the person responsible for deduction or collection.
Higher rates for non-furnishing of PAN
| Transaction | Rate rule under Section 397(2)(b) |
|---|---|
| Most payments subject to TDS | Highest of the rate in the relevant provision, rates in force, or 20%. |
| Payments under Section 393(1), Table serial numbers 8(ii) or 8(v) | Highest of the relevant rate, rates in force, or 5%. |
| Payments subject to TCS | Higher of twice the rate in the relevant provision or 5%, capped at 20%. |
The special rates must be read with all exceptions and qualifications in Section 397(2). In particular:
- Section 397(2)(c): The higher TDS rule does not apply to specified interest on long-term bonds paid to certain non-residents and other prescribed payments, subject to the stated conditions.
- Section 397(2)(d): The higher TCS rule does not apply to a non-resident without a permanent establishment in India.
- Section 397(2)(e): In specified rent cases, the higher TDS deduction is capped by the rent payable for the last month of the tax year or tenancy, as applicable.
- Section 397(2)(f) and (g): A declaration under Section 393(6) or 394(2) without valid PAN becomes invalid; an application under Section 395(1) or (3) without valid PAN cannot result in the relevant certificate. An invalid declaration triggers deduction or collection under the higher-rate rule.
- Section 397(2)(h): The deductee or collectee must provide valid PAN, which must be reflected in bills, vouchers, correspondence and other documents exchanged.
Section 397(3): Tax deposits, reporting and correction statements
397(3)(a): Deposit of TDS, TCS and employer-paid tax
Every person responsible for deducting or collecting tax, and an employer covered by Section 392(2)(a), must pay the relevant amount to the credit of the Central Government within the prescribed time. Section 397 does not itself state one universal calendar due date for every case.
397(3)(b): Periodic statements
After paying tax, the responsible person must deliver the prescribed statement to the prescribed income-tax authority or authorised person, with the prescribed period, form, verification, particulars and deadline.
397(3)(c) to (e): Special reporting
- Clause (c): Prescribed authorities must provide statements to specified buyers, licensors or lessees under Section 394(1), Table serial numbers 1 to 4 or 9.
- Clause (d): A person making a payment to a non-resident (other than a company) or foreign company must furnish information in the prescribed manner, whether or not the sum is chargeable to tax.
- Clause (e): Designated Government officers must report specified tax credits made without a challan.
397(3)(f): Time limit for correction statements
A person filing a statement under clause (b) or (e) may correct discrepancies or update information through a prescribed correction statement within two years from the end of the tax year in which the statement was required to be delivered, including statements covered by the cross-reference to Section 200 of the Income-tax Act, 1961.
397(3)(g): Additional information reporting
Specified banking companies, co-operative societies and public companies paying resident interest within the relevant threshold must file prescribed statements. The Board may extend reporting to other persons paying residents income liable for TDS. The provision also permits corrections to such information statements in the prescribed manner.
397(3)(h): TCS not collected
A person responsible for collecting tax under Section 394 who fails to collect it remains liable to pay the tax to the Central Government in accordance with clause (a), irrespective of that failure. Separate consequences may arise under Section 398.
Relevant statutory and compliance definitions
- TAN (Tax Deduction and Collection Account Number)
- An account number allotted for persons responsible for tax deduction or collection, subject to the exceptions in Section 397(1)(c).
- PAN (Permanent Account Number)
- The valid identification number required to be furnished for specified TDS and TCS transactions under Section 397(2).
- Deductor
- The person responsible under the Act for deducting tax from a payment or credit.
- Collector
- The person responsible under the Act for collecting tax in a transaction covered by the relevant TCS provision.
- Permanent establishment
- For Section 397(2)(d), this includes a fixed place of business through which the enterprise's business is wholly or partly carried on.
- Correction statement
- A prescribed statement filed to correct discrepancies or update information in an earlier statement, subject to the relevant subsection and applicable time limit.
Practical illustrations
Example 1: PAN not provided for an ordinary TDS payment
If a payment is ordinarily subject to TDS at 10%, and no exception applies, failure to provide a valid PAN may require deduction at 20% under Section 397(2)(b)(i), since the highest applicable rate controls.
Example 2: Higher TCS where PAN is absent
If the otherwise applicable TCS rate is 2%, the comparison under Section 397(2)(b)(ii) is twice that rate (4%) against 5%. The higher rate is 5%, subject to the subsection's exceptions.
Example 3: Correcting a reporting error
A deductor discovers an incorrect PAN in a filed statement. Section 397(3)(f) permits a prescribed correction statement for statements covered by clauses (b) or (e), within the statutory two-year period. The deductor should check the applicable form and filing requirements.
Frequently asked questions
Is TAN mandatory for every TDS transaction?
Section 397(1) generally requires a tax deduction and collection account number, but clause (1)(c) specifies transaction-based and notified exceptions. The exception list was substituted with effect from 1 October 2026.
What happens if the recipient does not provide a valid PAN?
Section 397(2) prescribes higher deduction or collection rates, subject to the relevant payment category, statutory cap and stated exceptions.
What is the general higher TDS rate without PAN?
The rate is the highest of the relevant statutory rate, the rates in force, or 20%; for two specified entries in Section 393(1), the alternative statutory floor is 5% rather than 20%.
What is the higher TCS rate without PAN?
The higher of twice the relevant statutory rate or 5%, subject to a maximum of 20%, unless a statutory exception applies.
Can TDS and TCS statements be corrected?
Yes. Section 397(3)(f) permits correction statements for statements under clauses (b) and (e), subject to the two-year statutory period. Section 397(3)(g)(iii) separately permits correction of specified information statements.
Does failure to collect TCS remove the duty to deposit it?
No. Section 397(3)(h) preserves the collector's obligation to pay the tax to the Central Government even if collection under Section 394 was omitted.
Legal note: This explanatory article is based on the amended statutory text. Forms, filing dates and procedural requirements must be verified against the applicable Income-tax Rules and notifications for the relevant tax year.