TDS on FD Interest When Your PAN Is Inoperative 2026: Section 206AA's 20% Rate, and the Relief Window That Fixes It

By Nitish Bharadwaj · Published Sep 23, 2026 · 6 min

If your PAN isn't linked to Aadhaar, it's legally 'inoperative' — treated as if you never furnished a PAN at all. Section 206AA then forces the bank to deduct TDS on your FD interest at a flat 20%, overriding the usual 10% under Section 194A, and blocks the Form 15G/15H exemption senior citizens rely on. A CBDT relief from August 2025 offers a fix: relink within two months, and the bank's short-deduction demand gets waived — though the extra tax cut from your interest still has to be claimed back at filing.

Every FD holder knows the basic rule: interest above ₹50,000 a year (₹1 lakh for senior citizens) gets TDS deducted at 10% under Section 194A. Fewer know that a completely different section can override that rate entirely, jumping it to a flat 20% — and the trigger has nothing to do with how much interest you're earning. It's about whether your PAN itself is legally 'operative,' a status that quietly breaks the moment you miss linking it to Aadhaar.

What 'Inoperative' Actually Means

PAN-Aadhaar linking became mandatory years ago, and any PAN that was never linked turned inoperative from July 1, 2023 onward. An inoperative PAN isn't cancelled in every sense — it still exists, it still shows up correctly on your bank's records, and you can still use it to open accounts. For TDS purposes specifically, though, the law treats an inoperative PAN exactly as if you'd never furnished a PAN at all, which is what pulls Section 206AA into play.

Section 206AA — The Section That Overrides 194A

Section 206AA of the Income Tax Act says that whenever a deductee hasn't furnished a valid PAN, the deductor must apply TDS at the highest of: the rate specified in the relevant section (10% under 194A for FD interest), the rate(s) in force, or a flat 20%. In practice, 20% is almost always the highest of these three, so that's the rate that applies. Because an inoperative PAN counts as 'no PAN furnished,' your bank is legally required to deduct 20% on your FD interest — not the 10% you'd expect — even though the PAN number on file is completely correct and matches your account.

The August 2025 Relief — A Prospective Fix, Not a Retrospective One

A CBDT circular effective for deductions made on or after August 1, 2025 gives some room to recover from this. If a depositor's PAN turns inoperative and the bank deducts TDS at 20% as a result, the bank won't face a 'short-deduction' demand for that period — provided the depositor relinks PAN with Aadhaar within two months of the end of the month in which the deduction was made. That protects the bank from a compliance demand; it does not automatically refund the extra 10% already deducted from your interest. That part is still yours to claim, and the only way to get it back is through your regular ITR — the excess TDS shows up as tax already paid, and any amount beyond your actual liability comes back as a refund once you file.

What This Looks Like on ₹5 Lakh of FD Interest

On ₹5 lakh of taxable FD interest in a year, 10% TDS under Section 194A works out to ₹50,000 withheld. At the inoperative-PAN rate of 20%, the same interest has ₹1 lakh withheld instead — an extra ₹50,000 sitting with the tax department rather than in your account, for the entire period the PAN stays inoperative. Relinking doesn't return that ₹50,000 immediately; it only stops the higher rate from applying to interest paid after the relink takes effect and PAN reactivation completes.

Fixing It

1. Check your PAN's status directly on the income tax e-filing portal, rather than assuming it's fine because it's never been flagged before
2. If inoperative, pay the ₹1,000 fee under Section 234H through e-Pay Tax
3. Complete the Aadhaar-PAN linking request on the same portal
4. Allow the stated reactivation window before assuming the fix has taken effect — banks continue deducting at 20% until PAN is confirmed active again, not from the date you submit the linking request
5. Once reactivated, ask your bank to apply the standard 10% rate going forward, and reconcile any excess TDS already deducted against your Form 26AS/AIS at ITR filing, exactly as our Form 26AS vs AIS reconciliation guide walks through

This sits on top of, not instead of, the regular TDS rules on FD interest — our complete guide to Section 194A TDS thresholds covers the ₹50,000/₹1 lakh limits that decide whether TDS applies at all. Section 206AA doesn't change that threshold — it only changes the rate once interest crosses it, from 10% to 20%. If you're holding FDs specifically to stay under that threshold by splitting deposits across banks, an inoperative PAN doesn't affect that strategy at all; it only matters once TDS is already due.