Overview
PAN (Permanent Account Number) is a ten-character alphanumeric identifier issued by the Indian Income Tax Department to individuals, companies, and other entities. Each PAN is unique and serves as a universal identification key for all financial transactions and tax-related activities in India. The format of a PAN is five letters, four digits, and one letter (for example, ABCDE1234F). PAN was introduced to track taxable financial transactions and prevent tax evasion by linking all of an entity’s dealings (like income, investments, and acquisitions) to this single number. For individuals, the PAN is lifelong and does not change with change of address or job, making it a stable ID for financial identity.
Purpose and Usage
PAN’s primary purpose is for taxation: it must be quoted in all correspondence with the Income Tax Department, such as filing income tax returns, paying taxes, or responding to notices. Beyond that, PAN is now required for a host of financial transactions to ensure they are reported to tax authorities. Key usages include:
• Salary and Tax Payments: Employers use employees’ PANs to deduct income tax (TDS) on salaries and attribute that tax payment to the correct individual. The PAN ensures that the tax credit goes into the employee’s tax account. Employees need PAN to file their annual tax returns as well.
• Banking and Financial Transactions: Opening a bank account (savings or current) requires PAN. Similarly, applying for a credit card or loan, investing in stocks, mutual funds, or even making fixed deposits beyond a threshold all require quoting PAN. The government has mandated PAN for any cash deposit or withdrawal exceeding ₹50,000 at a time, and for aggregating smaller deposits that total above ₹2.5 lakh in a financial year in bank accounts.
• High-Value Transactions: Purchasing or selling property, buying vehicles, payments above certain limits (like hotel bills over ₹50,000, or jewelry purchases beyond ₹2 lakh) require PAN disclosure. Basically, any high-value transaction is linked via PAN so that the tax department can monitor big spends against declared income.
• Business and Professional Use: Companies and partnership firms need PAN for their own tax filings and also when engaging in transactions like payments to contractors, foreign remittances, etc. Quoting the firm’s PAN is necessary on invoices in certain cases. For freelancers or consultants, PAN is needed for clients to deduct TDS on professional fees.
Applicability and Obtaining PAN
Who needs a PAN? Any person or entity that has a taxable income in India, or intends to enter financial transactions in India above the specified thresholds, should obtain a PAN. This includes: Indian citizens (even minors can get a PAN through parents if needed, especially if they hold investments), companies incorporated in India, partnerships, trusts, as well as foreign companies or foreign nationals if they have a taxable presence or need to do financial transactions (for example, a foreign company earning income in India or a foreign individual investing in Indian stocks would obtain a PAN). Essentially, PAN is now a must-have identification for participating in the Indian economy formally.
How to get PAN: The process involves submitting an application (Form 49A for Indian citizens, 49AA for foreigners) along with proof of identity, address, and date of birth (for individuals) or incorporation documents (for entities). This can be done online through portals of NSDL or UTIITSL (which are authorized to process PAN applications) or through physical forms. The documents need verification – often Aadhaar based e-KYC has made this easier for individuals. Once processed, a PAN is allotted and a PAN card is issued (a laminated card with the PAN, name, DOB, photo, signature). These days e-PAN (in PDF format) is also issued and is equally valid. The PAN card is an important proof of identity accepted in various contexts, but its main role is tax identification.
Compliance and Regulatory Implications
Having a PAN and quoting it where required is a legal obligation. Some compliance points:
• Mandatory Linking with Aadhaar: The government has mandated linking PAN with Aadhaar (the biometric ID) to eliminate duplicate PANs and improve tax compliance. Deadlines have been set (and extended multiple times); failing to link can make the PAN inoperative, meaning one cannot use it until linked. As of 2025, PAN-Aadhaar linking is compulsory, and if not done, the PAN might get deactivated and a penalty may be levied to reactivate it. HR departments often remind employees to complete this linkage to ensure their PAN remains valid for payroll processing.
• Quoting PAN: If a person doesn’t quote PAN where required, the transaction may either not be processed or could attract a higher rate of tax withholding. For example, if an individual doesn’t provide PAN to a bank where interest is earned, the bank must deduct TDS at a higher flat rate (20% instead of say 10%). Similarly, for salary, if an employee fails to provide PAN, the employer is mandated to withhold tax at the maximum rate (because the individual would be treated as not having PAN). This makes it crucial from an employee’s perspective to provide PAN to employers and all financial institutions.
• One PAN per Person: Legally, one individual or entity should not possess more than one PAN. Holding multiple PANs or misusing PAN (like giving someone else’s PAN for your transactions) is an offense. If inadvertently one ended up with duplicate PANs, there is a procedure to surrender extras.
• Penalties: If required to have a PAN (due to transactions or income) and one does not obtain it or deliberately avoids using it, Section 272B of the Income Tax Act can impose a penalty of ₹10,000 for failure to comply with PAN provisions. Additionally, incorrect quoting or misuse can attract penalties.
For HR and payroll, collecting PAN from employees at onboarding is standard procedure, as it’s needed for processing Form 16 (tax certificate) and TDS returns. PAN details are also used in various statutory forms (like PF returns sometimes require PAN for international workers, etc.). Ensuring the PAN records are accurate (matching the employee’s name as per PAN card) is important to avoid discrepancies in tax credit.
In summary, PAN is an essential element of regulatory compliance in India’s financial and tax system. It ties together all financial actions of an individual or company. In the era of increasing digitization, PAN data is used in combination with Aadhaar and other databases to track economic activity, making it a critical compliance point for both individuals and organizations.
