Section 397 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 397 is the compliance section of Chapter XIX. It requires a deductor or collector to hold a tax deduction and collection account number, requires both sides of a payment to deal with Permanent Account Numbers, fixes the higher rate that applies where the PAN is not furnished, and requires the tax to be paid to the Government with statements delivered afterwards. This article follows the text as per the Income-tax Act, 2025 as amended by the Finance Act, 2026. Businesses that deduct tax regularly can pair it with our TDS compliance support.
Every deductor or collector must obtain a tax deduction and collection account number (subject to the exceptions in clause (1)(c)) and quote it in challans, statements and certificates. A payee who does not furnish a valid PAN is subject to deduction at the higher of the specified rates, with 5% or 20% as the floor depending on the payment, and collection at twice the rate or 5%, capped at 20%. After paying the tax, the deductor must deliver a statement and may correct it within two years from the end of the tax year in which it was due.
Amendment and dates
Section 397 was amended by section 87 of the Finance Act, 2026. Clause (1)(c) is as substituted with effect from 1 October 2026; the other provisions of the section are in force from 1 April 2026 as the Act's commencement provides. Rules on time, form and manner are left to the Income-tax Rules, 2026 ("as may be prescribed"); see our rule-wise guides.
Section 397(1): the account number
| Clause | Rule |
|---|---|
| (a) | Every person deducting or collecting tax must apply to the Assessing Officer for allotment of a tax deduction and collection account number within the time prescribed, if not already allotted one |
| (b) | Where the number has been allotted, it must be quoted in all challans, statements and certificates referred to in Chapter XIX, and in all documents pertaining to such transactions as may be prescribed in the interests of revenue |
| (c) | Clause (a) does not apply to the persons listed below |
The persons excepted from clause (a) under clause (c), as it reads from 1 October 2026:
- a person in respect of a transaction where he must deduct tax under section 393(1) (Table: serial number 2(i), 3(i) or 6(ii));
- a person referred to in section 393(4) (Table: serial number 12.C(a)) for a transaction where he must deduct tax on consideration for transfer of a virtual digital asset under section 393(1) (Table: serial number 8(vi));
- a resident individual or Hindu undivided family who must deduct tax on any consideration for the transfer of any immovable property under section 393(2) (Table: serial number 17); and
- a person notified in this regard by the Central Government.
Which persons have been notified under item 4 is not in the text consulted. For the Tables behind these references, see our post on section 393.
Section 397(2): PAN of the payee
Clause (a) is written to override anything else in the Act. A person entitled to receive an amount on which tax is deductible, or paying an amount on which tax is collectible, must furnish a valid Permanent Account Number to the person responsible for deducting or collecting.
Higher rate when PAN is not furnished
If clause (a) is not complied with, clause (b) applies.
| Case | Rate |
|---|---|
| Tax to be deducted | The higher of: (A) the rate specified in the relevant provision of the Act; (B) the rate or rates in force; (C) 5% where tax is required to be deducted under section 393(1) (Table: serial number 8(ii) or 8(v)), or 20% in any other case |
| Tax to be collected | The higher of: (A) twice the rate specified in the relevant provision; (B) 5%, not exceeding 20% |
"Rate or rates in force" is the term the Act defines; its figures are fixed by the annual Finance Act and are not stated here.
Example (amounts and the other rates assumed). Anita Design Studio pays Rs. 1,00,000 to a vendor who has not furnished a PAN. Assume the rate in the relevant provision and the rate in force are both below 20% and the payment is not one of the two serial number 8 cases. The higher-of test then picks 20%, so tax of Rs. 1,00,000 x 20% = Rs. 20,000 is deducted.
Exceptions and consequences (clauses (c) to (h))
| Clause | Provision |
|---|---|
| (c) | The higher rate under (b)(i) does not apply to a non-resident who is not a company or foreign company in respect of (i) interest on long-term bonds as specified in section 393(2) (Table: serial number 2, 3 and 4), and (ii) any other payment on prescribed conditions |
| (d) | The higher collection rate under (b)(ii) does not apply to a non-resident who has no permanent establishment in India (including a fixed place of business through which the business is wholly or partly carried on) |
| (e) | For rent under section 393(1) (Table: serial number 2(i)), if tax is deducted at the higher rate, the deduction shall not exceed the rent payable for the last month of the tax year or the last month of the tenancy, as the case may be |
| (f) | A declaration under section 393(6) or 394(2) without a valid PAN becomes invalid; an application under section 395(1) or (3) without a valid PAN gets no certificate |
| (g) | Where a declaration becomes invalid under (f)(i), the deductor or collector deducts or collects as per (b)(i) or (ii) |
| (h) | The deductee or collectee must furnish the valid PAN to the deductor or collector, and it must be indicated in all bills, vouchers, correspondence and other documents sent to each other |
Section 397(3): paying and reporting
| Clause | Who | What |
|---|---|---|
| (a) | Person responsible for deduction or collection, or an employer referred to in section 392(2)(a) | Pay the amount deducted, collected or determined as per section 392(2)(b) to the credit of the Central Government in the prescribed time |
| (b) | The same persons, after paying | Deliver a statement to the prescribed income-tax authority (or a person authorised by it) for such period, in such form, verified in such manner, giving such particulars and within such time as may be prescribed |
| (c) | Every prescribed authority as per clause (b) | Deliver a statement, in the prescribed form and manner, to the buyer, licensor or lessee referred to in section 394(1) (Table: serial number 1 to 4 or 9) |
| (d) | A person paying a sum to a non-resident who is not a company or foreign company, whether or not chargeable under the Act | Furnish information on the payment, in the prescribed form and manner |
| (e) | Government offices where the sum was paid to the credit of the Central Government without a challan | The Pay and Accounts Officer, Treasury Officer, Cheque Drawing and Disbursing Officer or other responsible person delivers a prescribed statement |
| (f) | Every person referred to in (b) or (e) | May correct a discrepancy or update information by a correction statement, within two years from the end of the tax year in which the statement is required to be delivered under those clauses or under section 200 of the Income-tax Act, 1961 (43 of 1961) |
| (g) | See below | Statements for interest paid to residents |
| (h) | A person responsible for collecting tax who fails to collect as per section 394 | Is still liable to pay the tax to the credit of the Central Government as per clause (a) |
Clause (f) names section 200 of the Income-tax Act, 1961 as the text prints it; nothing further is said here about that Act.
Clause (g): interest statements
Under (g)(i), a banking company, co-operative society or public company referred to in Note 1 to section 393(1) (Table: serial number 5), responsible for paying to a resident interest not exceeding the threshold limit in section 393(1) (Table: serial number 5(ii) and (iii)), delivers a prescribed statement. Under (g)(ii), the Board may require any other person paying to a resident an income liable to deduction at source to deliver a statement. Under (g)(iii), either may deliver a correction statement. Form, manner and time are as may be prescribed.
Example (dates assumed). Verma and Sons Pvt Ltd was required to deliver a statement for the quarter ended in a given tax year. It notices a wrong amount against a payee. Under clause (f) it may deliver a correction statement within two years from the end of that tax year. A late discovery of an error after that period is outside clause (f).
Consequences of not complying
Section 397 itself does not impose a penalty, but other sections react to it. A failure to pay deducted tax makes the person an assessee in default under section 398; our post on section 398 covers that. Statements delivered are processed under section 399; see the article on sections 396, 399, 400 and 401. The penalty provisions in Chapter XXI refer to section 397 in several places; those are in later articles of this series.
Need help with TDS compliance?
A missing PAN, a wrong TAN or an uncorrected statement raises the cost of every payment. Our TDS compliance team reviews deductee PANs, deduction rates and statements so that the points in section 397 are in order before they turn into notices.
Key takeaways
- Deductors and collectors must hold and quote a tax deduction and collection account number, except where clause (1)(c) excepts them.
- Clause (1)(c) is as substituted with effect from 1 October 2026.
- No valid PAN means the higher rate of deduction or collection under clause (2)(b), with exceptions for certain non-residents.
- Declarations and certificate applications without a valid PAN are invalid or not granted.
- Pay the tax first, then deliver the statement; a correction statement is allowed within two years from the end of the tax year concerned.
- Details of time, form and manner are left to the Income-tax Rules, 2026.
Read next
- Sections 396, 399, 400 and 401: income received, processing, relaxation and bar on direct demand
- Section 402: definitions for TDS and TCS (clauses 1 to 26)
- Section 398: assessee in default and interest
- Section 393: the single TDS section
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.