Under the Indian income tax system, the responsibility of tax compliance does not rest only on the person earning income. In many situations, the law requires tax to be deducted or collected at the time of payment itself. This mechanism, known as Tax Deducted at Source (TDS) and Tax Collected at Source (TCS), helps the government receive tax in advance and ensures better tracking of taxable income.
To perform this role legally, the person or entity responsible for deducting or collecting tax must obtain a Tax Deduction and Collection Account Number, commonly referred to as TAN. Many taxpayers assume that PAN is sufficient for all tax-related activities, but that is not always the case. Understanding who is eligible for TAN registration is important to ensure compliance and avoid penalties.
What is TAN and Why is it Required?
TAN is a ten-character alphanumeric identification number issued by the Income Tax Department of India. It is mandatory for anyone who is required to deduct or collect tax at source under the Income Tax Act, 1961.
TAN must be quoted on all TDS and TCS-related documents, including challans for tax payment, TDS returns, TDS certificates issued to deductees, and correspondence with the tax department. Without TAN, a person cannot legally deposit TDS or file TDS returns.
Failure to apply for TAN or quoting an incorrect TAN can attract penalties and may also result in non-acceptance of TDS returns.
Who is Required to Obtain a TAN?
Any person or organisation that is responsible for deducting or collecting tax at source is eligible and legally required to apply for a TAN. This obligation does not depend on the size of the business or the nature of income, but on whether the transaction attracts TDS or TCS under the law.
1. Companies
All companies, whether private limited or public limited, must obtain a TAN if they make payments that require TDS. Common examples include salary payments to employees, professional or consultancy fees, rent, interest, commission, and payments to contractors.
Once a company becomes liable to deduct tax, TAN registration becomes compulsory.
2. Partnership Firms and LLPs
Partnership firms and Limited Liability Partnerships are also required to apply for TAN if they make payments covered under TDS provisions. Even small firms must obtain a TAN if they pay professionals, contractors, or employees and the payment crosses the applicable threshold.
The nature of registration, whether registered or unregistered partnership, does not affect the requirement for TAN.
3. Sole Proprietors
Sole proprietors often believe that TAN is not required for individual businesses. However, a proprietor must obtain a TAN if they are liable to deduct tax on payments made during the course of business or profession.
For instance, if a sole proprietor hires a consultant, pays contractual fees, or employs staff, and TDS is applicable, TAN registration becomes mandatory.
4. Trusts, Societies, and NGOs
Trusts, charitable institutions, societies, and non-profit organisations are also eligible for TAN registration if they make payments that attract TDS. The fact that an organisation is non-profit or enjoys tax exemptions does not exempt it from TDS compliance.
If such entities pay salaries, professional fees, or contractual charges, they must deduct tax and therefore must hold a valid TAN.
5. Government Bodies and Local Authorities
Government departments, public sector undertakings, municipal corporations, and other local authorities are compulsorily required to obtain a TAN if they deduct or collect tax at source. For these entities, TAN is essential for statutory compliance and reporting.
6. Banks and Financial Institutions
Banks and financial institutions that deduct tax on interest payments or collect tax at source on specified transactions must also obtain a TAN. Their compliance obligations are generally higher due to the volume and nature of transactions.
Eligibility of Individuals for TAN Registration
An individual does not require TAN merely because they earn income. TAN becomes necessary only when the individual is responsible for deducting or collecting tax at source.
For example, an individual carrying on a business or profession who makes payments to professionals, contractors, or employees may be required to deduct TDS. In such cases, TAN registration is mandatory.
However, individuals making purely personal payments that are not subject to TDS do not need a TAN.
Situations Where TAN Is Not Required
There are certain specific cases where TAN is not mandatory even though tax is deducted. In such situations, the law allows the use of PAN instead of TAN.
For instance, individuals and Hindu Undivided Families purchasing immovable property or paying high-value rent under specific sections of the Income Tax Act can deduct tax using their PAN. In these limited cases, separate TAN registration is not required.
It is important to note that these exceptions are transaction-specific and should not be treated as a general rule.
Why TAN Registration is Important?
TAN is the backbone of the TDS and TCS compliance system. Without TAN, it is not possible to file TDS returns, issue Form 16 or Form 16A, or claim proper credit of tax deducted.
For businesses, non-compliance with TAN requirements can lead to penalties, interest, and disputes with vendors or employees who may not receive TDS credit. Over time, this can also affect the credibility of the business during audits or due diligence.
Timely TAN registration ensures smooth tax compliance and avoids unnecessary legal complications.
Penalty for Non-Compliance
If a person who is liable to deduct or collect tax fails to apply for a TAN, a penalty may be imposed under the Income Tax Act. Additionally, quoting an incorrect TAN or failing to quote TAN in prescribed documents can also attract penalties.
These penalties, though seemingly small initially, can accumulate and lead to financial and procedural difficulties.
Conclusion
Any person or entity that is responsible for deducting or collecting tax at source under Indian income tax laws is eligible and required to obtain a TAN. This includes companies, firms, proprietors, trusts, government bodies, and financial institutions engaged in taxable transactions. While not every individual needs TAN, those involved in business or professional activities that attract TDS must apply for it without delay. Understanding TAN eligibility helps ensure legal compliance, prevents penalties, and supports smooth tax administration.
