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Section 194N – TDS on cash withdrawal in excess of Rs 1 crore

Section 194N was introduced in Union Budget 2019 to tax cash withdrawals over Rs 1 crore, discouraging cash payments. 

Updates: 

2023: Co-operative societies can now withdraw up to ₹ 3 crores annually. 

2020: The TDS threshold under Section 194N is now Rs 20 lakh for taxpayers who haven't filed returns in the last three years. 

If a taxpayer withdraws over Rs 20 lakh in a financial year, TDS will be deducted at prescribed rates. 

Details of Section 194N:

Section 194N Overview

Section 194N applies to cash withdrawals over Rs 1 crore from a bank account in a financial year. This includes all individual and collective withdrawals. It affects a range of taxpayers, such as: 

  • Individuals
  • Hindu Undivided Families (HUF)
  • Companies
  • Partnership firms or LLPs
  • Associations of Person (AOPs) or Body of Individuals (BOIs)

Exemptions are made for payments to: 

  • The Government
  • All banks (private or public sector)
  • Co-operative banks
  • Post-offices
  • Business correspondents of banking companies
  • White Label ATM operators
  • Traders or agents under APMC (Notification No. 70/2019-Income Tax, 20th September, 2019)
  • Authorized dealers or agents/sub-agents of franchises,
  • RBI licensed Full-Fledge Money Changers (FFMC) or agents of franchises, under certain conditions (Notification No. 80/2019-Income Tax, 15th October, 2019).
  • Other persons notified by the Government of India

Threshold Limit Calculation

Tax is deducted by the payer if any cash payment made to an individual exceeds Rs 1 crore from their bank account within a financial year. This limit applies to each bank or post office account, not the taxpayer's account.

For instance, if a person has three bank accounts with three different banks, he is permitted to withdraw cash up to Rs. 3 crore (Rs.

 

Only TDS under Section 194N will be applied to cash withdrawals made by any taxpayer from bank accounts managed by such taxpayer (recipient).

For instance, if a bank pays its account holder (i.e., any taxpayer) in cash for more than Rs 1 crore in a fiscal year from the account the taxpayer maintains, the bank is required to deduct TDS.

If a taxpayer issues a bearer cheque over Rs 1 crore in a fiscal year to a third party, not the account holder, confusion may arise about whether this falls under section 194N. It's unclear if the bank should deduct tax from the account holder's funds regarding the third party cheque. 

In business payments, a bearer cheque won't be permitted as an expense under section 40(A)(3) of the Income Tax Act. Any payment over Rs 10,000 per day isn't allowed as business expenditure. 

Section 194N is applicable to payments made from 1 September 2019 onwards. However, the Rs 1 crore limit applies to cash payments/withdrawals made during FY 2019-20.

Introduction of Section 194N

'Section 194N – TDS on cash withdrawals over Rs 1 crore' was introduced via the Finance Bill, 2019 to reduce cash transactions and encourage the digital economy

Who is responsible for TDS deduction under Section 194N?

The payer performing the cash transaction is required to deduct TDS under Section 194N. These include: 

  • Any bank (private or public)
  • Co-operative banks
  • Post offices

This section doesn't apply to the following categories of payees:

  • Government body
  • Bank or co-operative bank
  • Banking company's business correspondent
  • White label ATM operator
  • APMC trader paying farmers
  • Other government-notified persons

Understanding TDS under Section 194N

TDS should be deducted by the payer when cash payments over Rs 1 crore in a financial year are made to the payee. This also applies if the payee withdraws money regularly and the total exceeds Rs 1 crore in a financial year. 

The tax is only deducted on the amount above Rs 1 crore. For instance, if a person withdraws Rs 99 lakh and then Rs 1,50,000, the TDS is only on the excess Rs 50,000.

TDS Rate under Section 194N

TDS is deducted at 2% for cash transactions over Rs 1 crore yearly under Section 194N. In an instance, the TDS on Rs 50,000 at 2% is Rs 1,000. 

For those who haven't filed income tax returns for the past three years, the deduction limit drops to Rs 20 lakh. 

The deduction rates are:
-2% for transactions over Rs 20 lakh and up to Rs 1 crore
-5% for transactions over Rs 1 crore

Key Takeaways

  1. The cash recipient can't provide Form No. 15G/15H to the bank or request a lower deduction certificate u/s 197.
  2. If the return date u/s 139(1) hasn't expired, the respective assessment year isn't included in the preceding three-year calculation.

Illustrations

Example 1 

Raj made several withdrawals in 2020-21 and hasn't filed his ITR for 2017-18, 2018-19, and 2019-20. The due dates for these have passed. 

Date

Withdrawal (Rs)

Total withdrawn (Rs)

Rate

Calculation

Tax deducted (Rs)

01/04/2020

14 lakh

14 lakh

21/07/2020

26 lakh

40 lakh

2%

(40 lakh -20 lakhs) x 2%

40,000

25/08/2020

35 lakh

75 lakh

2%

35 lakh x 2%

70,000

04/09/2020

35 lakh

1.10 cr

2% and 5%

(25 lakh x 2%) + (10 lakh x 5%)

1,00,000

18/10/2020

50 lakh

1.6 cr

5%

50 lakh x 5%

2,50,000

  • Section 194N applies when an amount is withdrawn from one or more accounts in the same bank.

Example 2 

Raj has a savings and current account with XYZ bank. His transactions in FY 2020-21 are: 

Date of cash withdrawn

Withdrawal from savings (in Rs)

Withdrawal from current (in Rs)

01-06-2020

5,00,000

15,00,000

15-07-2020

1,00,000

15,00,000

30-07-2020

2,00,000

20,00,000

01-10-2020

50,000

40,00,000

01-11-2020

1,50,000

10,00,000

Total

10,00,000

1,00,00,000

Tax to be deducted

Rs 20,000
(10,00,000+1,00,00,000-1,00,00,000)*2%

  • Tax deduction limit varies if multiple 
  • bank accounts exist.

Example 3 

Mr. Raj withdrew cash from these banks during the year–

Bank

Cash Withdrawn (FY 2020-21)

Axis Bank

₹60 lakh

SBI Bank

₹50 lakh

ICICI Bank

₹10 lakh

No bank needs to deduct TDS under Section 194N since no one has crossed the ₹1 crore limit. 

If Mr Raj withdraws more than ₹1 crore from SBI, TDS of 2% or 5% will apply.


 

The Tax Heaven

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