Section 194N – TDS on cash withdrawal

Summary

-The Union Budget 2019 has introduced Section 194N for tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore.

-The Budget 2020 has reduced the threshold limit for TDS to Rs 20 lakh for taxpayers who have not filed their income tax returns for past three years.

-Why is Section 194N- To discourage cash transactions in the country and promote the digital economy

-The recipient of cash cannot furnish Form No. 15G/15H to the bank and cannot apply for a lower deduction certificate u/s 197.

-While calculating three years immediately preceding the years, if the date of return u/s 139(1) has not expired, then that assessment year is not to be considered.

About Section 194N

Section 194 N applies to every person, being

• a Banking Company to which banking regulation Act, 1949 applies; or
• a co-operative society engage in carrying business of banking; or
• a post office

Who is responsible for paying any sum, being the amount or aggregate of amounts, as the case may be, in cash exceeding 1 crore during the previous year, to any person from one or more accounts maintained by such recipient-person with it, shall deduct tax at source @2% of such sum at the time of payment.

For example, if a person withdraws Rs 99 lakh in aggregate in the financial year and next time, an amount of Rs 150000 is withdrawn, the TDS liability is only on the excess amount of Rs 50000.

TDS would be 50000*2%= 1000

Modification in rate of TDS and threshold limit of withdrawal for recipient who has not furnished return of income for last 3 years

If the recipient has not furnished the returns of income for all the three assessment years relevant to the three previous years, for which the time limit of file return of income under section 139(1) has expired, where the sums is aggregate of amounts, as the case may be, in cash exceeding 20 lakhs during the previous year, and the tax shall be deducted at the rate of –

– 2% of the sum, where the amount or aggregate of amounts, as the case may be, being paid in cash exceeding 20 lakhs but up to 1 crore.

– 5% of the sum, where the amount or aggregate of amounts, as the case may be, being paid in cash exceeding 1 crore.

However, the Central Government is empowered to specify, with the consultation of RBI, by notification, the recipient in whose case this provision shall not apply or apply at reduced rate, subject to the satisfaction of the conditions specified in such notification.

Non-applicability of TDS under section 194N to any payment made to –

♦ the Government

♦ any banking company or co-operative society engaged in carrying on the business of banking or a post-office

♦ any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the RBI guidelines

♦ any white label ATM operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorization issued by the RBI under the Payment and Settlement Systems Act, 2007.

Illustrations

Example 1

Mr. Rohit has made the following withdrawals during the financial year 2020-21. He has not filed his ITR for the financial year-2017-18, 2018- 19, 2019-20 and that the due date for filing of return for these years has expired.

Section 194N is applicable when an amount is withdrawn from one or more accounts maintained with the same bank.

Example 2

Mr. Ronit has withdrawn cash from the following banks during the financial year–

In the above example, No bank is required to deduct TDS under Section 194N as the limit of Rs 1 crore is not exhausted in any of the banks.

However, if Mr. Ronit withdraws cash of more than Rs 1 crore from SBI bank, then SBI bank is liable to deduct TDS at 2% or 5%, as the case may be.