Section 194N was inserted into Income Tax Act, 1961 (the Act) via Finance Act (No.2) 2019 which mandated that tax must be deducted at source (TDS) at the rate of 2% if cash withdrawals exceed Rupees one crore in a previous year. This section stands amended by Finance Act, 2020 which has brought in significant changes.
The erstwhile provisions of section 194N continue to apply i.e. TDS continues to be applicable at the rate of 2% on cash withdrawal over Rs. 1 crore in a financial year. In addition to this, 194N comes with an unpleasant twist in its new avatar after its amendment.
For persons who have failed to file their return of income promptly in the last 3 years, TDS of 2% would be applicable for cash withdrawals over Rs. 20 lakhs upto Rs. 1 crore and a higher rate of TDS at 5% applies beyond Rs. 1 crore.
There are several questions and concerns surrounding the constitutional validity, applicability and implementation of the provisions of section 194N and this write up is an attempt to summarize the understanding of this section in the form of frequently asked questions with a few practical examples.
The modified language of section 194N reads as follows:
“Payment of certain amounts in cash.
194N. Every person, being,—
(i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);
(ii) a co-operative society engaged in carrying on the business of banking; or
(iii) a post office,
who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of such sum, as income-tax:
Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—
(i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and
(ii) the deduction shall be—
(a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or
(b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:
Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first proviso shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification:
Provided also that nothing contained in this section shall apply to any payment made to—
(i) the Government;
(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007):
Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.”
Salient features of section 194N are as follows:
A simple reading shows that this section applies to payments made in Cash (and not to any other mode of payment). The recipient can be any person i.e. individual, firm, company or any other entity regarded as person under the Act including a non-resident.
Further, this section casts an obligation on three distinct categories of payers. i.e. (a) Banks (including scheduled banks, co-operative banks, regional rural banks etc.) to whom Banking regulation Act is applicable (b) Co-operative Societies engaged in banking business and (c) Post office.
The earlier threshold was Rs. 1 crore and a flat rate of 2% TDS was applicable on all cash withdrawals exceeding the prescribed limit. After the amendment, while the earlier provisions continue to apply in general, specific carve out is inserted for those persons who have not filed their return of income in the last 3 years. They would be subject to a combination of a higher rate of TDS and a lower threshold on their cash withdrawals.
To understand the provisions in detail, the author believes that the following FAQs would be appropriate. A few questions are related to first time implementation in the middle of the year 2019. Nonetheless, they form part of this FAQs and make it a comprehensive read.
1. When did section 194N come into force?
Applicable from Sep 01, 2019
2. Whether it applies to cash withdrawals in excess of 1 crore made after Sep 01, 2019 or withdrawals in the financial year from Apr 01, 2019 should be reckoned?
The section clearly states that it is applicable for the cash withdrawals exceeding the threshold during the previous year. This implies, for calculation of threshold limit, all cash withdrawals from Apr 01, 2019 should be considered.
Example 1: If on Aug 31, 2019 a person withdraws more than 1 Cr in cash the TDS provisions are not applicable, as it is prior to the date of this section coming into effect. However, if the same person withdraws even Rs. 100 in cash on Sep 01, 2019 or thereafter the TDS provisions kick in.
Example 2: A person has withdrawn Rs. 75 Lakhs upto Aug 31, 2019. Further withdrawal of Rs. 20 Lakhs is made on 2nd Sep 2019 – TDS is not applicable as the limit of 1 crore is not breached in the year. If further withdrawal of Rs. 15 lakhs is made on 6th of Sep, 2019 – TDS is applicable u/s 194N.
3. Whether TDS applies on cash withdrawals from Rupee 1 in case the aggregate withdrawals are in excess of prescribed threshold?
TDS u/s 194N applies on cash withdrawals only in excess of prescribed threshold. This means TDS will not apply on the first one crore (or twenty lakhs as the case may be) of cash withdrawal during the previous year. It applies only on the amount withdrawn in cash in excess of prescribed limit.
4. Whether TDS applies on cash withdrawals from a single account of the account holder or multiple accounts should be reckoned together?
The language of the draft bill (in 2019) provided that cash withdrawal from single account should be considered for this purpose. However, this anomaly was duly rectified by inserting the phrase “one or more accounts maintained by the recipient”. Therefore, cash withdrawals from all accounts of the same person should be considered in aggregate for reckoning the threshold limit.
5. Whether TDS is applicable for cash withdrawals made by Charitable Institutions, Clubs, AOPs, Trusts, Resident Welfare Associations, etc. from its bank accounts?
If cash withdrawals exceed the prescribed threshold, it is applicable in case of all persons in general. However, exceptions are clearly defined in the third proviso. TDS is not applicable in case of the Government, Co-operative society engaged in banking business, business correspondent or ATM operator of a banking company or co-operative society engaged in carrying on the business of banking and other notified persons. This means 194N is applicable in all other cases including Charitable Institutions, Clubs, AOPs, Trusts, Resident Welfare Associations, etc.
6. How 194N should be applied in case of cash withdrawals involving joint accounts?
This is a grey area where there could be multiple view-points. Let’s consider an example: Husband and wife has individual accounts in a Bank. They also have a joint account in the same bank. Let’s say they have withdrawn upto 90 lakhs from their individual accounts in cash. Now, the husband intends to withdraw Rs. 11 lakhs from their joint account in cash. In this case, one might argue that only 50% of cash withdrawal should be attributed towards husband and TDS may not be required. In my view, this may not be appropriate. Whether Rs. 11 lakhs cash withdrawal is made by husband or wife, the limit should be treated as breached. This is so because both persons (in this case) are responsible for the operation of the account and qua each recipient the limit is reckoned from all accounts maintained in the bank. Even the banking software must be attuned to detect cash withdrawals breaching the specified threshold by duly considering cash withdrawals even in the joint accounts.
7. What is the best way for implementation from a practical perspective?
Assuming all account holders are KYC cleared, the banks, societies and Post Office could rely on Permanent Account Number (PAN) of the account holder to be recognized as the key field within their database to prompt TDS on cash withdrawal u/s 194N once the limit is breached.
It should be noted that the PAN as a key field should be considered and applied on all India basis. The limit should be reckoned not a branch level or city level but at the institution level regardless of where the home branch for that particular account might be.
This might pose a great challenge if cash is withdrawn from foreign branches. It would be far-fetched to interpret the language in such manner so as to have extra territorial applicability. But, one should note there plain reading of the language provides no exception for cash withdrawals made outside India.
TDS on Cash withdrawals at the ATMs is definitely another challenge from a practical perspective considering multiple thresholds and TDS rates.
8. Is TDS is applicable on issue of bearer cheques?
This is another debatable area. If one were to consider the intention behind the introduction of section 194N, (promoting digital economy and discouraging cash transactions) then TDS must also be applied on cash withdrawals by use of bearer cheques provided it breaches the threshold. However, the fundamental questions is – whether issue of bearer cheque is same as Cash withdrawal?
As the name itself suggests a bearer cheque is payable to the bearer of the cheque. A bearer could be any person other than the holder of the account.
A ‘cheque’ is defined under the Negotiable Instruments Act, as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. The fact that an instrument in writing separately recognized as ‘cheque’ is employed to direct the banker to disburse the amount, it must be treated differently than a mere cash withdrawal or a self-cheque.
Closer examination of the provisions of section 194N reveals that the focus is not on the type of instrument used to withdraw the funds, the emphasis is on whether cash is paid out of the account held by the person or not. Although withdrawal by bearer cheque is not same as cash withdrawal simpliciter, it culminates in payment of cash by the banker from the account maintained by the account holder. TDS is on “aggregate of sums, in cash, in excess of one crore rupees”. There is no distinction based on the instrument employed for withdrawal. So, one might want to conclude that TDS is applicable on issue of bearer cheques as well.
This is not the end of the debate. A literal interpretation of the next phrase ‘from one or more accounts maintained by the recipient with it’ – suggests that the recipient of cash must be the same person who has maintained the bank account. This is not true in case of bearer cheques as the recipient will usually be a person other than the bank account holder. Therefore, one may still argue that TDS would not be applicable u/s 194N for issue of bearer cheques.
While more than one view is possible, the tax office appears to think issue of bearer cheques are on par with cash withdrawals. When one takes note of item (c) under serial no.1 under Rule 114E which mentions ‘cash withdrawals (including through bearer’s cheque)’ for the purposes of Specified Financial Transactions Reporting. Therefore, the author believes that taking a conservative stance appears to be prudent to avoid unpleasant consequences.
9. Assuming the threshold is breached, how to calculate the TDS amount? Whether it should be on an inclusive or exclusive basis? If a person withdraws Rs 100, whether TDS of Rs. 2 should be in excess of Rs. 100 or TDS of Rs. 2 should be made from Rs. 100 and Rs. 98 to be paid in cash?
The language employed in section 194N is as follows:
“… who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of such sum, as income-tax:…”
If total payment were to be in excess of prescribed threshold in cash, the emphasis is to deduct two percent of such sum exceeding the threshold. Kindly note the language in the section it says two percent of such sum, it does not say two percent from such sum. This implies if Rs. 100 is being paid in excess of one crore, then two percent of such sum should be deducted. Therefore, if Bank pays out Rs. 100, then Rs. 2 should be debited towards TDS on cash withdrawal so that it is two percent of sum paid in cash to the account holder.
This proposition will not work in a situation where the account balance falls below and TDS cannot be made or at the time of closure of account by cash withdrawal. Imagine an amount of Rs. 1,00,01,000 lying in a bank account. If Rs. 1 crore is withdrawn in cash, the balance of Rs. 1,000 is insufficient for TDS @ 2%. Therefore, in such situations, the computation will have to be made on an inclusive basis. In this case, the customer could be allowed to withdraw 98,03,922/- in cash and TDS in the amount of Rs. 1,96,078/- must be deducted which works out to 2% of amount withdrawn. In such cases, customer will have to amend his request for cash withdrawal and state a lower amount for documentation purposes.
10. How to claim the amount deducted as TDS on cash withdrawal?
TDS made u/s 194N is expected to be reflected in Form 26AS. Notification 74/2019 has inserted sub rule (3A), under rule 37BA, which states “Notwithstanding anything contained in sub-rule (1), sub-rule (2) or sub-rule (3), for the purposes of section 194N, credit for tax deducted at source shall be given to the person from whose account tax is deducted and paid to the Central Government account for the assessment year relevant to the previous year in which such tax deduction is made.” Also note that proviso to Section 198 of the Act, clarifies that sum deducted in accordance with the provisions of section 194N for the purpose of computing the income of an assessee, shall not be deemed to be income received. The amount deducted as TDS would be reflected in Form 26AS and credit can be claimed in the usual course like any other TDS. However, TDS on cash withdrawals cannot be carried over to the successive assessment year(s) as there would be no corresponding income component present, either in the current year or in the future, against which credit can be claimed.
11. Is there a perfectly legal way of circumventing TDS from the point of view of the person withdrawing the cash?
Yes. The provision u/s 194N lays down that cash withdrawal from one or more accounts will have to be aggregated. If accounts are maintained with different or multiple banks then this provision is not applicable across all the banks or financial institutions considered together. One could plan their cash needs by transacting across accounts maintained with multiple banks so that in one financial year, in one bank the limit is not breached. Furthermore, if you are close to breaching the threshold at the year-end (say at about 30th March or so) then you could wait for a few days and withdraw sum in excess of one crore in the next financial year.
12. How does the first proviso to sec 194N operate as regards filing of tax returns in the past 3 years?
First proviso to Sec 194N says “Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years” This implies even if tax returns are filed even for one of the assessment years out of three, the proviso ceases to operate. Otherwise, the expression ‘all of the three assessment years’ would be rendered redundant and that would not be appropriate way of interpretation.
13. With respect to the first proviso, whether filing the tax return is necessary before the due date specified under section 139(1) for all past 3 AYs or whether a belated return is also considered as sufficient compliance for this purpose?
The relevant part of the proviso reads ‘Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply…’
The author believes that the correct way to interpret this would be to first consider date of payment i.e. date on which cash withdrawal is proposed to be made and then check for the three preceding assessment years where the due date for filing tax return under section 139(1) has expired.
For Ex. In case of an individual if the cash payment is made by Banker in October of that year, the due date for filing tax return for the immediately preceding year has expired. If say payment is made in April, consider the immediate 3 preceding assessment years where such due date for filing has already expired (barring the immediately preceding year where there is still time to file the return). After determining the 3 assessment years relevant for the purpose, check whether tax return is filed or not, for those years. There is no need to check whether the returns were filed within the original due date(s) in each of those assessment years. It is sufficient if they are filed at the date of proposed cash withdrawal. Based on this finding, the appropriate threshold and tax rate must be applied.
If this sounds too complicated for you, the Income tax dept. has made life easy and has come up with a PAN based online tool to verify applicability of 194N on its e-filing website. Otherwise, Bankers had to ask for return filing status of past 3 years for its account holder(s) before disbursing cash and determine the rate and threshold applicable for each case.
In the new online verification tool, one could input the PAN, provide a mobile no. for OTP and determine whether TDS must be applied against that PAN. The online verification link specifies the percentage of TDS to be applied and the applicable threshold.
The author opines that the online report appears to have been rolled out hastily without much thought. The output simply shows a standard text something like ‘TDS is deductible @ 2% if cash withdrawal exceeds Rs. 1 crore’. The output throws up the standard text without even stating or confirming the PAN to which it applies, the name of the person, date of verification and the return filing status for the past 3 years. None of these parameters are displayed in the output except the standard text. Even if the output shows something erroneous, there is absolutely no means to correct this as on date. Furthermore, this has little value for updating and preserving the documentation in Bank or financial records, as the output omits all vital information including the PAN itself. A bulk verification option for Banks could prove to be more useful. One can only hope that this would be fine-tuned in the coming days based on user feedback.
14. Constitutional Validity of Section 194N
Art. 265 of the Constitution of India prescribes that ‘No tax shall be levied or collected except by authority of law’. If tax is deducted at source, it implies that such TDS should be against certain income component. Common sense says that when a person withdraws his/her own monies from the bank account it is receipt of funds and there is no income component. Is it correct to characterize every receipt as ‘income’? It is difficult to conceive how and in what manner, mere withdrawal of money from bank account could be regarded as income? At this stage, it is important to note that proviso to Section 198, states the amount of TDS under Section 194N of the Act is not deemed to be ‘income’ received by the assessee. This shows that even the Govt. acknowledges and fully understands that there is no income component involved in cash withdrawal from one’s own account.
One could argue such a measure would serve as an index to know the extent of money getting circulated as cash in the economy. If that be the case, the counter would be the rules are already in place whereby cash withdrawal above a particular threshold mandates quoting of PAN. Furthermore, if this measure serves only as a trail to understand the extent of cash being circulated then even a mere 0.1% may serve the purpose. So why 2% or 5%? Furthermore, the author believes that discouraging cash transactions must be coupled with increased vigilance on combating cyber-crimes and digital theft. Unfortunately, this aspect is completely left out of the discussion. Anyway, that is a separate matter in itself.
The author believes that the constitutional validity of this provision may be debated and tested in courts and God knows how long it takes to have a final word, if at all it is challenged. In the meanwhile, today’s cold fact is that this section stays on the statute book and entities to which it applies must comply with the nagging requirement.
It would be interesting to see how the compliance and implementation of this relatively new section on the statute book evolves in the coming days.