FM Nirmala Sitharaman has presented her first Union Budget on 5 July 2019.With a view to encourage digital payments and discourage the practice of making payments in cash, the Union Budget 2019 has introduced Section 194N for deduction of tax at source (TDS) on cash withdrawals exceeding Rs 1 crore.

Section 194N is applicable in case of cash withdrawals of more than Rs 1 crore during a financial year. This section will apply to all the sum of money or an aggregate of sums withdrawn from a particular payer in a financial year.

The section will apply to withdrawals made by any taxpayer including:

a) An Individual

b) A Hindu Undivided Family (HUF)

c) A Company

d) A partnership firm or an LLP

e) A local authority

f) An Association of Person (AOPs) or Body of Individuals (BOIs)

The following payers are covered under this section:

a) Any bank (private or public sector)

b) A co-operative bank

c) A post office

The tax will be deducted by the payer while making payment to any individual in cash from a taxpayer’s bank account on the amount in excess of Rs 1 crore.

The limit of Rs 1 crore in a financial year is with respect to per bank or post office account and not a taxpayer’s individual account. For example, a person having three bank accounts with three different banks, he can withdraw cash of Rs 1 crore * 3 = Rs 3 crores without any TDS.

The cash withdrawal made by any taxpayer from the bank accounts maintained by such recipient will only attract TDS under Section 194N. For instance, if a bank makes a cash payment of more than Rs 1 crore in an FY to its account holder (i.e any taxpayer) from the account maintained by such taxpayer, then the bank will have to deduct TDS.

In the case of a payment made by a taxpayer through a bearer cheque issued to third party, in excess of Rs 1 crore in a financial year, the recipient of the cash is not the account holder, but a third party. In such a case, the payment is not made by the bank to the account holder.

In the above situation, there is an ambiguity that whether such bearer cheque given to any person (like vendor) to collect payment from the bank will be covered under section 194N? Whether the bank is liable to deduct tax on the funds of the account holder in respect of the bearer cheque issued to third party.

Separately, in case of business payments, payment made through a bearer cheque would not be allowed as an expenditure under section 40(A)(3) of the income tax act. Any payment made exceeding Rs 10,000 per day (in a single transaction or in aggregate) is not allowed as business expenditure.

The limit of Rs 1 crore will be applicable to the cash payments/withdrawals made during the FY 2019-20. The provisions of Section 194N will be applied to the payments made on or after 1 September 2019.

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