TDS on Cash Withdrawal – Section 194N

TDS ON CASH WITHDRAWAL

Introduction:

This article discusses the concept of TDS on cash withdrawals as per the Income Tax Act, its applicability, rates, threshold limits, and the process of TDS deduction and return filing. The article also explains the role and importance of the TDS certificate and how it can be used to claim tax credit and consequences.

The concept of TDS on cash withdrawals is an important mechanism for the government to track and regulate high-value cash transactions, and to curb the circulation of black money in the economy. By deducting tax at the source, the government can ensure that the tax liability of the taxpayer is discharged at the earliest possible stage. It is important for taxpayers and financial institutions to be aware of the provisions and comply with the regulations to avoid any penalties or legal implications.

Tax Deducted at Source (TDS) on cash withdrawals is a tax collection mechanism where a certain percentage of tax is deducted at the time of making cash withdrawals from a bank account. The TDS on cash withdrawals is applicable under section 1 94N of the Income Tax Act, 1961, and was introduced in the Union Budget 2019.

Applicability & Exemptions:

According to section 194N of the Act, TDS has to be deducted if a sum or aggregate of sum withdrawn in cash by a person in a particular FY exceeds :

• ₹ 20 lakh (if no ITR has been filed for all the three previous AYs), or
• ₹ 1 crore (if ITRs have been filed for all or any one of three previous AYs).

Let’s take a closer look at the applicability and exemptions of TDS on cash withdrawals:

• Applicability:

TDS on cash withdrawals is applicable to all banks, co-operative banks, and post offices. Persons, who withdraws cash in excess of Rs. 1 crore in a financial year is liable to pay TDS at the rate of 2% on the amount exceeding Rs. 1 crore ( If return filed) and 2% on cash withdrawal in excess of Rs. 20 Lakhs (if no ITR has been filed for all the three previous AYs) and 5% on cash withdrawal in excess of Rs. 1 crore (if no ITR has been filed for all the three previous AYs).

It is proposed to increase the threshold limit of Rs. 1crore to Rs. 3crore, if the recipient is a “co-operative society”. This amend will take effect from 1st April, 2023 .

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

• An individual
• A Hindu Undivided Family (HUF)
• A company
• A partnership firm or an LLP
• An Association of Person (AOPs) or Body of Individuals (BOIs)
• Exemptions:

TDS on cash withdrawal u/s 194N will not apply to withdrawals made by the following persons:

• Central or state government
• Private or public sector bank
• Any cooperative bank
• Post office
• Business correspondent of any bank
• White label ATM operator of any bank
• Central government specified commission agents or traders operating under Agriculture Produce Market Committee (APMC) for making payment to the farmers on account of purchase of agriculture produce
• Authorized dealers and its franchise agent and sub-agent and Full-Fledged Money Changer (FFMC) licensed by RBI and its franchise agents
• Any other person notified by the Government in consultation with RBI.

It is important to note that The recipient of cash cannot furnish Form No. 1 5G/1 5H 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.

The exemption from TDS on cash withdrawals is not automatic and individuals must provide the necessary documents to claim the exemption. In case of non­compliance with the provisions of TDS on cash withdrawals, penalties and legal implications may arise. Therefore, it is important for taxpayers to be aware of the regulations and comply with the provisions to avoid any adverse consequences.

Rates of TDS:

As per the provisions of section 1 94N of the Income Tax Act, 1961, TDS at the rate of 2% is applicable on cash withdrawals exceeding Rs. 1 crore in a financial year. However, there are certain scenarios where the TDS rate may vary depending on the nature of the transaction and the status of the individual making the withdrawal. Let’s take a closer look at the rates of TDS applicable on cash withdrawals under different scenarios:

TDS rate of 2% on cash withdrawals exceeding Rs. 1 crore per financial year: As per section 1 94N of the Income Tax Act, 1961, if an individual withdraws cash in excess of Rs. 1 crore in a financial year, TDS at the rate of 2% is applicable on the amount exceeding Rs. 1 crore.

Example: Mr. X withdraws cash of Rs. 1.5 crore from his bank account in a financial year. TDS at the rate of 2% will be applicable on Rs. 50 lakh (i.e., Rs. 1.5 crore – Rs. 1 crore), which amounts to Rs. 1 lakh.

TDS rate of 5% on cash withdrawals by non-filers of income tax returns: If an individual withdraws cash in excess of Rs. 20 lakh in a financial year but has not filed income tax returns for the three preceding years, TDS at the rate of 5% is applicable on the amount exceeding Rs. 20 lakh.

Example: Mr. Y withdraws cash of Rs. 30 lakh in a financial year but has not filed income tax returns for the three preceding years. TDS at the rate of 5% will be applicable on Rs. 10 lakh (i.e., Rs. 30 lakh – Rs. 20 lakh), which amounts to Rs. 50,000.

The rate of TDS on cash withdrawals depends on various factors such as the amount of cash withdrawn, the status of the individual making the withdrawal, and whether income tax returns have been filed or not. It is important for taxpayers to understand the applicable rates of TDS to avoid any penalties or legal implications.

TDS Deduction:

The process of TDS deduction on cash withdrawals is a three-step process that involves the person making the payment, the person receiving the payment, and the government. The process is as follows:

Person making the payment: The person making the payment, such as a bank or a post office, is responsible for deducting TDS on cash withdrawals. When an individual withdraws cash in excess of Rs. 1 crore in a financial year, the bank or post office is required to deduct TDS at the rate of 2% on the amount exceeding Rs. 1 crore.

Person receiving the payment: The person receiving the payment, i.e., the individual who has withdrawn cash, is required to provide their PAN details to the bank or post office at the time of withdrawal. The PAN details are necessary for the purpose of TDS deduction and reporting.

Government: The government plays a regulatory role in the process of TDS deduction on cash withdrawals. The bank or post office is required to file a TDS return, containing details of the TDS deducted and deposited with the government, on a quarterly basis. The government then matches the TDS details filed by the bank or post office with the details furnished by the individual in their income tax returns. If there is a mismatch, the government may initiate an inquiry or impose penalties.

The role of the person making the payment, i.e., the bank or post office, is crucial in the process of TDS deduction on cash withdrawals. The bank or post office must ensure that the TDS is deducted and deposited with the government within the prescribed timelines. They must also ensure that the PAN details of the individual are verified and furnished correctly to avoid any issues with the TDS deduction process.

The role of the person receiving the payment, i.e., the individual who has withdrawn cash, is also important. They must ensure that their PAN details are correctly furnished to the bank or post office at the time of withdrawal. They must also ensure that the TDS deducted is correctly reflected in their income tax returns to avoid any mismatches with the details filed by the bank or post office.

Overall, the process of TDS deduction on cash withdrawals involves the coordination and compliance of all parties involved, including the person making the payment, the person receiving the payment, and the government.

TDS Return Filing:

TDS return filing is the process of submitting a statement to the Income Tax Department containing details of TDS deductions made by the deductor (i.e., the person who made the payment) and deposited with the government. The process involves the following steps:

Collection of TDS details: The deductor must collect and compile the details of TDS deductions made during the relevant period, including the amount of TDS deducted, the PAN details of the deductee (i.e., the person receiving the payment), and the date of deposit of TDS with the government.

Preparation of TDS return: The deductor must prepare the TDS return in the prescribed format using the software provided by the Income Tax Department or other authorized vendors.

Submission of TDS return: The TDS return must be submitted to the Income Tax Department within the prescribed timelines. The timelines for filing TDS returns are as follows:

For quarterly TDS returns: The due dates are 31st July, 31st October, 31st January, and 31st May for the quarters ending June, September, December, and March, respectively.

For annual TDS returns: The due date is 31st May for the financial year ending 31st March.

Consequences of non-filing or late filing: Non-filing or late filing of TDS returns may result in penalties and interest. The penalty for non-filing or late filing of

TDS returns is Rs. 200 per day of delay, subject to a maximum of the TDS amount. In case of deliberate non-filing or incorrect filing of TDS returns, the penalty can go up to Rs. 1 lakh.

The documents required for TDS return filing are:

TDS certificate issued by the deductor to the deductee.

Challan copies for TDS payments made to the government.

PAN details of the deductee. PAN details of the deductor.

One can go through process of filing of tds return on this below link

https://www.incometax.gov.in/iec/foportal/help/tds-on-cash-withdrawal-us­-194n

TDS Certificate:

The TDS certificate is a document issued by the deductor (i.e., the person who made the payment) to the deductee (i.e., the person receiving the payment) containing details of TDS deductions made and deposited with the government. The TDS certificate plays a crucial role in the income tax filing process, as it serves as proof of TDS deductions made and allows the deductee to claim tax credit for the TDS amount.

The TDS certificate is issued by the deductor within the prescribed timelines, which are as follows:

For TDS on salary: The TDS certificate must be issued by 15th June of the financial year following the year in which TDS was deducted.

For other TDS: The TDS certificate must be issued within one month from the end of the quarter in which TDS was deducted.

The TDS certificate contains the following information: Name and address of the deductor and the deductee PAN details of the deductor and the deductee

Amount of TDS deducted

Date of deduction and deposit of TDS with the government

Type of payment TDS rate applied

The TDS certificate can be used by the deductee to claim tax credit while filing income tax returns. The deductee must enter the TDS details mentioned in the TDS certificate in the relevant sections of the income tax return form. The TDS amount is then credited to the deductee’s income tax account, reducing the tax liability.

TDS certificate is an essential document for both the deductor and the deductee, serving as proof of TDS deductions made and deposited with the government. The TDS certificate facilitates the income tax filing process by allowing the deductee to claim tax credit for the TDS amount, thereby reducing the tax liability.

Consequences:

Section 194N of the Income Tax Act mandates the deduction of TDS on cash withdrawals exceeding specified limits from a person’s bank account. The consequences for not deducting TDS under Section 194N are as follows:

• Penalty: As per the provisions of Section 271 C of the Income Tax Act, if a person fails to deduct TDS under Section 194N, a penalty equal to the amount of TDS not deducted or short deducted can be imposed.
• Interest: If TDS is not deducted or deposited with the government within the prescribed timelines, interest is levied under Section 201 of the Income Tax Act. The interest rate is 1% per month or part of the month from the date on which TDS was required to be deducted till the date on which it is deducted.
• Prosecution: If a person wilfully fails to deduct or pay TDS, they can be prosecuted under Section 276B of the Income Tax Act. The punishment for the offense is imprisonment for a term ranging from three months to seven years, along with a fine.
• Disallowance of Expenses: As per the provisions of Section 40(a)(ia) of the Income Tax Act, if TDS is not deducted or deposited, the expenses incurred by the deductor will not be allowed as a deduction while computing taxable income.

Conclusion:

To ensure compliance with TDS regulations on cash withdrawals, readers should:

Understand the applicability of TDS on cash withdrawals and ensure that TDS is deducted and deposited with the government as per the prescribed rates and timelines.

Maintain proper records of TDS deductions and deposit with the government, and ensure timely and accurate filing of TDS returns to avoid any penalties or interest.

Obtain TDS certificates from the deductor for all TDS deductions made and use them to claim tax credit while filing income tax returns.

Stay updated on any changes in TDS regulations and seek professional advice if required.