Understanding TDS on Cash Withdrawals: A Comprehensive Guide

Tax Deducted at Source (TDS) is a crucial component of India’s tax system, and it applies to various financial transactions. One such transaction is cash withdrawals, governed by Section 194N. This provision mandates that banking companies, cooperative banks, and post offices deduct tax at source from sums paid in cash from recipient accounts. In this comprehensive guide, we’ll explore the nuances of TDS on cash withdrawals, including who needs to deduct tax, the applicable rates, threshold limits, exemptions, consequences of non-compliance, and more.

TDS on cash withdrawals 

Section 194N provides that every banking company, cooperative bank, or post office shall be required to deduct tax at source from any sum paid in cash from one or more accounts maintained by the recipient. The tax shall be deducted at the rate of 2% or 5% as the case may be.

Who is required to deduct tax under section 194N?

Every banking company (including any bank or banking institution), co-operative bank, or a post-office, which is responsible for payment of cash to a person, from one or more accounts maintained by him, shall be required to deduct tax under this provision. The tax shall be deducted at the time of payment.

Who is a deductee under Section 194N?

Tax is required to be deducted in all cases, whether the deductee is a resident or non-resident.

Rate of TDS under Section 194N and threshold limit

If no default is made in the filing of the return

Tax is required to be deducted at the rate of 2% of the sum if the aggregate of the amount withdrawn exceeds Rs. 1 crore (Rs. 3 crores where the recipient is a co-operative society1). The rate shall not be further increased by Surcharge and Health & Education Cess if the sum is payable to a resident person. The rate of TDS shall be increased by the applicable surcharge and health & education cess if the payee is a non-resident person or a foreign company. If the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate of 20% under Section 206AA.

If a person defaults in the filing of a return

If a person has not filed a return of income for all of the three assessment years immediately preceding the previous year in which cash is withdrawn, and the due date for filing the return under section 139(1) has expired, the tax shall be deducted at the rates specified:

a) At the rate of 2% of the sum, if the aggregate of the amount withdrawn exceeds Rs. 20 lakhs during the previous year but does not exceed Rs. 1 crore (Rs. 3 crores where the recipient is a co-operative society²);

b) At the rate of 5% of the sum, if the aggregate of the amount withdrawn exceeds Rs. 1 crore (Rs. 3 crores where the recipient is a co-operative society³) during the previous year.

How to check the TDS return filing status?

The Department has provided a utility of “ITR Filing Compliance Check” on https://report.insight.gov.in which will be available to Scheduled Commercial Banks (SCBs) to check the IT Return filing status in bulk mode on the basis of the PAN of the deductee.

Exemption from TDS under Section 194N

No tax is required to be deducted from any sum paid or payable to the following:

a) The Government

b) Any banking company or a co-operative bank or a post office

c) Any business correspondent of a banking company or a co-operative bank in accordance with the RBI guidelines

d) Any white-label automated teller machine (ATM) operator of a banking company or a co-operative bank in accordance with the RBI Authorisation; or

e) Any person specified by the Central Government. Further, Central Government is empowered to specify the reduced rate for the deduction of tax under this provision.

How to deposit TDS under Section 194N?

Tax deducted under this provision is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which tax was deducted.

However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year.

Filing of TDS statement under Section 194N

The person responsible for the deduction of tax at source under this provision is required to file a statement of tax deducted at source in Form 26Q quarterly.

TDS Certificate in respect of TDS deduction under Section 194N

The deductor shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from the due date of furnishing of the TDS statement.

Consequences for failure to deduct or deposit tax under Section 194N

Where any person responsible for deducting tax at source fails to deduct tax or after deducting fails to deposit the same, he shall be treated as assessee-in-default. In that case, interest under section 201 will be applicable.

If the deductor fails to deduct TDS, interest at the rate of 1% per month or part of the month shall be applicable, till such failure continues. Interest shall be calculated from the date when such tax was required to be deducted till the date such tax is actually deducted.

Further, if the deductor after having deducted the tax, fails to deposit the same to the credit of the Central Government, interest at the rate of 1.5% per month or part thereof shall be applicable till such failure continues. The interest computation shall commence from the date on which the tax was deducted and end with the date when such tax was deposited to the government.

Penalty and Prosecution for non-deduction of TDS

Failure to comply with the provisions of deduction of tax at source under this provision may result in penalties and prosecution as per the following provisions:

a) If a person fails to deduct tax at source, he shall be liable for payment of penalty under Section 271C;

b) If a person deducts tax but fails to deposit the same to the credit of the Central Government, he shall be liable for the penalty under Section 221 and prosecution under Section 276B.

However, no person shall be punishable under Section 276B if he proves that there was reasonable cause for the failure. Further, a person can also file an application for compounding of offence.

Consequences for failure to furnish TDS Statement?

Where any person fails to furnish a TDS statement, section 234E shall be applicable, wherein the deductor is liable to pay fees at the rate of Rs. 200 per day during such default continues. However, such fees should not exceed the amount of TDS.

Moreover, he shall be liable for penalties under sections 271H of Rs. 10,000 which can be extended to Rs. 100,000, and 272A of Rs. 500 for every day during which failure continues.

Consequences for failure to issue TDS Certificates

Where any person, responsible for issuing TDS Certificates, fails to issue such certificates, a penalty under section 272A shall be applicable of Rs. 500 for every day during which failure continues.

Important points on Payment of Certain amounts in Cash

1. Every banking company (including any bank or banking institution), co-operative bank, or a post-office, which is responsible for payment of cash to a person, from one or more accounts maintained by him, shall be required to deduct tax under Section 194N.

2. Tax is required to be deducted in all cases whether the deductee is a resident or non-resident.

3. Where no default is made in the filing of the return i.e., deductee has filed its return of income timely, tax is required to be deducted if the aggregate of the amount withdrawn exceeds Rs. 1 crore (Rs. 3 crores where the recipient is a co-operative society).

4. No tax is required to be deducted from any sum paid or payable to the following:

a) The Government

b) Any banking company or a co-operative bank or a post office

c) Any business correspondent of a banking company or a co-operative bank in accordance with the RBI guidelines

d) Any white-label automated teller machine (ATM) operator of a banking company or a co-operative bank in accordance with the RBI Authorisation; or

e) Any person specified by the Central Government. Further, Central Government is empowered to specify the reduced rate for the deduction of tax under this provision.

5. Tax deducted under this provision is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which tax was deducted. However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year.

6. The person responsible for the deduction of tax at source under this provision is required to file a statement of tax deducted at source in Form 26Q quarterly.

Conclusion:

TDS on cash withdrawals, as governed by Section 194N, plays a crucial role in the Indian tax framework, ensuring that appropriate taxes are deducted when substantial sums are withdrawn in cash. Understanding the provisions, rates, and compliance requirements is essential for both financial institutions and individuals. By following these guidelines and complying with the rules, stakeholders can avoid penalties and ensure the smooth operation of this tax deduction system. This comprehensive guide should serve as a valuable resource for anyone seeking clarity on the subject of TDS on cash withdrawals.

Notes

¹ Amendment made by the Finance Act, 2023 with effect from 01.04.2023.

² Amendment made by the Finance Act, 2023 with effect from 01.04.2023.

³ Amendment made by the Finance Act, 2023 with effect from 01.04.2023.