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Introduction

Ever wondered about those additional deductions made from your cash withdrawals? Enter Section 194N of the Income Tax Act, a game-changer in the financial realm. This section is all about the government’s effort to track and regulate cash transactions, with the goal of curbing unaccounted money circulation. If you’ve found yourself questioning those deductions on your bank statements or wondering how this impacts your day-to-day transactions, you’re in the right place. In this article, we’ll unravel the mysteries of Section 194N, exploring why it matters, what it means for you, and how it’s shaping the financial landscape in India. So, let’s dive in and demystify the world of TDS on cash withdrawals.

Prevailing Law

Any person, being,—

a. 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);

b. a co-operative society engaged in carrying on the business of banking; or

c. 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 (hereafter in this section 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.

Where the recipient 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 filing return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum referred to in sub-section (1) is made, the provisions of sub-section (1) shall apply with the modification that,—

a. 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;

b. the deduction shall be—

i. an amount equal to two per cent. of the sum where the amount or aggregate of amounts, as the case may be, being paid exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; and

ii. an amount equal to five per cent. of the sum where the amount or aggregate of amounts, as the case may be, being paid exceeds one crore rupees during the previous year.

No deduction shall be made under sub-section (1) from any sum being the amount or the aggregate of amounts, as the case may be, in cash paid to, or, as the case may be, debited to the account of, the Government, a banking company, a co-operative society engaged in carrying on the business of banking, or a post office.

The provisions of this section shall not apply to any payment made to—

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

b. any Government;

c. any business correspondent of a banking company or a 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), where such business correspondent is an individual or a Hindu undivided family.

Practicality

Threshold Limits: Section 194N applies to cash withdrawals exceeding specified thresholds. As of the provision, cash withdrawals exceeding one crore rupees in a financial year are subject to TDS. Additionally, if the recipient has not filed income tax returns for the preceding three assessment years, the threshold reduces to twenty lakh rupees.

TDS Deduction: Banks, cooperative societies, and post offices are responsible for deducting TDS at the time of making cash payments exceeding the specified thresholds. The TDS rate is two percent for withdrawals exceeding one crore rupees and five percent for withdrawals exceeding one crore rupees if the recipient has not filed income tax returns for the preceding three assessment years.

Recipient’s Compliance: The requirement for the recipient to have filed income tax returns for the preceding three assessment years is crucial. If the recipient is compliant, the standard threshold of one crore rupees applies. However, if the recipient has not filed returns, a lower threshold of twenty lakh rupees applies, and the TDS rates are higher.

Exceptions: There are certain exceptions to Section 194N. For instance, no TDS is deducted for cash withdrawals made by the government, banks, cooperative societies, post offices, or certain specified entities like business correspondents as per the guidelines of the Reserve Bank of India.

Taxpayer Awareness: It’s essential for taxpayers to be aware of the implications of Section 194N, especially if they frequently engage in large cash transactions. Being knowledgeable about the threshold limits and TDS rates can help individuals and businesses plan their cash withdrawals more effectively.

Impact on Cash Management: Section 194N may influence cash management strategies for businesses and individuals. They may opt for alternative payment methods or stagger cash withdrawals to avoid crossing the threshold limits and triggering TDS deductions.

Conclusion

In summary, Section 194N aims to curb tax evasion, promote digital transactions, and enhance tax compliance by imposing TDS on large cash withdrawals. Understanding its provisions and implications is crucial for both taxpayers and financial institutions to ensure compliance with the law.

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