Understanding Section 194N: TDS on Cash Withdrawals

Understanding Section 194N

Section 194N of the Income Tax Act, introduced in the Union Budget 2019, aims to promote digital transactions and curb cash usage in large volumes. This section mandates the deduction of Tax Deducted at Source (TDS) on cash withdrawals above specified limits. In this blog, we delve into the details of Section 194N, including its applicability, limits, TDS rates, and exemptions.

Applicability of Section 194N

Section 194N applies to cash withdrawals made by any person from the following entities:

1. A banking company or cooperative bank.
2. A post office.

This provision covers individuals, HUFs, companies, firms, or any other entity making significant cash withdrawals.

Threshold Limits for TDS Deduction

The applicability of TDS under Section 194N depends on whether the person withdrawing cash has filed their income tax returns (ITRs) in the previous years:

1. For those who filed ITRs for the preceding 3 financial years:
   • TDS is deducted if cash withdrawals exceed ₹1 crore in a financial year.
2. For those who did not file ITRs for the preceding 3 financial years:
   • TDS is deducted if cash withdrawals exceed ₹20 lakh in a financial year.

TDS Rates Under Section 194N

The rate of TDS varies based on the ITR filing status of the individual or entity:

1. If ITRs are filed for the last 3 financial years:
   • TDS is deducted at 2% on the amount exceeding ₹1 crore.
2. If ITRs are not filed for the last 3 financial years:
   • TDS is deducted at 2% for cash withdrawals exceeding ₹20 lakh but up to ₹1 crore.
   • TDS is deducted at 5% for cash withdrawals exceeding ₹1 crore.

Important Points to Note

1. Cumulative Withdrawals: The limit is calculated cumulatively across all accounts held in a bank or post office.
2. Net Payment: The deducted TDS is reflected in the taxpayer’s Form 26AS and can be claimed as a credit while filing the ITR.

Exemptions from Section 194N

Certain entities and transactions are exempt from the provisions of Section 194N. These include:

1. Government Bodies: Withdrawals made by the Central or State Government.
2. Banking Entities: Withdrawals by cooperative societies engaged in carrying out banking operations.
3. ATM Operators: Withdrawals by white-label ATM operators for disbursing cash to the public.
4. Authorized Dealers: Withdrawals made for business operations by authorized forex dealers and payment system operators.
5. Other Specified Entities: Withdrawals by entities such as embassies, consulates, and statutory bodies.

Purpose of Section 194N

The introduction of Section 194N aligns with the government’s vision of:

1. Curbing Black Money: Discouraging large cash transactions that might facilitate unreported income.
2. Promoting Digital Economy: Encouraging taxpayers to adopt digital payment methods over cash transactions.
3. Ensuring Compliance: Nudging entities to file ITRs to benefit from higher withdrawal limits.

Illustration

Consider an individual who did not file ITRs for the last 3 financial years and withdraws ₹50 lakh in cash from a bank during the financial year. Here’s how TDS will be calculated:

1. For withdrawals up to ₹20 lakh – No TDS.
2. For withdrawals between ₹20 lakh and ₹1 crore (₹30 lakh) – TDS at 2% = ₹60,000.
3. For withdrawals exceeding ₹1 crore – TDS at 5% applies to the excess amount.

Compliance and Penalties

Failure to comply with Section 194N can lead to penalties for the deductor, including interest on late payment of TDS and potential disallowance of the amount as an expense in the books of accounts.

Conclusion

Section 194N aims to discourage excessive cash transactions and enhance tax compliance among individuals and entities. Taxpayers must be aware of their ITR filing status and the associated cash withdrawal limits to avoid unnecessary deductions. Opting for digital payment methods and adhering to compliance requirements can help mitigate the impact of this provision.