Introduction

Section 194N is a provision in the Income Tax Act that deals with the deduction of tax TDS on cash withdrawals. It was introduced to discourage large cash transactions and promote digital payments. The main idea behind this provision is to make people use electronic modes of payment instead of relying heavily on cash

TDS on cash withdrawal u/s 194N of the Act is applicable starting 1st September 2019, or FY 2019-2020.

Section 194N of the Income Tax Act, 1961, was introduced to curb the circulation of unaccounted money and promote a cashless economy in India. Let’s delve into the details:

 

 

What is Section 194N?

1. • Section 194N applies to cash withdrawals exceeding ₹1 crore from a bank account during a financial year.
   • It encompasses the withdrawal of all sums of money or an aggregate of sums from a specific bank within a financial year.
   • This section applies to withdrawals made by various entities, including:
     • Individuals
     • Hindu Undivided Families (HUFs)
     • Companies
     • Partnership firms or Limited Liability Partnerships (LLPs)
     • Associations of Persons (AOPs) or Bodies of Individuals (BOIs)
   • However, it does not apply if the payment is made to:
     • The Government
     • Any bank (private or public sector)
     • Co-operative banks
     • Post offices
     • Business correspondents of a banking company
     • White Label ATM operators of any bank
     • Specified traders or commission agents operating under the Agriculture Produce Market Committee (APMC)
     • Authorized dealers or agents/sub-agents of RBI-licensed Full-Fledged Money Changers (FFMCs) or their franchises (subject to conditions)
     • Any other person notified by the Government of India

 

Threshold Limit Calculation:

1. 1. TDS (Tax Deducted at Source) is applicable when an individual withdraws cash from their bank account beyond ₹1 crore.
   2. The ₹1 crore limit applies per bank or post office account, not per taxpayer’s account.
   3. For instance, if a person has three bank accounts with different banks, they can withdraw a total of ₹3 crore (₹1 crore per bank) without any TDS.
   4. Only cash withdrawals made by the taxpayer (recipient) from their own bank accounts attract TDS under Section 194N.
   5. If a bank pays more than ₹1 crore in cash to an account holder (i.e., any taxpayer) from the account maintained by that taxpayer, the bank must deduct TDS.
   6. Note that if the taxpayer issues a bearer cheque to a third party for an amount exceeding ₹1 crore in a financial year, the recipient of the cash is not the account holder but a third party, and TDS is not applicable in that case

 

Who will deduct TDS 

• TDS (Tax Deducted at Source) under Section 194N of the Income Tax Act, 1961, is deducted by
• Any banks (private or public,
• A Co-operative bank or
• post offices.
• These entities are responsible for deducting TDS when making cash payments to any person in excess of either:
• ₹20 lakh (if the individual has not filed income tax returns for all the three previous assessment years), or
• ₹1 crore (if the individual has filed income tax returns for all or any one of the three previous assessment years)

 

Rate of TDS

The rate of TDS on cash withdrawal (Tax Deducted at Source) under Section 194N is 2% on cash withdrawals exceeding ₹1 crore in a financial year. Let’s break it down:

• If an individual withdraws more than ₹1 crore in cash from their bank account during a financial year, the bank or post office will deduct TDS at a rate of 2%.
• For instance, if the total cash withdrawal exceeds ₹1 crore, the TDS would be calculated on the excess amount. Let’s consider an example:
  • Withdrawal amount: ₹1,50,000,000 (₹1.5 crore)
  • Excess amount subject to TDS: ₹50,00,000 (₹50 lakh)
  • TDS at 2% on ₹50 lakh: ₹1,00,000

Certainly! Let’s delve into the amendments made to Section 194N of the Income Tax Act. These changes impact the Tax Deduction at Source (TDS) on cash withdrawals. Here’s what you need to know:

 

Amendments Under Sec 194N

1. Threshold Limit of TDS on cash withdrawal:

1. • Prior to the Budget of 2023, Section 194N mandated TDS on cash withdrawals exceeding Rs. 1 crore.
   • Budget 2023: For co-operative societies, the threshold limit for annual cash withdrawals has been increased to ₹ 3 crores.
   • However, the Finance Act, 2021, brought about a significant change. It reduced the threshold limit for TDS on cash withdrawals from Rs. 1 crore to Rs. 20 lakh for individuals who have not filed their income tax returns for the previous three assessment years and whose accounts are not linked with their Aadhaar

 

Higher TDS Rates for Non-Filers:

• Alongside the above amendment, the Finance Act, 2021 introduced a new provision under Section 206AB. Under this provision:
• If the individual receiving the money has not filed an income tax return for three years immediately preceding the year, the tax deduction limit is reduced to Rs 20 lakh.
• The TDS on cash withdrawal will be deducted at:
  -2% on the cash payments/withdrawals of more than Rs 20 lakh and up to Rs 1 crore
  -5% for withdrawal exceeding Rs 1 crore

 

MCQs on TDS on Cash Withdrawal

Q1. Tax under section 194N is required to be deducted by.

(a) Banking Company
(b) Co-operative bank
(c) Post-office
(d) All of the above

Correct answer: (d)
Justification of the correct answer: 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.

Q2. Tax is required to be deducted in case where the deductee is a non-resident.

(a) True
(b) False

Correct answer: (a)
Justification of the correct answer: Tax is required to be deducted in all cases whether the deductee is a resident or non-resident.

Q3: What is the threshold limit to deduct tax under section 194N, where no default is made in the filing of the return by the deductee who is an individual?

(a) Rs. 1 crore
(b) Rs. 20 lakhs
(c) Rs. 50 lakhs
(d) No limit

Correct answer: (a)
Justification of the correct answer: 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).

Q4: No tax under section 194N is required to be deducted if cash withdrawal is made by.

(a) Any banking company or a co-operative bank or a post office
(b) Any white-label automated teller machine (ATM) operator of a banking company or a co-operative bank in accordance with the RBI          Authorisation
(c) The Government
(d) All of the above

Correct answer: (d)
Justification of the correct answer: 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.

Q5: Tax deducted under this provision is required to be deposited to the credit of the Central Government through.

(a) Challan ITNS 281
(b) Challan ITNS 280
(c) Challan ITNS 283
(d) None of the above

Correct answer: (a)
Justification of the correct answer: 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.

Q6: 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.

(a) Form 26Q
(b) Form 24Q
(c) Form 27Q
(d) None of the above

Correct answer: (a)
Justification of the correct answer: 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.